Thoughts For Thursday: AI Is Still Ascending

AI is still ascending which means the market will continue to move higher.  With higher moves like the ones we are experiencing now, you need to brace yourself for hard corrections as well. Easy to say, but hard to predict.

 

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The markets were closed yesterday for the Juneteenth holiday, a few gains were managed prior to the closing bell on Tuesday.

The S&P 500 closed at 5,487, up 14 points, the Dow closed at 38,835, up 57 points and the Nasdaq Composite closed at 17,862, up 5 points. A look at the monthly chart shows that so far June is showing strength, though we have a week and a half to go.

 

 

 

Chart: The New York Times

 

In morning futures action, S&P 500 market futures are up 23 points, Dow market futures are up 48 points and Nasdaq 100 market futures are up 130 points.

TalkMarkets contributor Lance Roberts says Consumer Survey Shows Rising Bullishness.

"The latest consumer survey data from the New York Federal Reserve had interesting data.

The chart below shows the annual change in consumer surveys of higher stock prices. Unsurprisingly, investors have become increasingly exuberant about stock prices in conjunction with the market rally that began in 2022.

 

Consumer Survey Ann Pct Change of higher asset prices

 

However, Yahoo suggests that the rising bullish sentiment in the consumer survey reflects the “haves and have-nots.” That statement is understandable when considering the breakdown of household equity ownership and the finding that the top 10% of households hold 85% of the equities.

 

Household equity ownership by bracket

 

Consumer survey data shows rising stock market prices lifted confidence across age and income brackets. That should be unsurprising given the daily drumbeat of social and mainstream media highlights of the current bullish market.

 

Market Warning In Bullishness

To understand the problem, we must first realize from which capital gains are derived.

Capital gains from markets are primarily a function of market capitalization, nominal economic growth, plus dividend yield. Using John Hussman’s formula, we can mathematically calculate returns over the next 10-year period as follows:

(1+nominal GDP growth)*(normal market cap to GDP ratio / actual market cap to GDP ratio)^(1/10)-1

Therefore, IF we assume that GDP could maintain 2% annualized growth in the future, with no recessions ever, AND IF current market cap/GDP stays flat at 2.0, AND IF the dividend yield remains at roughly 2%, we get forward returns of:

(1.02)*(1.2/1.5)^(1/10)-1+.02 = -(1.08%)

But there are a “whole lotta ifs” in that assumption. Most importantly, we must also assume the Fed can get inflation to its 2% target, reduce current interest rates, and, as stated, avoid a recession over the next decade.”

 

Yet, despite these essential fundamental factors, retail investors are again throwing caution to the wind. As shown, household equity ownership has reverted to near-record levels. Historically, such exuberance has been the mark of more important market cycle peaks.

 

household equity ownership level vs the market

 

If economic growth reverses, the valuation reduction will be quite detrimental...

While the consumer survey is very bullish on the outlook for continuing asset price increases, that sentiment is based on the “hope” that the Fed has everything under control. History suggests there is more than a reasonable chance they don’t." 

Roberts unpacks this further in his full article. Worth a look if you have time.

Contributor Tim Knight is also concerned about levels of household equity he finds they reflect Record High Allocation.

"This is what generational tops smell like."

 

A visually arresting chart for sure. What is not depicted in the chart is that one of the reasons levels of household equity are rising is because home ownership is out of reach for households for whom it shouldn't be, and many are hoping for stock market gains to provide needed income to facilitate same. A slippery slope which needs to be navigated with wisdom and fact rather than emotion and hype.

Speaking of home ownership TM contributor Mish Shedlock reports that A New High-Rise Building Will House The LA Homeless In $600,000 Units.

"A grand opening of Weingart Tower will have 278 units to shelter the homeless. Hooray!?

ABC News reports New high-rise building to house homeless in $600K units in downtown Los Angeles

There are 278 units in the 19-story development known as the Weingart Tower. It’s intended to help people currently without shelter on Skid Row and it will be L.A.’s largest permanent support housing project.

The building will have an entire floor of offices for case workers, in addition to a list of impressive amenities: a gym, art room, music room, computer room and library.

Residents will enjoy six common balconies and a café.

It’s considered affordable housing, but the cost to build this type of project still adds up. Each unit costs nearly $600,000 and it’s being funded by taxpayers.

The $165 million project is receiving permanent financing from Proposition HHH, which voters overwhelmingly passed in 2016. The new tower is also receiving state housing funds and $56 million in state tax credits.

Several elected officials, including L.A. Mayor Karen Bass, attended a grand opening ceremony for the building.

Building Tour

 

 

NBC news reports There are 75,518 people are homeless in the county, and 46,260 in the city of Los Angeles, an increase from the 69,144 in the county, and 41,980 the city from 2022 as of Jan 23, 2023."

See the full article for Shedlock's take on the idea.

Contributor Hendra of Elliot Wave Forecast, postulates Elliott Wave Analysis On Nasdaq Looking For Further Rally.

"Short Term Elliott Wave in Nasdaq Futures (NQ) suggests that cycle from 4.19.2024 low is in progress as an impulse. Up from 4.19.2024 low, wave 1 ended at 19023.25 and pullback in wave 2 ended at 18241.25. Wave 3 higher is currently in progress with subdivision of an impulse in lesser degree. Up from wave 2, wave (i) ended at 18755.50 and pullback in wave (ii) ended at 18435.75. The Index rallied higher in wave (iii) towards 19124.5 and dips in wave (iv) ended at 18940. Final leg wave (v) ended at 19155 which completed wave ((i)).

Pullback in wave ((ii)) ended at 18971.93 with internal subdivision as a zigzag structure. Down from wave ((i)), wave (a) ended at 18997 and wave (b) ended at 19067.75. Wave (c) lower ended at 18971.93 which completed wave ((ii)) in higher degree. The Index rallied higher in wave ((iii)) as an impulse. Up from wave ((ii)), wave (i) ended at 19671.75 and wave (ii) pullback ended at 19500. Near term, as far as pivot at 18971.9 low stays intact, expect pullback to find support in 3, 7, or 11 swing for further upside."


Nasdaq 60 Minutes Elliott Wave Chart
 

 

TM contributor Stephen Innes writes Cutting Rates Might Be The Most Effective Strategy To Reduce Inflation In The U.S.

"...According to data released on Wednesday, U.S. home builder sentiment has fallen to its lowest level in 2024. The National Association of Home Builders (NAHB) gauge registered a reading of 43, marking the second consecutive month below the threshold separating optimism from pessimism. The primary culprit is clear: high interest rates.

Buyers are highly sensitive to changes in interest rates. As home prices continue to rise, relief can only come from lower rates due to the structural mismatch in supply and demand.

NAHB Chief Economist Robert Dietz described the current situation as "unusual." Elevated shelter inflation is "making it difficult for the Fed to achieve its [inflation] target," he noted on Wednesday. This challenge is preventing the Federal Reserve from cutting rates. However, Dietz argued that "the best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply," which requires "a more favorable interest rate environment for construction and development loans."

The Federal Reserve faces a paradoxical reality: high rates may now contribute to inflation. The challenging yet essential conclusion that contradicts traditional economic orthodoxy is that cutting rates might be the most effective strategy to reduce inflation in the U.S."

I'm not convinced. Christopher D. Cotton of the Boston Fed has a new paper out on the topic of shelter costs and inflation which you can read here, A Faster Convergence of Shelter Prices and Market Rent: Implications for Inflation.

To close out today's column on a positive not contributor Wajeeh Khan finds 3 Dividend Stocks In Tech With Potential To Significantly Outperform.

"Tech stocks are primarily known for their upside potential. But wouldn’t they be all the more exciting if they came up with a lucrative dividend yield as well? 

 

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Juniper Networks Inc (JNPR)
 

Juniper Networks has gained some 20% since the start of this year... 

Plus, JNPR currently pays a dividend yield of 2.48% as well. 

Juniper Networks stock is worth owning also because it has a single native AI platform which helps cut operating costs by up to 85% in some cases. 

Note that HPE is currently in the process of acquiring Juniper Networks Inc for about $14 billion to accelerate AI-driven innovation. The all-cash agreement values each share of JNPR at $40. 


Skyworks Solutions Inc (SWKS)
 

Skyworks Solutions is a dividend stock in tech that Kevin Cassidy of Rosenblatt Securities expects will outperform in the coming months. 

His $120 price objective on SKWS indicates roughly 15% upside from here and the semiconductor firm pays a dividend yield of 2.55% as well. 

Skyworks stock is worth owning also because it has been raising its dividend payments for about ten years. 

Liam Griffin – the chief executive of Skyworks Solutions Inc recently parked $1.0 million in SKWS that signals insider confidence in what the future holds for the Nasdaq-listed firm that showcased industrial and automotive isolation solutions at PCIM Europe last week. 


Cisco Systems Inc (CSCO)

Cisco has been in a downtrend this year and is currently exchanging hands at under $46... 

What makes CSCO all the more exciting to own in 2024 is its rather healthy 3.48% dividend yield. The multinational based out of San Jose, California has raised dividends for thirteen years straight. 

Investors should consider owning Cisco stock also because it reported market-beating financial results for its third quarter in May. 

At the time, the Nasdaq-listed firm also issued encouraging guidance. CSCO forecasts its revenue to fall between $53.6 billion and $53.8 billion on up to $3.71 a share of adjusted earnings this year – ahead of analysts at $53.14 billion and $3.67 per share, respectively."

Caveat Emptor, as always.

Have a good one.

Peace.

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More By This Author:

Tuesday Talk: Punting For The Holiday
Thoughts For Thursday: Tech Still Leading
Tuesday Talk: Looking Good Across The Board, What About China?

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