Microsoft Sparks a Rally, Trump Promises Peace, Truth About Traders
Let’s find out if the relief rally can last, whether we can believe fighting will stop in Gaza … and … what I know about that footage of traders on the news.
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Relief rally? Yes. A massive relief rally. Can it stick? It certainly could. More on that in a bit. On Thursday, U.S; equity markets decided to focus on the good rather than the bad. Microsoft (MSFT) earnings lit the fuse on Wednesday evening. Markets decided to focus on the more than robust free cash flow results for the second quarter rather than on more mega-cap disappointment from Meta Platforms (META). The shares of MSFT ran 15.5% higher on Thursday during the regular session. adding at least at one point, $450B to Microsoft’s market cap.
That was the largest single session gain in market capitalization for any U.S. company ever. Shares of META, in contrast, gave up 8% on Thursday despite a broad rally that ran through growth-type stocks. It looks like the Thursday into Friday morning overnight has produced another split in mega-cap performance as Amazon (AMZN) shares have reacted very well to its earnings release, while Apple (AAPL) shares have not. Microsoft and Amazon are both Sarge-folio names.
What caused the rally on Thursday. I mean besides the momentum-driven nature of high-speed keyword-reading algorithms? As I mentioned, there was a relief type rally. The Philadelphia Semiconductor Index popped for a gain of 8.2%. Within that index, SanDisk (SNDK) ran wild, gaining an even 26% for the session, while Micron (MU) gained 18.4% and Lam Research (LRCX) gained 18%. That seemingly robust rally only put some of these stocks back where they were earlier in the week.
It wasn’t just the semis. The Dow Jones U.S. Software Index added 8.4% on Thursday, led by CoreWeave (CRWV) and of course, Microsoft. On the flipside, the Dow Jones U.S. Internet Index lost 2.3%, as it was weighed down by Meta Platforms. So, was this rally simply born of relief? No. I do see South Korean tech stocks soaring on Friday, but no. Take a look at the macro…
Pushing Back on the Hawks
On Thursday morning, the Bureau of Economic Analysis released its June data for consumer-level inflation as well as personal income and personal spending. The data, while welcome on the inflation side, was mildly sobering on the income and spending side. Personal consumption and personal income printed at monthly growth of 0.3% and 0.2% respectively in June, in both cases, a tenth of a full percentage point below expectations.
In addition, headline personal consumption expenditure inflation landed at -0.1% m/m and 3.7% year over year. That was down from 4.1% growth in May. Core PCE prices hit the tape at growth of 0.1% for the month and an annual 3.3% pace. That was down from 3.4% in May, meaning that the slowdown in prices seen in the consumer price index was evident here in the Fed’s favored measure of consumer-level inflation and it could not simply be credited to falling gasoline prices during that month.
While the data on inflation was positive for the policy doves, not to mention Wall Street, second-quarter gross domestic product, at the headline, was a welcome disappointment for interest rate watchers. U.S. GDP growth for the second quarter crossed the tape at growth of 1.5% (q/q, SAAR), well below expectations. This got the algorithms that simply skim for keywords moving in the right direction. Never mind that the report really was not that weak at all. That’s how keyword-reading algorithms took it, so that’s how the markets took it.
Remember, those shots you see in the media of traders working on trading floors are mostly file footage. Those traders have been replaced by robots that do not take the price discovery process all that seriously. Earlier this week I saw two of my friends trading on TV as the anchors described the market action. I know both of those men to have passed away several years ago, but there they were trading with each other as if it had happened that day. I also saw another friend of mine who went bald years ago, trading in his youthful glory with a full head of hair.
So few of us know that the financial media takes these kinds of liberties, but it’s important for investors to know that the human traders that were replaced by these algorithmic traders did not live to drive momentum. They fought for the best possible price for their customers, and the result was a purer outcome at the point of sale. The drive to keep one’s customers happy actually suppressed volatility.
Back to the GDP print. No, it was not bad at all. Personal consumption expenditures printed at +3.2%, Gross private domestic investment hit the tape at 3.0%. Exports landed at +4.5%. Why did GDP disappoint? Federal Spending printed at -4.1%. That’s why. Defense spending was actually up 2.4%. Non-defense spending printed at -12.9%. Economic activity, my friends, was stronger than you think during the second quarter. Much stronger. Psst… don’t tell the algos.
Peace?
Oh, there was some positivity on the war-front as well. Both the Wall Street Journal and the Financial Times reported that late Thursday evening, U.S. officials had announced an agreement, that if actually followed, would see Hamas and other Palestinian militant groups gradually disarm in Gaza in exchange for an Israeli military withdrawal from the troubled region.
Mediators from Egypt, Qatar and Turkey apparently brokered the deal that will be carried out in phases. Pres. Trump posted to social media, “Today, the Board of Peace reached a HISTORIC agreement for the COMPLETE DISARMAMENT of Hamas and all other armed groups in Gaza. This is a monumental step toward lasting PEACE and SECURITY,” There was no immediate comment from Israel.
So, do you believe peace is about to reign supreme in the Gaza Strip? Do you believe that Israel and Palestinian militants will stop fighting? For investors, there is reality and then there is what those momentum chasing / forcing algorithms will do. You had to pay those street kids on the trading floor a commission. Without them, the market’s “powers that be” found a way to take your pound of flesh anyway. Just at reduced cost, to them.
Marketplace
On Thursday, Treasury yields were a little lower. This morning, they are a little lower than that. Crude prices are lower too, but up a bit since midnight. On Thursday, the S&P 500 gained 1.66% as the Nasdaq Composite added a beefy 2.78%. The tech-heavier Nasdaq 100 tacked on a nifty 3.38%. You already know the semis soared. Small and mid-cap stocks did well, too. Only the Dow Transports had a lousy day on Thursday.
That said, only five of the S&P sector SPDR ETFs managed to close out the day in the green. The breakdown was optimistic though. Tech (XLK) led, followed by all of the cyclical sectors. The defensive sectors all closed in the red, which is something you want to see if you’re a buy and hold investor.
Winners beat losers by just about five to four at the NYSE, but by a more impressive seven-to-four margin at the Nasdaq. Advancing volume took a rather pedestrian 55.4% share of composite NYSE-listed trade, but a much more commanding 73.7% share of composite Nasdaq-listed activity.
It’s difficult to see Thursday as more than a day of pause. We would need the indexes to rise on Friday (which looks promising right now) above the Tuesday highs.
Markets are very close to that right now. A boost in positive trading volume would help too. On Thursday, aggregate trade was lower on a day over day basis across both NYSE-listings and the membership of the S&P 500. Activity was only higher across Nasdaq-listings. We like to see trading volumes higher across the board before we start “high-fiving.”
Economics (All Times Eastern)
08:30 – Employment Cost Index (Q2): Expecting 0.9% q/q, Last 1.2% q/q.
09:45 – Chicago PMI (July): Expecting 57.5, Last 56.7.
10:00 – U of M Consumer Sentiment (July-F): Flashed 54.4.
10:00 – U of M One-Year Inflation Expectations (July-F): Flashed 4.2%.
10:00 – U of M Five-Year Inflation Expectations (July-F): Flashed 3.3%.
1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 587.
1:00 – Baker Hughes Oil Rig Count (Weekly): Last 450.
The Fed (All Times Eastern)
No public appearances scheduled.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: ABBV (3.63), CVX (5.57), XOM (3.68)
At the time of publication, Guilfoyle was long MSFT, AMZN, SNDK, MU equity.
