What to Expect From the Fed This Week
Markets seemed to respond “appropriately” to the jobs report on Friday. We published our immediate take in the aftermath, and that seems to have become the consensus view: that the “real” jobs situation is somewhere in between the household and establishment surveys.
I’ve been doing this for a long time and I don’t think I can remember so many people talking about the discrepancy between the two surveys (though this is certainly not the first time they have deviated by so much).
With the Fed meeting on Wednesday, don’t expect rates to do too much. They should drift a bit higher in yield terms but won’t do much more until we get the dots and Chairman Powell speaks. The market is likely going to bet on Powell’s inner dove making an appearance at the press conference.
Nvidia Could Set the Tone This Week
I don’t typically cover individual stocks, but undefined could well set the tone this week as it starts the week having done a 10-for-1 split that kept a penny dividend for each share.
I’ve heard some argue that the split will allow far more retail participation. One case for this is that, at above $1,000 a share, it was difficult for retail to participate. Small accounts might not want to have a large percentage of NVDA, just to own one or two shares. The smaller price will let retail allocate more appropriately.
I think the split will not help, or may lead to less upward momentum.
The first case against that is how many accounts with less than, say, $20,000, are there? Anyone with $20,000 could have bought one share and had a 5% allocation. I find it difficult to believe, in this day and age, that the stock split is that meaningful for retail. (Back in the day, where everything traded in 100 lots, sure. But now?)
NVDL, a two-times leveraged ETF on NVDA, already exists (and has a market cap of $3 billion). This is so unique in my experience, that I suspect this already catered to the small-account day traders, hence no big change in small-account demand.
I’ve heard that the option pricing might be more punitive and that option prices will become relatively more expensive. That dealers have a tendency to charge more for out of the money options on lower-priced stocks than higher-priced stocks. On the surface, at least mathematically, that doesn’t make sense, but some people I trust have pretty good arguments for this. Anything that shrinks the call option buying and reduces the “gamma squeeze” might prove to be a hindrance.
So, watch NVDA and watch the Fed.
A Look at Credit Markets
While we wait for that, credit markets look to be in great shape.
Since I don’t love yields, I’d hold off on adding investment grade and munis. I think structured credit can continue to do well, and is less dependent on yields. While I’m not buying (JAAA) or (JBBB) , the case could be made (I’m heavily skewed toward muni closed-end funds in my income portion of the portfolio). High yield isn’t as rate dependent as investment grade, so maybe nibble here, though I’d lean toward leveraged loans (floating rate).
Two things that are really important in high yield and leveraged loans are slightly tied to private credit:
- The composition of these markets, especially the high-yield bond market, continues to move toward higher-quality, very large (hence more transparent) issuers than in the past. That makes all the longer-term charts less relevant than otherwise.
- Banks are starting to compete with private credit again, meaning the smaller, lesser-known issuers will see cost of debt reduce, which will move on up the “food chain” helping larger credits as well.
Two Looming Questions
Can the Fed disappoint or help? Can AI disappoint or help?
Those seem to be the two questions that have needed answers every day for the past year. I’m leaning toward disappointment, but more often than not, the market has taken AI and the Fed in a positive light!
At the time of publication, Tchir had no positions in any securities mentioned.