In law school, we learned about “proximate cause,” one of the few valuable concepts that can be learned from three years of drudgery. It’s about who and what caused the injury and who pays for it.
The current stock market lends itself to proximate causes, as in “We need to find a cause for the sharp slowdown that could drive technology, and more specifically, Super Microdown the rabbit hole. “If you can determine the proximate cause of a 23% decline in the market’s best-performing stock to date, S&P500 this year you may be able to understand what is happening in the market below. Of course, the difference between this collapse, which does not seem to be over, and real life? There is no insurance, which is the basic payer when you determine who is at fault in the market.
Or is there any? Let me explain.
On Friday, Super Micro, a server and data storage company, committed the mortal sin of announcing when it would release its quarterly results, April 30. Nowhere in the press release about this vital cog in the generative artificial intelligence boom was there any mention. advance announcement of its latest results, the absence of which became the rallying signal to push the stock to $713 from $877 during the session. Let’s not forget that the stock fell another 3% after hours.
But was this the immediate cause? Super Micro shares had already fallen from a high of $1,229 on March 8, so you can’t ignore the pre-announcement. No, the real immediate cause, the one that is really at fault, was the February unemployment report, released on March 8th. It’s a day that should live in tech infamy, the day Nvidia rose 5% to its peak only to fall 5%. % until the close – one of the worst reversals I have ever seen. Nvidia stock opened at $951, climbed to a yearly high of $974 and closed at $875. It has not increased since.
At the time, many believed that the immediate cause of Nvidia’s spin was the performance of two of its chipmaker peers. Marvell Technology fell short of its revenue numbers and fell far short of its AI equipment guidance. It seemed rather innocuous. But not in combination with Club stock news Broadcom, which provided an outlook that did not include an increase in revenue. Given that Broadcom and Marvell are key players in bringing AI to customers and that they compete with each other, the only logical conclusion was that generative AI might slow down. Both stocks fell sharply. Marvell CEO Matt Murphy talked about how AI equipment is powerful enough, but not enough to compensate for the decline of traditional technology infrastructure, including cell phones. When you think your company is making 40 cents and it’s making 23 cents, that’s worrying and it turned out to be a metaphor for AI as a whole.
Surely these two updates couldn’t be the immediate cause of Nvidia’s spike, right?
Correct, because that day was also the day the nonfarm payrolls report came in hot, just after Federal Reserve Chairman Jay Powell signaled he was willing to cut interest rates. interest. Given that employment rose to 303,000, about 100,000 more than expected, with strong wage growth, we recognized that Powell was completely wrong in his forecast. Yes, that’s the day things started to go down as a whole.
This is the day it all began, the great exodus of leaders. This was the day Nvidia peaked, as did the entire cohort.
It was the unemployment figure that was the real immediate cause, as that was the day the theory of a big rate cut was dashed. It was that day that brought about the heyday of technology and began the great swing into the hot money spotlight that had set fire to the stocks that dominated the market.
Did the technology peak coincide with the number of jobs or was the number of jobs the proximate cause of what has happened since?
In my market research, I have come to believe that there are only 12 important indicators per year, the 12 employment numbers. Of course, this Fed has made it clear that it cares about the price deflator, the one we’re getting this Friday, and the consumer price index. That’s all well and good, but the bond market sets the rules and the bond market lives and dies by employment data. I don’t care what Jay Powell thinks is important, or what other Fed officials gossip about that we cover like everyone is a god who sits and spits ideas with Zeus.
I know one thing: if unemployment doesn’t exceed 4%, then nothing matters. We won’t get job growth without some inflation. This is wishful thinking. Of course, sub rosa, you can get it no matter how many immigrants arrive. But the reported numbers don’t include immigrants and we don’t know how many of them have work permits because the Biden administration won’t tell us.
All we know is the apples-to-apples ratio. It was the day the market realized there might not be as many rate cuts this year as previously thought. These jobs numbers tell you everything you need to know about Powell’s big mistake. This number has wiped out dot plots. This set us up for a fall, but many did not expect that the fall would be in generative AI and not the typical losers, the industrialists. They lit up.
Here’s what happened on that fateful day: We knew there wouldn’t be a recession, and if there wasn’t a recession, we didn’t need policy easing. Fed. We also didn’t need to invest in super growth stocks that were turning into only high growth stocks. Indeed, high-growth comparisons simply aren’t as interesting as those of homebuilders or decyclical companies like caterpillar which reports this week. Decyclical is actually a term that Caterpillar CEO Jim Umpleby gave me to explain why CAT would surprise analysts. He said that when CAT shares were worth $208, they now trade at around $354. Now there is a right decision.
Since March 8, this market has been particularly miserable. Amazon, MicrosoftAnd Metaplatforms are the only ones to stand out. THE Nasdaq was particularly bad.
What could change things? If the date of March 8 is the right one, it would require both positive surprises and only falling employment. You see, the lack of positive surprises in the hottest tech cohort and strong employment are the proximate causes of what happened. The collapse in Super Micro stock is just part of an ongoing movement that has only accelerated since that peak day.
Currently, the money coming from this market is being ferociously neglected. We had the largest two-week cash outflow since 2022. Some went to pay taxes – bills were unusually high this year.
But I think many investors had no idea what Super Micro did or was and are still mystified by Nvidia, mystified enough to exit when they saw the slide without really thinking about anything other than the pain that they felt.
When Jeff Marks and I talk this week about what we see happening in the future, we’ll delve into that past and how it all happened so quickly. Fortunately, there is money left for stocks. Not everything has moved from technology to touch. Our miserable technological expansion as we progress has given us a chance to re-apply, so to speak, and it has worked both relatively and absolutely, except in extreme cases. Apple and Nvidia, which we reduced to resize our positions. The discipline of concentration rules trumps even the dictum that hold stocks, don’t trade them. Apple, as we know, has been relegated to the near-disaster category. This is a stock heading toward $160, not a new forecast. Nvidia? I thought the situation might stabilize in this area, but it will be a battle like last year, from July to the end of the year.
What matters is March 8, the combination of an overly strong economy that avoided budget cuts and a bunch of key AI games that failed to hit their numbers.
Right now, the money is moving towards higher rate and longer plays. This includes two of the best of Wells Fargo And Morgan Stanley, as well as industrial sectors that can stay in business even though they don’t need help from the Fed. This also includes consumer packaged goods companies that raised their prices and did not have to reduce their prices for the consumer: consider General mills And Procter & Gamble. That’s why it was so stupid that P&G initially fell on Friday after reporting strong earnings.
I’ll let you know what we can get out of this mix when we meet Wednesday at noon ET for the April monthly meeting. But now at least you know how we got into this mess and that’s the key to getting out of it – both for an oversold rebound for tech and then perhaps another decline before we let’s get something sustainable on the rise.
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