Investing Insights

AI STOCKS  •  April 22, 2024  •  Jon Wolfenbarger

Why Hawkish Fed Policy Is Punishing NVIDIA And AI Tech Stocks

SAN DIEGO, CA — The NASDAQ 100 ETF “QQQ” has fallen nearly 8% over the past month, largely due to investor concerns over the stubbornly high inflation we have been warning about, which is forcing the Fed and investors to abandon the fantasy of rate cuts anytime soon…outside of a recession.

On Friday, even Chicago Fed President Austan Goolsbee, a notorious “dove” on monetary policy, pushed back on the idea of rate cuts. As Goolsbee reluctantly admitted, “So far in 2024, that progress on inflation has stalled. You never want to make too much of any one month’s data, especially inflation, which is a noisy series, but after three months of this, it can’t be dismissed. Right now, it makes sense to wait and get more clarity before moving.”

Yes, the Fed is always full of blinding insights about the economy.

Leading Economic Index Continues To Fall

Note that Fed doves are pushing back on rate cuts despite leading economic indicators continuing to point to a recession. This is truly a unique time in history.

For example, The Conference Board’s Leading Economic Index (LEI) continues its long decline.

Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators at The Conference Board, summarized the latest LEI data: 

“February’s uptick in the U.S. LEI proved to be ephemeral as the Index posted a decline in March. Negative contributions from the yield spread, new building permits, consumers’ outlook on business conditions, new orders, and initial unemployment insurance claims drove March’s decline. The LEI’s six-month and annual growth rates remain negative, but the pace of contraction has slowed. Overall, the Index points to a fragile—even if not recessionary—outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024. The Conference Board forecasts GDP growth to cool after the rapid expansion in the second half of 2023. As consumer spending slows, US GDP growth is expected to moderate over Q2 and Q3 of this year.”

Source: The Conference Board

The Conference Board had previously forecasted a recession, but due to the bullish social mood that drove the stock market higher since late 2022, they recently pulled their recession forecast.

Since there has always been a recession following aggressive Fed rates hikes and an inverted yield curve, we think The Conference Board made a mistake due to being influenced by the prevailing bullish mood of Wall Street.

Yield Curve Remains Inverted

One of The Conference Board’s leading economic indicators is the yield curve. After every single one of the nine times the 10-Year/3-Month yield curve inverted since the late 1920s, there has been a recession and stock bear market. As the chart below shows, the longer the yield curve has remained inverted, the deeper the stock bear market declines, on average. 

Source: OVOM Research

The current yield curve inversion is already longer than the inversion that preceded the Great Recession of 2008-2009. There are still more than 150 days left to reach the duration of inversion that preceded the Great Depression of the early 1930s, but with rate cuts being pushed back due to high inflation, we are getting closer every day.

Magnificent Seven Stocks Are Getting Shot By The Fed

Highly valued stocks are impacted significantly by interest rates, since most of their cash flows are expected in the distant future. Since these future cash flows must be discounted back at prevailing interest rates, the higher the interest rate, the lower the present value of the stock and vice versa. Few stocks are more highly valued these days than AI-oriented tech stocks like the Magnificent Seven. That is why the Fed’s hawkish pushback on interest rates — which follows the market’s increase in the 2-Year Treasury yield from 4.12% to 5.02% in recent months — is starting to pressure these stocks. 

For example, stock market leader NVIDIA is down 22% over the past six weeks. The NYSE FANG+ Index — comprised of beloved tech stocks NVIDIA, Meta, Amazon, Netflix, Google (Alphabet), Apple, Microsoft, Tesla, Snowflake and AMD — is down nearly 8% over the past month, as shown in the weekly price chart below. This chart shows that there was a very big bearish candle last week (top clip) after the FANG+ Index was very overbought, based on the weekly RSI (middle clip). Now weekly price momentum has turned negative for the first time since the selloff last summer, based on the weekly PPO (bottom clip). 

Investment Implications

Is this a healthy pullback in an ongoing bull market like last summer or the beginning of another bear market decline like late 2021? 

No one has a crystal ball to know for sure, but with inflation remaining high, Fed rate cuts being pushed back and leading economic indicators pointing to recession, the odds are not favorable for a bull market.