XLC - JOLTS shows megacaps are still mega-dependent on the Fed

2023-08-30 04:18:42 ET

AI may be the future, but today still belongs to the Federal Reserve when it comes to risk assets.

The Magnificent 7 megacaps all rallied Tuesday, driving the broader market to its third-straight session in the green and best one-day performance since June. The S&P 500 ( SP500 ) ( NYSEARCA: SPY ) ( IVV ) ( VOO ) rose 1.45%, the Nasdaq ( COMP.IND ) popped 1.74% with the Nasdaq 100 ( NDX ) ( QQQ ) notching a 2.15% gain.

The VIX ( VIX ) dropped to its lowest level for the month.

The megacap sectors led the way, with Consumer Discretionary ( XLY ), Communications Services ( XLC ) and Info Tech ( XLK ) up more than 2% on the day.

XLK hasn't seen a rise like that since June, when chips were still riding the AI wave of Nvidia's ( NASDAQ: NVDA ) stunning guidance in late May .

Nvidia exceeded lofty expectations with its latest results and guidance last week, but the sell-the-news reaction led to speculation the market was oversaturated on the AI front. On Tuesday, NVDA rose more than 4% to close at a record high.

Yes, there were headlines of a Google AI partnership. But the difference was the double dose of Fed friendly weak data out at 10:00 a.m. ET.

In the chart you can see the Magnificent 7 take off. Tesla ( TSLA ) saw the biggest pop, up nearly 8%, followed by NVDA, Apple ( AAPL ), Alphabet ( GOOG ) ( GOOGL ) and Meta ( META ) up more than 2% and Microsoft ( MSFT ) and Amazon ( AMZN ) up more than 1%.

First, the JOLTS report showed an unexpected drop in job openings to below 9M for the first time since March 2021.

The "JOLTS report bodes well for the Fed's 'soft landing' dreams," Wells Fargo economists wrote. "Job openings per unemployed person remain above pre-pandemic levels, but this indicator is clearly on a downward trajectory amid cooling labor demand growth and impressive labor supply growth."

"We suspect the FOMC will want to see today's data confirmed in future JOLTS reports as well as in other indicators, particularly those tied to labor compensation growth. That said, today's data are yet another sign that the inflation pressures of the past few years are slowly diminishing."

In addition, the Conference Board's August measure of consumer confidence dropped more than expected to 106.1, reflecting labor market jitters as well as the stock market decline and a rise in gas prices. The drop wiped out the gains of June and July .

The bad-news-is-good-news trade kicked in, with equities rallying and Treasuries yields re-pricing to reflect a slightly more dovish Fed path than the one plotted after Jay Powell's Jackson Hole speech.

The 10-year Treasury yield ( US10Y ) fell closer to 4.1% and the 2-year yield ( US2Y ), more closely tied to the fed funds rates, dropped even more to slip below 4.9% (See how rates are trading across the curve. )

Fed funds futures that had shifted to pricing one more quarter-point hike in November post-Powell shifted back to a 52% chance of a pause. Expectations for a first rate cut pulled forward to May from June.

The question for investors is whether this was the spark for a megacap breakout . Wells Fargo analyst Chris Harvey said recently the group had consolidated enough to see a second-half rally in stocks offering "solid balance sheets, stable earnings, and in many cases an 'AI kicker.'"

Richard Saperstein, CIO at Treasury Partners, expects stock market volatility to continue into September and continues to recommend overweighting large-cap tech, as well as oil stocks ( XOP ).

"So far this year, markets have been melting higher on goldilocks economic data, moderating inflation and a pause in Fed tightening," he said. "Fiscal spending continues to blunt the impact of quantitative tightening and higher interest rates."

"Given elevated multiples, we expect increased volatility from the potential bite of aggressive Fed policy leading to further declines in economic activity."

More on the Fed and AI

• Powell Isn't Bluffing
• Fed prepared to hike more
• Nvidia: The Market Is Missing The Big Picture
• Top 3 AI Stocks: Buy the Dip

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