Week Begins with Aggressive Selloff; All S&P 500 Price Action Below Support Trendline on Tuesday
The U.S. stock market experienced a significant downturn on February 20, ending a notable rally driven by predictions of falling interest rates and the Federal Reserve's more accommodative stance. This abrupt sell-off led to a sharp decline in major indexes with the Dow Jones Industrial Average down 1.27%, the S&P 500 down 1.47%, and the Nasdaq Composite down 1.50%. The day's trading saw all 11 major sectors of the S&P 500 closing in the red; consumer staples experienced the largest percentage decline. This sell-off halted the momentum of what had been an impressive rally, raising questions about the market's next direction. The sell-off was surprisingly aggressive; a rapid shift from positive to negative sentiment among investors allowed for robust selling. The volatility may have been exacerbated by significant put option purchases on the S&P 500.
Key factors contributing to the market's performance included FedEx quarterly results and negative guidance from General Mills. FedEx saw a significant drop of 12.1% after it missed quarterly profit estimates and reduced its full-year revenue forecast. General Mills also contributed to the market's downturn by cutting its annual sales forecast.
Wednesday's Fed Minutes Release Reinforces Known Themes
The current benchmark interest rate in the U.S. stands at 5.50 percent. The Federal Reserve's policymakers have assessed this rate might represent the zenith of the current tightening cycle. According to the minutes from the January Federal Open Market Committee (FOMC) meeting, the consensus was that a rate cut wouldn't be considered until there was more certainty that inflation was on a consistent path back to the 2% target. The discussions also touched on the unpredictability surrounding the duration for which tight monetary policy would need to be in place. Only a couple of members voiced concerns about the negative implications of a prolonged restrictive policy whereas the majority underscored the hazards associated with premature adjustments. Furthermore, the Fed emphasized that the future trajectory of interest rates would hinge on new economic data, changes in the economic outlook, and risk assessments. In its January 2024 meeting, the Federal Reserve decided to maintain the federal funds rate at its 23-year peak of between 5.25% and 5.5% for the fourth consecutive time.
Russia Reported to be Developing Space Based Antisatellite Weapon
Recent reports highlight that Russia is developing a space-based antisatellite (ASAT) weapon. According to the White House, this development is "troubling" but is not considered an immediate threat as the weapon is not currently operational. US intelligence officials have information on the new weapon technology developed by Russia, but there are no details confirming whether such a weapon is nuclear-capable or nuclear-powered. The weapon is described as space-based and is intended to pose risks to astronauts and satellites in low Earth orbit (LEO). Advanced economies in the West and the United States in particular have leveraged LEO for its major commercial, military, and intelligence advantages. U.S. assets in this area of space are critical to daily telecommunication, internet service, military coordination, intelligence gathering, and economic activity. As Russian space fairing ability buckles under the pressures of international sanctions put in place after the invasion of Ukraine, the developed world's reliance on LEO becomes a unique source of vulnerability. Russia has assessed that threatening the West's space based assets used to power allied economies and militaries could level an otherwise lopsided playing field in any future conflict.
For now, the United States has warned Russia not to deploy the weapon. Both the U.S. national security advisor as well as the Director of the CIA have reached out to their Russian counterparts to deliver the message of restraint. Weapons of the kind currently being discussed would likely violate the 1967 Outer Space Treaty which prohibits the deployment of nuclear or other weapons of mass destruction in orbit.
Nvidia Projects Artificial Intelligence as 'Whole New Industry'
Nvidia recently reported its quarterly earnings which showcase a strong quarterly and annual performance that exceeded expectations. The company posted earnings per share (EPS) of $5.16 for the quarter, surpassing the consensus estimate of $4.21 by $0.95. This figure represents a significant beat and highlights Nvidia's robust profitability.
Revenue for the quarter was reported at $22.10 billion, again exceeding analysts' expectations, which were set at $20.40 billion. This revenue figure represents a staggering 265.3% increase on a year-over-year basis, underlining the company's impressive growth and its successful capture of market opportunities.
While cloud computing may seem ethereal, there are tangible examples of the artificial intelligence boom all over the United States, especially in rural America. Major technology companies like Google, Amazon, Meta Platforms, and Microsoft are building massive data centers that require impressive amounts of constant power and water. Nvidia began investing in chips capable of handling the immense amount of data processing needed to drive artificial intelligence applications a decade ago. The company's graphics processing units (GPU/s) are uniquely capable of handling simultaneous calculations which makes them ideal for AI work. On the other hand, the previously more ubiquitous central processing units (CPU/s) are inadequate for artificial intelligence applications because they process calculations in series which is much less efficient and desirable. Thanks to this distinction, Nvidia has attained roughly 80% market share and boasts nearly every major technology company as a customer.
Currently, Nvidia's market leadership is unchallenged. While one company does not an industry make, the artificial intelligence space seems poised to expand to a sustainable business even though end use cases are yet to be clearly defined. Look no further than the billions of dollars pouring into the construction of data centers across the U.S.
Red Sea Maritime Trade Disruptions Continue
The Houthi movement has stated this week it will increase attacks on ships in the Red Sea and continue to introduce "submarine weapons" as part of their operations. For the first time since these hostilities began, a freighter has been incapacitated by Houthi weapons. The UK-registered Rubymar is heavily damaged, drifting, and partially submerged after being struck by a Houthi missile in the Gulf of Aden on February 18th. The militant group also targeted the port city of Eilat in Israel with a ballistic weapon which the Israeli military was able to intercept.
The ongoing attacks have disrupted the roughly 12% of global trade using the affected waterways. Shippers continue to use longer and more expensive trade routes around Africa. Despite repeated U.S. and allied attacks on Houthi military assets in Yemen and effective U.S. Navy seaborne missile and drone defense, the attacks and subsequent trade disruptions show no sign of abating. These events continue to place an upward force on shipping stocks which utilize these waterways.
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