Magic reemerges at Disney

Stocks legged higher yesterday after the Consumer Price Index came in lower-than-expected sparking speculation that the Fed would slow down its aggressive hiking measures. The Nasdaq entered a bull market yesterday – you read that correctly, read more about what that means in today’s note.

Swingers. Let’s start at the top. Inflation, as measured by the Consumer Price Index / CPI showed an +8.5% change from last July, lower that the expected +8.7% and far lower than the prior month’s +9.1% change. Lately, with critical numbers like these, investors have conditioned to expect the worst with recent hot prints in employment numbers and technical recession warning lights. That is why when an inflation number comes in cooler than expected, stocks, especially ones tied to interest rates, take wing. If you are only an occasional reader, you know by now that tech and growth stocks have become highly, inversely correlated to bond yields. I won’t get into the exact reason but rising interest rates starting late in 2021 were the principal driver for the big drawdown in technology and growth stocks, which lasted through June of this year.

The Nasdaq Composite Index is typically used as a proxy to represent technology and growth as the index is heavily weighted in those shares. After hitting an all-time high last November, the index tumbled over -33% bottoming out in mid-June. The index entered a bear market in early March this year. An index enters a bear market when it falls by more than -20% from its most recent high. For the Nasdaq that occurred on March 4^th, earlier this year. An attempt to recover failed later in the month before the index spiraled into the close of the second quarter. If you own mega-cap tech stocks you don’t need to know these exact numbers to know the conditions, and the many clients that I speak to have come up with other colorful ways to describe the performance of their much-loved tech stocks for the first half of the year. This is a PG-13 note so we will stick to bear market for now.

Conditions changed a bit in the beginning days of the current quarter. Economic conditions began to show signs of deterioration and even Fed officials began to hint that the pace of rate hikes needed to be curtailed. This helped lift the Nasdaq out of its bear-market doldrum, which ultimately led to the index entering into a bull market at yesterday's close. “Wait, what,” you ask, “a BULL market… that’s a bunch of bull.” Say what you will, but the numbers tell the story and yes, indeed, the Nasdaq is now in bull territory. You don’t have to look at the calendar; I will do the math for you. The Nasdaq went from bull to bear to bull all within roughly 7 months (see the following chart). That’s a lot of moving and shaking within a short period of time. The broader-based S&P500 didn’t enter its bear market until mid-June of this year, and it is only some +15% off its June low…still in a bear market. That tells us that the Nasdaq is a more volatile, or riskier index, depending on how you define risk. Looking back at the Nasdaq since the early 1970s, the index went through 18 bear markets and 19 bull markets. That’s a lot, but you must also recognize that the additional risk in the Nasdaq gives us greater potential for return. Big downswings mean big upswings as well. Through all those bull and bear markets, the Nasdaq grew by some +12,754%. So, is the bull market thing good? Not necessarily, it is simply a description, but it still feels good to hear it. Tread carefully however, the Fed has given no indication that it will stop raising rates and there are still several more critical economic releases leading up to September’s meeting.

WHAT’S SHAKIN’

Walt Disney (DIS) shares are higher by +7.84% in the premarket after the company announced that it beat EPS and Revenue estimates by +13.25% and +2.37% respectively. The company attributed the success to theme parks and streaming revenue with new subscribers topping analysts’ estimates. Potential average analyst target upside: +24.2%.

YESTERDAY’S MARKETS

Stocks took flight yesterday after CPI hinted that inflation may be cooling. The S&P500 Index rose by +2.13%, the Dow Jones Industrial Average gained +1.63%, the Nasdaq Composite Index advanced by +2.89%, and the Russell 2000 Index was higher by +2.95%. Bonds gained and 10-year Treasury Note yields gained by +1 basis point to 2.78%. Cryptos gained +4.89 and Bitcoin added +3.28%.

NXT UP

1. Initial Jobless Claims (August 6) is expected to come in at 265k, a slight gain over last week’s 260k.
2. Producer Price Index / PPI (July) may have moderated to +10.4% from +11.3%.