It was bound to happen eventually. Prices of gold, silver and copper fell sharply this week as traders rang their cash registers and began taking profits after weeks of gains. But technology was boosted by Nvidia's earnings.
Technology stocks led the way, and the S&P 500 and NASDAQ continued to rise, but the overall market was lackluster.Early estimates of the strength of the economy and the purchasing managers' index, known as the flash PMI, suggested prices were still rising.Also making matters worse was the Federal Open Market Committee's release on Wednesday of the minutes of the last Fed meeting.
“Participants recognized that while inflation has moderated over the past year, recent months have not demonstrated further progress toward the Committee's 2 percent objective,” Fed members wrote.
This was no surprise to markets, given that committee members had been repeating the same theme of “high interest rates for longer” in interviews and speeches this week. What was new and concerning to investors was that “several members noted their readiness to further tighten policy if inflation risks materialized and such action became appropriate.”
This is the first time this year that the Fed has mentioned the possibility of raising interest rates. Investors panicked. Rising interest rates are like a code for the markets, especially for commodities like gold, silver and copper. This will call into question the claims of gold bulls that we are in a super cycle for commodities.
But it wasn't just commodities that fell: Chinese stocks, which had also been doing well, succumbed to a similar sell-off. Overbought conditions gave traders in mainland China and the U.S. an excuse to take profits.
What I found interesting was that several large Chinese companies that are also traded in the US reported surprising profits and sales. For example, PDD, the parent company of Tumu (Amazon's Chinese rival both at home and abroad), reported revenue and profits that were double what analysts expected. Trip.com Group (travel), Bilibili (social media), and NetEase (online gaming) were other companies that posted impressive profits as well. However, their stock prices have fallen in this downturn.
As for the U.S. stock and bond markets, investors were looking to Nvidia for earnings, a leader in artificial intelligence that has buoyed stock prices all year and whose use is expanding into many sectors of the market, from utilities to grocery stores.
The good news is that the company has beaten expectations in earnings, revenue and guidance for three consecutive periods, and it also announced a 10-for-1 stock split effective June 7th.
The good news sent Nvidia shares up more than 11% on Thursday, and the stock market initially followed suit, but the average stock price gave up most of its gains by Thursday's close, although Nvidia held firm.
Last week I wrote that the S&P 500 could rise to 5,340, with the S&P 500 hitting intraday highs of 5,341 and the NASDAQ hitting 16,996.39. However, I also warned that I expect to see a few days of profit-taking, especially in areas that have seen significant gains. This would ideally ease overbought conditions and set the stage for another rally in June.
The declines in commodities and Chinese stocks this week certainly count as declines, but I would buy. As for the US market, I think we may see some profit taking early next week as traders focus on the Consumer Consumer Expenditures Index next Friday. Consumer Consumer Expenditures is the Fed's primary inflation indicator. Equity bulls will not want to see this data point rise.
I wish all my readers a happy long weekend, but please also take a moment to remember what the Memorial Day holiday means. I will remember my fellow Marines stranded in the jungles of Vietnam. Semper Fi!
