Trump-Powell tensions heat up, the stocks retail traders are buying & selling

Key Concepts

• Dow Jones Industrial Average (DJIA): A price-weighted measure of 30 large, publicly owned companies based in the United States.
• NASDAQ Composite: A market capitalization-weighted index of over 3,000 stocks listed on the Nasdaq stock exchange.
• S&P 500: A market capitalization-weighted index of 500 of the largest publicly traded companies in the U.S.
• S&P 400 (Midcaps): An index representing medium-sized companies in the U.S.
• Russell 2000 (Small Caps): An index representing small-cap U.S. stocks.
• Federal Reserve (The Fed): The central banking system of the United States.
• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Mag Seven: Refers to the seven largest technology companies (typically Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• VIX: The CBOE Volatility Index, often referred to as the "fear gauge," measuring market expectations of volatility.
• Stacks Report (Schwab): A report by Charles Schwab analyzing retail investor trading activity.
• RSI (Relative Strength Index): A momentum indicator used in technical analysis.

Market Overview & Stock Performance (January 10, 2024)

The market experienced a down day, with the Dow Jones Industrial Average falling approximately 400 points (0.8/10en of 1%), closing near its intraday low reached about 30 minutes prior. The NASDAQ Composite showed initial gains but failed to maintain them, while the S&P 500 declined by 2/10en of a percent. Notably, the S&P 400 (midcaps) reached a record high, increasing by 2/10en of 1%, while the Russell 2000 (small caps) did not follow suit.

Sector Performance: Energy led gains, up 1.5%, followed by staples, real estate, and utilities. Industrials and materials also saw positive movement, categorized as defensive sectors. Conversely, financials experienced the largest decline, down about 2%, followed by communication services and healthcare/discretionary/tech sectors underperforming the S&P 500.

Individual Stock Performance: Within the Dow, Nvidia and Apple showed modest gains (0.5% and 0.33% respectively). Walmart rose 2%, Home Depot 1%, Coca-Cola 1%, and J&J 2% – largely defensive names. Salesforce fell 7%, Verizon 2%, and American Express 0.5%. Banking sector performance was uniformly negative: JP Morgan down 4%, Morgan Stanley 2%, Wells Fargo, Bank of America, Goldman Sachs, and Citigroup all down 1%.

Federal Reserve Independence & DOJ Investigation

Concerns regarding the Federal Reserve’s independence are mounting, fueled by a criminal investigation launched by the Department of Justice (DOJ) into Fed Chair Jerome Powell. Former Kansas City Federal Reserve Bank President and CEO Thomas Hanik stated that while the initial announcement of the investigation was significant, the focus has shifted towards the administration, suggesting the investigation may be “a road to nowhere.”

Hanik emphasized that interfering with the Fed’s independence creates uncertainty, destabilizes markets, and can undermine economic goals. He noted the Fed has already eased monetary policy by 0.75 percentage points in recent meetings, seemingly aligning with the administration’s desire for easing, but the investigation throws a “monkey wrench” into the process, potentially delaying the confirmation of a new chair. BNY Mellon’s CEO argued that attacks on the Fed are counterproductive to the White House’s economic goals, risking disruption to the bond market.

Macroeconomic Outlook & Inflation

The CPI print came in softer than expected, around 2.8%, but remains above the Fed’s 2% target, hovering between 2.7% and 3% for the past year. Hanik believes the Fed has implicitly accepted 3% inflation as it prioritizes unemployment. He cautioned that allowing inflation to rise above 3% while pursuing lower unemployment could lead to both higher unemployment and higher inflation. He anticipates the Fed will likely hold interest rates steady, observing the impact of winter and early spring before making further adjustments.

Hanik highlighted the resilience of the economy despite a cooling labor market, attributing this to strong fiscal policy, continued government spending (a $2 trillion annual deficit), and the Fed’s monetization of debt. He acknowledged the potential role of AI in the labor market but believes its impact is currently limited, primarily affecting repetitive tasks at lower employment levels.

Trending Tickers & Analyst Ratings

• Adobe: Downgraded from “Outperform” to “Market Perform” by Oppenheimer due to a challenging operating environment, inconsistent product execution, and weak operating margin guidance, compounded by competition from Apple’s new creative software subscription plan.
• Madna: Provided positive guidance, expecting improved operating expenses, $1.9 billion in 2025 revenue, increased year-end cash balance, and up to 10% revenue growth in 2026.
• UPS & FedEx: Downgraded by BNP Paribas. UPS downgraded from “Neutral” to “Underperform” due to concerns about earnings growth. FedEx downgraded from “Outperform” to “Neutral” citing medium-term competitive pressures.

Retail Investor Activity (Schwab Stacks Report)

Charles Schwab’s Stacks report indicates retail investors turned net sellers in December, particularly in the final week of the year when trading volume was down 26%. Joe Maza, Head of Trading and Derivatives Strategist at Schwab, attributes this to end-of-year repositioning rather than a significant shift in sentiment.

Retail investors sold consumer discretionary stocks and bought financials, materials, and industrials, aligning with a cyclical trade. Technology saw a shift from the biggest net buy in November to the biggest net sell in December, largely driven by profit-taking, particularly in Palantir and Nvidia. Intel remains a consistent sell despite recent gains.

Maza noted a growing skepticism towards the “Magnificent Seven” stocks, with only two outperforming the S&P 500 in 2024. He emphasized a shift towards a stock-picker’s market. Generational differences were observed: Gen X is more aggressively positioned, while Gen Z is more cautious, potentially due to past market experiences and differing financial situations.

To Watch Wednesday (January 11, 2024)

• Earnings Reports: City, Bank of America, and Wells Fargo will release their fourth-quarter results. JP Morgan’s earnings miss and Jamie Dimon’s cautionary remarks regarding geopolitical risks, inflation, and asset prices are key context.
• Retail Sales Data: November retail sales data is expected to show a 0.4% increase, providing insights into consumer spending.
• Supreme Court Ruling on Trump Tariffs: The Supreme Court will rule on the legality of Trump’s tariffs, a decision with significant implications for trade and supply chains.

Conclusion

The market experienced a modest pullback amid concerns about Fed independence, ongoing inflation, and shifting investor sentiment. While economic fundamentals remain relatively strong, increased volatility is anticipated in 2024. Retail investors are exhibiting a more cautious approach, shifting from net buyers to net sellers, and demonstrating a growing skepticism towards the high-flying technology stocks that dominated 2023. Key economic data releases and the Supreme Court ruling on tariffs will be closely watched in the coming days.