Category: Markets

Russell Reconstitution 2024, What Investors Should Know

Posted on by slightbourne@noblecapitalmarkets.com

The Annual Russell Index Revision and Dates to Watch (2024)

The yearly process of recasting the Russell Indexes begins on Tuesday, April 30 and will be complete by market opening on June 30. During the period in between, FTSE Russell will rank stocks for additions, for deletions and evaluate the companies to make sure they conform overall. The methodology for inserting and removing tickers in the Russell 3000, Russell 2000, and Russell 1000 is intentionally transparent to help eliminate price shocks. Price movements do of course occur along the way, and investors try to foresee and capitalize on them. Channelchek will be providing updates that may uncover opportunities, or at least provide an understanding of stock price swings during this period.

Background

Russell index products are widely used by institutional and retail investors throughout the world. There is more than $20.1 trillion currently benchmarked to a Russell index. This includes approximately $12.1 trillion benchmarked to the Russell US Equity indexes. The trading volume of some companies moving into an index will heighten around the last Friday in June as fund managers seek to maintain level tracking with their benchmark target.

Opportunity

For non-passive investing, determining which stocks may benefit from moving up to a large-cap index, down to a smaller one, or into or out of the measurements is an annual event causing volatility around stocks. There has, of course, the potential for very profitable long and short trades. And the potential for an unwitting investor to be holding a company moving out of an index, which could cause less interest in the stock, and perhaps unfortunate performance.

Active investors should make themselves aware of the forces at play so they may either get out of the way or determine if they should become involved by taking positions with those being added or those at the end of their reign within one of the Russell measurements.

Dramatic Valuation Shifts

The leading industries and altered market-cap of companies of a year ago have changed dramatically from last year’s reconstitution. This will be reflected in the 2023 rebalancing and is going to impact a much larger number of companies than most years. That is to say, a higher percentage of companies than normal will move in, out, or to another index, and may be subject to amplified price movement.

The 2024 Russell Reconstitution Schedule:

• Tuesday, April 30th – “Rank Day” – Index membership eligibility for 2024 Russell Reconstitution determined from constituent market capitalization at market close.

• Friday, May 24 – Preliminary index additions & deletions membership lists posted to the FTSE Russell website after 6 PM US eastern time.

•   Friday, May 31st, June 7th, 14th and 21st – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6 PM US eastern time.

• Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

• Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.

• Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

Take-Away

The annual reconstitution is a significant driver of dramatic shifts in some stock prices as portfolio managers have their holding needs shifted within a very short period of time. Longer-term demand for certain equities is altered as well. Sizable price movements and volatility are expected, especially around the last week in June. In fact, the opening day of the reconstitution is typically one of the highest trading-volume days of the year in the US equity markets.

The market event impacts more than $9 trillion of investor assets benchmarked to or invested in products based on the Russell US Indexes. Portfolio managers that are required to track one of these indexes will work to have minimal portfolio slippage away from their benchmark.  The days and weeks from April 30 through the last Friday in June can create opportunities for investors seeking to benefit from price moves, Channelchek will be covering the event as stocks to be added to, or removed from this year’s Russell Reconstitution and other information plays out.

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GameStop Frenzy Erupts as “Roaring Kitty” Resurfaces After 3 Years

Posted on by slightbourne@noblecapitalmarkets.com

In an explosive return, the man who inspired the historic GameStop “meme stock” mania in 2021 has re-emerged from a three-year hiatus – sending shockwaves through Wall Street once again.

Keith Gill, known online as the legendary “Roaring Kitty” had been silent across social media since rallying an “ape army” of retail traders to bet big against hedge funds that were shorting GameStop stock. That is, until May 13th, 2024, when he ominously posted a simple image of an intensely focused video gamer to his X account.

The GameStop “Roaring Kitty” Rallying Cry Heard Again
It was all the wake-up call the meme stock movement needed. Within hours of Gill’s first post in over 1,000 days, shares of GameStop Corp (GME) were halted for volatility multiple times as they skyrocketed as much as 110%. When the mayhem settled, the video game retailer’s stock closed a staggering 70% higher on the day.

The Roaring Kitty-inspired surge was a flashback to January 2021, when GameStop became the poster child for a new era of disruption on Wall Street. Gill’s passionate YouTube streams advocating for the struggling company had mobilized a horde of online day traders from the Reddit forum r/WallStreetBets.

By piling into GameStop shares and options contracts, these self-dubbed “apes” triggered a cataclysmic short squeeze – forcing institutional investors with massive bearish bets against GME to cover their positions at rapidly escalating prices. Within two weeks, the stock had captured the world’s attention by inexplicably spiking over 2,700% from $17.25 to an intraday peak of $483.

Hedge Fund Decimation and Hollywood Deals
Billion-dollar hedge funds like Melvin Capital were decimated by the GameStop short squeeze, requiring emergency cash injections to stay afloat. The historic market event shined a light on the fragility of Wall Street’s short-selling practices and the power of unified retail investors.

Roaring Kitty himself faced intense scrutiny over his role. Gill testified before Congress about his GameStop windfall and was slapped with a class-action lawsuit alleging he misrepresented his expertise. The saga even inspired the 2023 feature film “Dumb Money,” with actor Paul Dano portraying Gill’s journey to meme stock fame.

Can Lightning Strike Twice for Meme Stocks?
While the hype around GameStop had cooled off in recent years, Roaring Kitty’s comeback appearance instantly rejuvenated the movement he started. But can retail traders engineer another shocking short squeeze against institutional behemoths?

GameStop’s core business remains on shaky ground against digital downloads and e-commerce juggernauts. In its latest earnings report, the company posted lower revenue and cut jobs to reduce costs, showing its stock may still be disconnected from fundamentals.

However, with Roaring Kitty leading the rallying cry once more, the army of “ape” traders is ready to shake up the establishment all over again. And with nearly 25% of GameStop’s shares still sold short, the conditions may be ripe for another seismic confrontation in the meme stock revolution.

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Robinhood’s Crypto Arm Receives Wells Notice from SEC: What Investors Need to Know

Posted on by cpatches

On May 4, 2024, Robinhood Markets, Inc. (NASDAQ: HOOD) announced that its cryptocurrency trading division, Robinhood Crypto, had been served with a Wells notice from the U.S. Securities and Exchange Commission (SEC). The news sent ripples through the market, prompting concerns among investors and stakeholders. But what exactly does this mean for Robinhood and its investors?

A Wells notice is not a confirmation of guilt but rather a formal notification from the SEC indicating its intent to recommend enforcement action against a company or individual. In Robinhood’s case, the SEC alleges potential violations of Sections 15(a) and 17A of the Securities Exchange Act of 1934, as amended. This notice follows a prior SEC investigation into Robinhood Crypto’s cryptocurrency listings, custody practices, and platform operations.

Dan Gallagher, Robinhood’s chief legal, compliance, and corporate affairs officer, emphasized the company’s stance, stating, “We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be.” Despite the Wells notice, Robinhood remains resolute in its position regarding the nature of the assets listed on its platform.

The receipt of a Wells notice can have multifaceted implications for both the company and its investors. From a financial perspective, Robinhood could face increased legal costs associated with defending against potential enforcement actions. Moreover, the company’s reputation may suffer, potentially leading to decreased investor confidence and stock price volatility. However, it’s essential to note that a Wells notice does not guarantee the ultimate filing of enforcement actions, and the outcome of any regulatory proceedings remains uncertain.

Following the announcement, Robinhood’s stock experienced a brief downturn in pre-market trading, dropping as much as 9%. However, the stock quickly rebounded after the opening bell. Year-to-date, Robinhood’s stock has seen substantial growth, up more than 43%, while bitcoin futures have climbed over 50%. The market’s reaction underscores the uncertainty surrounding the potential implications of the Wells notice on Robinhood’s future performance.

As Robinhood prepares to navigate the regulatory landscape in response to the Wells notice, investors should closely monitor developments and assess the potential impact on the company’s operations and financial health. While uncertainties loom, Robinhood’s proactive approach and commitment to engaging with the SEC signal its intent to address regulatory concerns head-on. Ultimately, the resolution of this matter will shape the trajectory of Robinhood’s journey in the crypto space and its relationship with investors moving forward.

Yellen Sounds Alarm on “Impossible” Housing Market for First-Time Buyers

Posted on by slightbourne@noblecapitalmarkets.com

For investors looking at hot housing sectors, Treasury Secretary Janet Yellen just aired some cold hard truths about the brutal landscape facing first-time homebuyers. In testimony before the House Ways and Means Committee, the former Federal Reserve chair minced no words in declaring it “almost impossible” for those trying to get that coveted first rung on the property ladder.

“With house prices having gone up and now with much higher interest and mortgage rates, it’s almost impossible for first-time buyers,” Yellen bluntly stated, citing the twin pains of home price appreciation and elevated financing costs.

Her candid assessment encapsulates the scorching environment scorching the dreams of millions of aspiring homeowners. After a pandemic-driven housing boom, the headwinds buffeting the entry-level market show no signs of abating:

Prices at Nosebleed Heights
According to Zillow data, a staggering 550 U.S. cities now have median home values topping the once-unthinkable $1 million mark. California accounts for nearly 40% of those cities, with the Los Angeles and San Francisco areas ground zero for pricing outliers.

Mortgage Rates Kryptonite
The days of locking in a 30-year mortgage under 3% now seem quaint relics. As the Fed jacked rates higher to tame inflation, average mortgage rates soared past 7% as of early 2024 – more than double pandemic-era levels. For cash-strapped first-timers, that translates into over $600 extra in monthly payments for a $400,000 loan.

Inventory Drought
Perhaps the biggest obstacle is critically low supply pipelines thanks to existing homeowners being financially “locked-in” to their low mortgage rates, as Yellen described it. They are disincentivized from listing and moving to avoid securing a new mortgage at higher rates – leading to a self-perpetuating cycle.

Rapacious Investor Competition
Even affordable starter homes in short supply are being ravenously consumed by investors. A Redfin report showed they purchased over 1 in 4 U.S. homes in Q4 2023 alone. With hedge funds and private equity firms devoting massive capital to residential real estate, it’s perhaps the biggest pricing pressure of all.

Yellen herself acknowledged the troubling dynamic, stating “We know that affordable housing and starter homes are an area where we really need to do a lot to increase availability.”

So what is being done to combat the brutal affordability crisis freezing out so many first-time buyers? The Biden administration has floated a novel twin tax credit concept:

  • A $10,000 credit for first-time homebuyers could provide vital funds for larger down payments to offset higher rates.
  • A separate $10,000 credit incentivizing existing owners to sell their “starter home” when upsizing could modestly relieve inventory shortages.

Some lawmakers are taking a more forceful approach – moving to punish corporate real estate investors gobbling up residential properties. Proposals include revoking depreciation and mortgage interest deductions, penalty taxes, and even mandates to divest rental home portfolios over time.

Whether such measures gain traction remains to be seen. But there’s no denying the current state of housing markets represents something close to a perfect storm for strivers trying to get in the game.

As an investor, the opportunities are evident amid the obstacles:

  • A generational housing shortage should keep upward pressure on asset pricing
  • Financing challenges and inventory scarcity create huge pent-up demand tailwinds for homebuilders
  • Solutions like single-family rental operators may temporarily ease entry-level pressures
  • And any public-private innovations that help reignite first-time buyer demand could be lucrative portfolio additions

Because for now – as Janet Yellen so starkly articulated – breaking into the housing market as a newcomer is indeed “almost impossible” based on today’s towering barriers. Sometimes the frank truth is the first step towards meaningful investment opportunities.

Billionaire Leon Cooperman Sounds the Alarm on Looming Financial Crisis

Posted on by slightbourne@noblecapitalmarkets.com

In a characteristically blunt assessment, billionaire investor Leon Cooperman painted a grim picture of the current economic landscape during his recent appearance on CNBC’s Squawk Box. The legendary investor, known for his storied career at Goldman Sachs and the success of his hedge fund Omega Advisors, did not mince words as he expressed grave concerns about the state of the nation’s leadership, fiscal policies, and the potential for an impending financial crisis.

Cooperman’s remarks kicked off with a scathing critique of the upcoming presidential election, describing the choices as “bad and worse.” This sentiment underscored his belief in a broader “leadership crisis” within the country, which he believes is exacerbating the already precarious economic situation.

At the forefront of Cooperman’s concerns is the ballooning federal debt and the persistent trade deficit plaguing the nation. “The evils of trade and debt deficit,” as he put it, are a ticking time bomb that could potentially trigger a financial crisis of unprecedented proportions. He emphasized that “deficits matter,” and the current trajectory is unsustainable, warning that the consequences of unchecked borrowing and spending could manifest in the form of higher interest rates, rampant inflation, and a weakened currency.

Cooperman also leveled criticism at the Federal Reserve, giving them a “low grade” for their handling of monetary policy. He lambasted the central bank for keeping interest rates near zero for nearly a decade, only to abruptly raise them by a staggering 500 basis points within a year. This whiplash-inducing policy shift, according to Cooperman, is symptomatic of the Fed’s missteps and lack of foresight.

Despite the stock market hovering near record highs, Cooperman warned of rampant speculation and froth in certain segments of the market. He cited the frenzy surrounding former President Trump’s social media venture and the proliferation of special purpose acquisition companies (SPACs) as examples of speculative excess. Cooperman cautioned that the current market euphoria might be misguided, as there are no clear signs that the Fed’s tightening measures have been sufficiently restrictive to rein in inflation.

Interestingly, Cooperman’s portfolio reflects a defensive posture, with 15% allocated to energy stocks and 20% invested in bonds. However, he expressed concerns about the ongoing lawsuit with Spectrum against the government, which could impact the value of his bond holdings.

In a contrarian move, Cooperman revealed a preference for equities over bonds, defying conventional wisdom that favors fixed-income assets in times of economic uncertainty. This stance underscores his belief that certain sectors and companies may offer better risk-adjusted returns than the bond market, which he views as overvalued.

Cooperman’s dire warnings and contrarian positions serve as a stark reminder of the uncertainties and potential pitfalls facing investors in the current market environment. While his views may be controversial, they underscore the importance of vigilance, risk management, and careful asset allocation in navigating the turbulent waters of the global economy.

As investors and financial professionals grapple with the challenges ahead, Cooperman’s sobering assessments demand careful consideration, even if they challenge conventional wisdom. In the end, his candor and willingness to voice unpopular opinions may prove invaluable in preparing for the potential storms on the horizon.

The New York Stock Exchange’s Bold Proposal for 24/7 Trading: Risks and Opportunities

Posted on by slightbourne@noblecapitalmarkets.com

The New York Stock Exchange (NYSE), the iconic centerpiece of global finance, is exploring a groundbreaking shift that could reshape how stock markets operate worldwide. The proposal to transition to 24/7 trading is a bold move that promises both opportunities and challenges for investors and market participants alike.

The Lure of Continuous Trading
The driving force behind the NYSE’s consideration of round-the-clock trading is the desire to align with the increasingly global and interconnected nature of modern financial markets. As the world’s economic activities continue to transcend time zones, the traditional trading hours impose limitations on investors’ ability to react swiftly to events that could significantly impact stock prices.

By embracing a 24/7 trading model, the NYSE aims to democratize access, allowing investors across the globe to participate in the markets at their convenience. This could potentially enhance liquidity and market efficiency, providing a more seamless flow of capital and pricing information.

Moreover, the rise of digital currencies and their associated markets, which operate continuously, has set a precedent that traditional stock exchanges are keen to emulate. The promise of reducing volatility at market openings, as news and events would be immediately reflected in stock prices, is an enticing proposition for advocates of 24/7 trading.

Navigating Potential Risks
However, this revolutionary shift is not without its challenges and concerns. One significant apprehension is the potential for increased price volatility, particularly during off-peak hours when trading volumes may be lower. Uninformed or less experienced investors could face substantial risks if prices swing erratically due to lower liquidity or unforeseen events.

The NYSE’s survey specifically probes for mechanisms to safeguard against such volatility, underscoring the need for robust investor protection measures in a 24/7 trading environment. Regulatory bodies, such as the Securities and Exchange Commission (SEC), will play a pivotal role in shaping the framework and rules to mitigate risks and ensure market integrity.

Operational and logistical demands pose another significant hurdle. Staffing for overnight sessions, upgrading technical infrastructure, and overhauling clearing house operations to accommodate non-stop trading will require substantial investments and coordination across the financial ecosystem.

Implications for Investors and Markets
If the NYSE successfully navigates these challenges and implements 24/7 trading, the implications for investors could be far-reaching. Individual investors may benefit from increased flexibility, as they would no longer be constrained by traditional trading hours. This could democratize access to market opportunities, allowing investors to react more swiftly to global events that could impact their portfolios.

However, the potential for increased volatility during off-peak hours could pose risks for less experienced or risk-averse investors. Prudent investors may need to adjust their strategies and risk management approaches to account for the possibility of sudden price swings during overnight trading sessions.

For institutional investors and market makers, 24/7 trading could present both opportunities and challenges. While continuous access to markets could enable more efficient portfolio management and risk hedging, it may also necessitate adjustments to staffing, trading algorithms, and risk management protocols to accommodate round-the-clock operations.

Moreover, the transition to 24/7 trading could have broader implications for market dynamics and behavior. With the traditional opening and closing bell ceremonies no longer demarcating trading sessions, the psychological and behavioral factors that influence market participants may evolve. Investors and traders may need to adapt their decision-making processes and strategies to account for the absence of these temporal anchors.

Conclusion
The NYSE’s exploration of 24/7 trading represents a pivotal moment in the evolution of financial markets. While the potential benefits of continuous trading, such as increased liquidity and market efficiency, are appealing, the industry must carefully navigate the associated risks and challenges.

As the world moves towards a more interconnected and digitized financial landscape, the future of trading may indeed lie in a 24/7 model. However, achieving this paradigm shift will require collaboration among exchanges, regulators, and market participants to ensure investor protection, operational readiness, and market stability.

The road ahead may be arduous, but the prospect of more accessible, efficient, and globally inclusive markets could usher in a new era of trading that better serves the needs of a rapidly evolving financial ecosystem.

Dow’s Worst Week Since January as Inflation Tensions Flare

Posted on by slightbourne@noblecapitalmarkets.com

Wall Street’s budding 2024 stock rebound hit a speed bump this week as stubbornly high inflation rekindled fears of an extended rate hike cycle – sending major indexes tumbling to cap a volatile stretch.

After rallying through most of March and early April, markets gave back ground over the last few sessions as fresh economic data suggested the Federal Reserve may need to keep interest rates higher for longer to fully squash rapid price growth.

The Dow Jones Industrial Average ended the turbulent week down 2.3% to lead the market lower. The S&P 500 retreated 1.5% while the tech-heavy Nasdaq shed 0.5% – narrowly avoiding its third consecutive weekly decline.

“Inflation is too stubborn. That means less rate cuts and that’s not good for valuations,” said Bob Doll, chief investment officer at Crossmark Global Investments.

Fueling concerns, import prices jumped 0.4% in March – more than expected and the largest three-month gain in about two years according to the Labor Department. The closely watched University of Michigan consumer sentiment survey also showed inflation expectations ticking higher, suggesting price pressures remain frustratingly entrenched.

The worrisome data sparked a revival of the relentless selling that had gripped markets for most of 2023, triggering the worst day for the Dow industrials since early last year.

Still, the shellacking wasn’t completely one-sided. While banks led the retreat – with JPMorgan plunging over 5% after warning about sticky inflation – energy stocks like Exxon Mobil hit all-time highs as oil spiked on heightened geopolitical risks around the Middle East.

The volatile price action underscored Wall Street’s continuing tug-of-war as investors try to weigh whether the economy can avoid a harsh recession, even as the Fed keeps rates higher for longer to restore its 2% inflation target.

“We’ve lost the immediate benefit of the forecast rate cuts. The market is saying interest rates are not supportive now, but it still has earnings to rely on,” said Brad Conger, chief investment officer at Hirtle, Callaghan & Co.

Potential Opportunities in Emerging Growth Stocks
While the overall markets may be choppy with inflation worries persisting, volatile periods can present opportunities for investors to find undervalued gems, particularly among emerging growth stocks and smaller public companies.

As large-cap stocks face headwinds from elevated interest rates and input costs, many smaller and micro-cap firms with innovative products and services could be well-positioned to deliver outsized growth. However, additional research is required to identify quality opportunities in this space.

Investors looking to stay up-to-date on potential small and micro-cap stocks that may be flying under the radar can register for a free account on ChannelChek.com. This allows access to thousands of engaging investment ideas and analytical insights from diverse perspectives.

Back to the Big Picture
After kicking off the first quarter earnings season with big banks like JPMorgan, Citi and Wells Fargo reporting mixed results this week, a clearer picture on the overall profit outlook should emerge over the next few weeks as hundreds more major companies report.

Outside corporate fundamentals, geopolitical risks also loomed large, with oil prices surging Friday on reports Israel is preparing for potential retaliation from Iran. U.S. crude topped $87 a barrel, adding to inflationary pressures.

While the S&P 500 remains solidly higher so far in 2024, up around 5% through Friday’s session, the week’s volatility served as a reminder that the path forward remains fraught amid high interest rates, rising costs, and risks of a harder economic landing.

For investors hoping the April rally could morph into a more durable uptrend, getting inflation fully under control remains the key to unlocking a sustainable comeback on Wall Street. This week’s price pressures data showed that while progress is being made, the battle is far from over.

“Despite the sell-off, financial conditions remain easy. We believe inflation progress will require tighter financial conditions, which should entail still higher long-term rates,” wrote Barclays’ Anshul Pradhan in a note advising investors to remain short on the 10-year Treasury.

With the Fed signaling a higher-for-longer rate path may be needed to restore price stability, markets could be in for more turbulence and diverging currents in the weeks and months ahead. This rollercoaster week may have been just a preview of what’s to come as Wall Street’s inflation fight rages on.

Markets on Edge as Inflation Jitters Spark Volatility

Posted on by slightbourne@noblecapitalmarkets.com

The red hot U.S. economy has financial markets caught between fears of overheating versus overtightening, leading to a tense environment of volatility and angst. U.S. stocks fell sharply on Tuesday, reversing early gains, as investors grew nervous ahead of this week’s critical inflation report that could help shape the Federal Reserve’s policy path.

All eyes are on Wednesday’s March Consumer Price Index (CPI) data, with economists forecasting headline inflation accelerated to 3.4% year-over-year, up from 3.2% in February. The more closely watched core measure excluding food and energy is expected to ease slightly to 3.7% from 3.8%.

The CPI print takes on heightened importance after a slate of robust economic data has traders quickly recalibrating expectations for Fed rate cuts this year. At the start of 2024, markets were pricing in up to 150 basis points of easing as worries about a potential recession peaked. But those easing bets have been dramatically pared back to just around 60 basis points currently.

The shift highlights how perspicacious the “no landing” scenario of stubbornly high inflation forcing the Fed to remain restrictive has become. Traders now only see a 57% chance of at least a 25 basis point cut at the June FOMC meeting, down from 64% just last week.

“Given the strength of the economic data, it’s getting easier and easier to defend the notion that we might be closer to an overheating economy than one nearing recession,” said Dave Grecsek at Aspiriant. “At the moment, three rate cuts this year seems a little demanding.”

Tuesday’s market turmoil underscored this increased skittishness around the inflation trajectory and its policy implications. Major U.S. indices fell, with the Dow Jones Industrial Average dropping 0.38%, the S&P 500 off 0.32%, and the Nasdaq Composite declining 0.17%.

The sell-off was broad-based, impacting many of the high-growth tech leaders that have powered the market’s gains so far in 2024. Megacap growth stocks including Nvidia, Meta Platforms, and Microsoft fell between 0.2% and 2.9%. Financial stocks, among the most rate-sensitive sectors, were the worst performers on the day with the S&P 500 Financials index down 0.8%.

The heightened volatility and economic uncertainty has been particularly punishing for the small and micro-cap segments of the market. These smaller, higher-risk companies tend to underperform during turbulent periods as investor appetite for risk diminishes. The Russell 2000 index of small-cap stocks fell 1.2% on Tuesday and is down over 5% from its highs just two weeks ago.

Cryptocurrency and blockchain-related stocks also got caught up in the downdraft, with Coinbase Global and MicroStrategy dropping sharply as bitcoin prices tumbled. Moderna bucked the bearish trend with a 6.9% surge after positive data for its cancer vaccine developed with Merck.

Geopolitical tensions around Iran’s threat to potentially close the critical Strait of Hormuz shipping lane added another layer of anxiety.

While some might view the market jitters as a buying opportunity, the unease is unlikely to dissipate soon given the Fed uncertainty. Investors will be closely scrutinizing the minutes from the March FOMC meeting due out on Wednesday as well for additional clues on policymakers’ latest thinking.

With inflation proving stickier than expected, the Fed has increasingly pushed back against market pricing for rate cuts this year. Several Fed officials have emphasized that any cuts in 2024 are far from assured if inflation does not moderate substantially. That will keep all eyes laser-focused on each CPI print going forward.

Markets have been whipsawed by conflicting economic signals and rampant volatility as investors try to game the unpredictable path ahead. With high stakes riding on the inflation trajectory and its policy implications, intense swings are likely to persist as markets grapple with this high-wire act between overheating and overtightening.

New Highs Across Markets Signal Bull Run For Investors

Posted on by slightbourne@noblecapitalmarkets.com

The stock market is heating up and signaling the return of the bulls, as evidenced by fresh all-time highs in the S&P 500 and a rally across risk assets like Bitcoin and gold. Fueled by booming innovation in artificial intelligence, speculative capital is flowing back into equities in a big way. For investors, it may be time to go hunting for the next big investments.

The S&P 500 broke out to new records this week, finally surpassing the previous highs set back in January 2022 before last year’s punishing bear market. The large-cap index closed at 5233 on Thursday, up over 28% year-to-date. This demonstrates that the decade-plus bull run that began after the 2008 financial crisis may have refreshed legs under it.

The strength comes as AI mania has gripped Wall Street and Main Street. The smash success of OpenAI’s ChatGPT triggered a cascade of investors plowing capital into AI startups and tech giants racing to deploy advanced language models and machine learning systems. Cathie Wood’s Ark Invest funds, which load up on disruptive innovation plays, have surged over 30% in 2023.

Even the traditionally cautious money managers are piling in. Just this week, e-commerce juggernaut Amazon announced a staggering $4 billion investment into AI research firm Anthropic. It shows the FANG giants remain at the vanguard of cutting-edge tech adoption and are more than willing to spend big to stay ahead of the curve.

The AI buzz has spurred a speculative frenzy not seen since the meme stock and SPAC manias of 2021. The heavy inflows, plus robust economic data, have pushed U.S. stock indexes to their most overbought levels since the rally out of the pandemic lows. Technical indicators suggest more volatility and pullbacks could be in store, but the trend remains firmly bullish for now.

The buying spree has spilled over into other risk assets like cryptocurrencies and gold. Bitcoin soared above $70,000 recently to its highest levels ever. The original crypto has rallied over 70% in 2023 as institutions warm back up to the space and the AI buzz rekindles visions of decentralized Web3 applications and business models.

Not to be outdone, gold has surpassed $2,200 per ounce and is trading at levels far greater than what was seen in 2020 during the pandemic turmoil. Bullion is benefiting from growing concerns over persistent inflation and fears the Federal Reserve could push the economy into recession as it keeps raising interest rates aggressively. The yellow metal is increasingly seen as a haven in times of economic and banking system stress.

Combined, the advancing prices and frothy trading action point to the return of the animal spirits last seen at the height of the Robinhood/Reddit meme stock craze from two years ago. Caution is certainly warranted, as downside risk remains with growing chances of an economic hard landing from the Fed’s inflation fight.

But the market often climbs a wall of worry, and the blowout action indicates speculators are back in full force. For investors able to navigate the volatility, this may be an ideal time to put capital to work and research the next big opportunities to ride the bull’s coattails.

As ARK’s Cathie Wood stated, “Given the breakthroughs in AI broadly, we believe we are living in the most profound period of commercial invention ever.” Profound invention tends to create extreme investment returns for those with the foresight to invest early in transformative technologies.

For investors searching for the potential 100-baggers of tomorrow across sectors like AI, quantum computing, biotech, fintech, and cybersecurity, buying dips and dollar-cost averaging into high-conviction positions could pay massive dividends down the road. The market mania may only be just beginning.

What Exactly is the Russell Reconstitution?

Posted on by slightbourne@noblecapitalmarkets.com

If you’re an investor, there’s an annual event on Wall Street that you should be aware of – the Russell Reconstitution. While it may not get much mainstream attention, this yearly process can have a major impact on certain stocks and drive significant trading activity.

So what exactly is the Russell Reconstitution? Let’s break it down in simple terms.

The Russell family of indexes is one of the most widely-followed equity benchmarks. The headline Russell 3000 represents the broad U.S. stock market, while the Russell 1000 tracks large-cap stocks and the Russell 2000 focuses on small-caps.

These indexes aim to be an accurate representation of the overall U.S. public market at any given time. However, company valuations and rankings are constantly evolving as businesses grow, stagnate, or decline.

To ensure the indexes stay up-to-date and reflective of the current market, they go through an annual “reconstitution” process of completely rebuilding membership from the ground up.

Each year, the Russell indexes perform this rebuilding exercise based on the latest market capitalization rankings for U.S. public companies after the market closes on a predetermined “ranking day.”

Companies are re-ranked from largest to smallest based on their new market caps. The top x% make up the Russell 1000 large-cap index, the bottom y% are assigned to the small-cap Russell 2000 index, and so on across Russell’s various capitalization-based indexes.

This rebalancing and membership shuffle occurs annually to keep the indexes properly aligned with the ever-changing market landscape. Companies experiencing strong growth may graduate into a higher cap-weighted index, while those losing ground get demoted to lower indexes.

Being added to the Russell 1000 or Russell 2000 indexes can provide a meaningful boost to a stock. These indexes are tracked by hundreds of billions in assets, so inclusion often comes with heightened liquidity, passive fund exposure, and institutional investor interest.

Conversely, stocks being removed from the headline indexes can suffer the opposite effects of reduced volume, investor exits, and volatility as funds rebalance their holdings.

Historically, stocks slated for inclusion in the Russell 2000 small-cap index have enjoyed a “reconstitution rally” in the run-up period as index funds buy in ahead of the official rebalance. Those migrating out often see selling pressure over this pre-rebalance window.

Why the Russell Rebalance Matters

While seemingly an administrative exercise, the annual Russell Reconstitution has taken on outsized significance in recent decades due to the explosion of passive index-tracking investment vehicles and strategies.

As major funds reposition their portfolios to replicate the updated index compositions each year, it creates a temporary imbalance of concentrated buying and selling in the impacted stocks joining or leaving the main benchmarks.

This trading frenzy can unlock rapid changes in volume, volatility, and institutional ownership levels for stocks experiencing an index status change – especially those smaller names making the cut for inclusion in the Russell 2000.

As index funds have grown to control trillions in assets tracking these benchmarks, the annual Russell rebalancing period has become an increasingly important event to monitor, particularly for stocks straddling the cap thresholds between indexes.

What to Watch For

While the Russell Reconstitution operates seamlessly in the background for most investors, those holding impacted stocks may want to anticipate potential volatility and position accordingly in the typical multi-week period ahead of each year’s official rebalance implementation.

The annual event reinforces the profound impact that passive investment strategies can wield on individual stocks simply due to their membership status in closely-tracked equity benchmarks. For better or worse, joining or leaving a major index can drastically alter a stock’s profile and trading dynamics – at least in the short-term rebalancing period.

As indexing grows even more ubiquitous, watching for potential reconstitution impacts could remain a wise practice for active traders and investors holding smaller stocks near the index composition cutoff levels.

2024 Russell US Indexes Reconstitution Schedule

  • Tuesday, April 30th – “Rank Day” – Index membership eligibility for 2024 Russell Reconstitution determined from constituent market capitalization at market close.
  • Friday, May 24th – Preliminary index additions & deletions membership lists posted to the website after 6 PM US eastern time.
  • Friday, May 31st, June 7th, 14th and 21st – Preliminary membership lists (reflecting any updates) posted to the website after 6 PM US eastern time.
  • Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.
  • Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.
  • Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

Core PCE Inflation Slows to Lowest Since 2021

Posted on by slightbourne@noblecapitalmarkets.com

The Personal Consumption Expenditures (PCE) price index rose 0.4% in January from the previous month, notching its largest monthly gain since January 2023, according to data released by the Commerce Department on Thursday. On an annual basis, headline PCE inflation, which includes volatile food and energy categories, slowed to 2.4% from 2.6% in December.

More importantly, the Federal Reserve’s preferred core PCE inflation gauge, which excludes food and energy, increased 0.4% month-over-month and 2.8% year-over-year. The 2.8% annual increase was the slowest since March 2021 and matched analyst estimates. However, the monthly pop indicates inflation may be bottoming out after two straight months of cooling.

The data presents a mixed picture for the Federal Reserve as it fights to lower inflation back to its 2% target. On one hand, the slowing annual inflation rate shows the cumulative effect of the Fed’s aggressive interest rate hikes in 2022. This supports the case for ending the hiking cycle soon and potentially cutting rates later this year if the trend continues.

On the other hand, the sharp monthly increase in January shows inflation is not yet on a clear downward trajectory. Some components of the PCE report also flashed warning signs. Services inflation excluding energy picked up while goods disinflation moderated. This could reflect the tight labor market and pent-up services demand.

Markets are currently pricing in around a 40% chance of a rate cut in June. But with inflation showing signs of stabilizing in January, the Fed will likely want to see a more definitive downward trend before changing course. Central bank officials have repeatedly emphasized they need to see “substantially more evidence” that inflation is falling before pausing or loosening policy.

The latest PCE data will unlikely satisfy that threshold. As a result, markets now see almost no chance of a rate cut at the March Fed meeting and still expect at least one more 25 basis point hike to the fed funds target range.

The January monthly pop in inflation will make Fed officials more cautious about declaring victory too soon or pivoting prematurely to rate cuts. But the slowing annual trend remains intact for now. As long as that continues, the Fed could shift to data-dependent mode later this year and consider rate cuts if other economic barometers, like employment, soften.

For consumers and businesses, the inflation outlook remains murky in the near-term but with some positive signs on the horizon. Overall price increases are gradually cooling from their peaks but could plateau at moderately high levels in the first half of 2024 based on January’s data.

Households will get temporary relief at the gas pump as energy inflation keeps slowing. But they will continue facing higher rents, medical care costs, and services prices amid strong demand and tight labor markets. Supply chain difficulties and China’s reopening could also re-accelerate some goods inflation.

Still, the Fed’s sustained monetary policy tightening should help rebalance demand and supply over time. As rate hikes compound and growth slows, inflationary pressures should continue easing. But consumers and businesses cannot expect rapid deflation or a return to the low inflation regime of the past decade anytime soon.

For the FOMC, the January data signals a need to hold steady at the upcoming March meeting and remain patient through the first half of 2024. Jumping straight to rate cuts risks repeating the mistake of the 1970s by loosening too soon. Officials have to let the delayed effects of tightening play out further.

With inflation showing early tentative signs of plateauing, the Fed is likely on hold for at least a few more meetings. But if price increases continue declining back toward 2% later this year, then small rate cuts can be back on the table. For now, the January data highlights the bumpy road back to price stability.

Warren Buffett’s Berkshire Hathaway in the Spotlight After Strong Earnings and New Legal Risks

Posted on by slightbourne@noblecapitalmarkets.com

Berkshire Hathaway, the conglomerate led by legendary investor Warren Buffett, was in the news this week after posting strong fourth quarter financial results. However, the company’s stock price slipped after Buffett warned of more modest growth prospects ahead and new legal risks facing one of Berkshire’s businesses were highlighted.

In his widely-read annual letter to shareholders released over the weekend, the 93-year-old Buffett reported that Berkshire’s operating profit soared 21% to $37.4 billion in 2022. These stellar results were driven by gains in the company’s massive insurance operations, which include brands like GEICO and General Re. Berkshire also boasted enormous cash reserves topping $167 billion by the end of last year.

This kind of performance has led some investors to speculate that Berkshire may soon reach a $1 trillion valuation, joining an elite club of companies like Apple and Microsoft. But Buffett himself threw cold water on expectations that Berkshire would continue to post outsized growth, stating “All in all, we have no possibility of eye-popping performance.”

In plain English, Buffett was telling shareholders not to expect Berkshire to significantly outperform the overall stock market going forward. He admitted the conglomerate, which owns over 90 businesses ranging from railroads to candy makers, now lacks enough attractive investment options to “move the needle.”

Still, Buffett assured investors that conservatively-managed Berkshire is “built to last” even in turbulent times. He also confirmed that his trusted deputy, Greg Abel, is ready to smoothly take over managing the company when needed.

But some cracks in Berkshire’s fortress-like foundation were revealed this week when the company disclosed new legal risks facing one of its utilities, PacificCorp. PacificCorp, which operates as Rocky Mountain Power, may be sued by the federal government over alleged failure to prevent a major wildfire in Oregon in 2020.

Buffett’s letter predicted the total costs of wildfires, which are becoming larger and more frequent across the Western U.S., will weigh on Berkshire’s utility earnings for many years. This warning likely contributed to the company’s stock slipping from all-time highs reached after the strong quarterly results were announced.

While Berkshire still posted impressive overall gains last year, the legal overhang on one of its utilities and Buffett’s clear message that Berkshire’s best growth is likely in the past may temper investor enthusiasm going forward. The legendary investor, who has delivered 20% average annual returns to shareholders over 50 years, is clearly preparing investors for more modest goals ahead.

Some analysts believe Berkshire’s stock may be approaching full valuation given the cautious outlook expressed by Buffett. The company’s enormous size also limits its ability to find investments large enough to significantly boost future growth. However, Berkshire still possesses an unparalleled collection of businesses that generate steady profits year after year. For long-term investors, Berkshire remains a rock-solid holding despite its fainter future growth prospects.

No Recession in Sight for 2024, Say Davos Attendees

Posted on by slightbourne@noblecapitalmarkets.com

The annual World Economic Forum concluded on Friday in Davos, Switzerland, after a week of insight from some of the biggest names in business and politics. One of the main takeaways was optimism about avoiding a recession in the U.S. this year, despite ongoing economic concerns.

Most experts and executives see steady growth continuing in 2024, believing the economy remains on solid footing. Reasons for their confidence include potential interest rate cuts by the Federal Reserve in coming months, which could further stimulate economic activity. Consumer confidence has also been rising, suggesting households are eager to keep spending. Barring any major global crises, these factors have led to consensus that a downturn is unlikely in the next year.

The optimism comes as a breath of fresh air after massive disruption from the pandemic in recent years. However, other parts of the world are facing greater struggles. China in particular is dealing with slower growth, which prompted officials to reveal at Davos that their GDP expanded by just 5.2% in 2023. That’s down significantly from the 6-7% range China was averaging pre-pandemic.

Reasons for the slowdown include an ongoing semiconductor trade battle with the U.S. that is hurting tech manufacturing. China is also losing foreign direct investment as companies eye other Asian markets with friendlier business climates. The country recently lost its spot as the world’s most populous to rival India as well. With these challenges mounting, China appears eager for overseas capital to help spur its economy. Its officials breaking precedent to announce 2023 GDP numbers hints at this thirst for foreign money.

While China scrambles, Davos remains as popular as ever, albeit with some growing pains. Several regular attendees commented that the city is having infrastructure troubles keeping up with swarming conferences like the World Economic Forum. Traffic jams of shuttles and Ubers have become constant as hotels fill up. Local government officials apparently can’t even expense rooms anymore due to astronomical prices driven by demand.

This disruption didn’t stop high-level conversations on major themes like technology and geopolitics. Artificial intelligence was one of the hottest topics this year, taking over from the crypto hype of 2022. Companies flooded Davos with advertisements for their AI products and services. Headliners like will.i.am spoke enthusiastically about AI’s potential, announcing plans for a new podcast co-hosted with an AI companion.

But among the boosterism were voices urging calm and perspective. Sam Altman of OpenAI said AI will “change the world much less than we all think.” He noted how companies are using AI as a collaborative tool alongside human employees, rather than replacing them outright. Such measured takes may ease fears about mass job losses from automation. Job postings remain high in most countries, signaling an ongoing need for human skills and oversight.

While AI took center stage this year, some pressing geopolitical matters received surprisingly little airtime. The conflict between Israel and Hamas was rarely discussed, despite its global significance. Some speculate that businesses are wary of irritating stakeholders by speaking out on the polarizing topic. Similar logic may be why few executives criticized the prospect of Donald Trump returning to power. Staying cautiously neutral, however cynical, remains the safest option for profits.

Relatedly, the rise in antisemitism worldwide was a glaring omission in Davos discussions per some attendees. Finding constructive ways to combat prejudice could have been a valuable session. But the lack of debate on this and other divisive issues speaks to a gathering that ultimately caters to the global elite.

AI and recession talk make for good business panel chatter, but taking on discrimination may be beyond Davos’s comfort zone. As the conference’s popularity increases however, pressure may mount to address the most vital social issues of the day rather than sidestep them. Navigating that tension will be key to keeping Davos a premiere gathering of thought leaders.

For now, the World Economic Forum remains sold out and buzzing. Its reputation seems secure even as conversations gravitate toward the safest corporate ground. But avoiding the divides splintering society risks making Davos an echo chamber detached from reality. If it wants to keep its relevance, future forums may need to push attendees out of their comfort zones.