Is Your Money Safe? A Deep Dive into Market Volatility

David Nelson, CFA host of the Money Runner Podcast breaks down the recent market volatility, offering a raw, unscripted analysis of the latest trends. From the S&P 500’s surprising rally to the role of institutional investors. This episode explores the impact of risk on and risk off sector positioning as well as shifting Federal Reserve policies. The latest inflation data and the Cornucopia conference drove much of the price action this week. Finally, what indicators say the rally has further to go and which ones aren't confirming. 

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

0:01

Welcome to the Money Runner. I'm David Nelson, your host. We're going to try something a little different today. I was talking with my producer, Chris Patti and we decided let's try to be a little bit more free form, a little bit more of a conversation, a little bit less scripted, no teleprompter. I'm going to walk you through the kind of conversation I have with our advisors around the country. And actually, this is a tag on to a call that we we had this this afternoon. So I'm going to share some of the charts and kind of open up my brain, so to speak, and give you a sense of my thinking. Because remember, when you're managing money and you're thinking about markets, it's an ongoing process. And what I say today, I might have to change my mind the next day. Change is a part of markets. And certainly in the last couple of weeks there's been a lot of change. So I'm going to walk you through the thinking. So let's look at some of these things. This first picture, it's not a chart. Obviously, I put it up because it asks a question. And if you recognize what this gentleman is saying, then it dates yourself. And I certainly do. This is from a movie back from my day called Marathon Man. Dustin Hoffman was the star. He's actually the one sitting in the dentist's chair. You can't see him. I can't remember the name of the actor in this scene, but he was a pretty menacing character. And he's obviously going to inflict a lot of pain on Dustin Hoffman here. And he's asking, is it safe? And that's really a question that a lot of investors are probably asking themselves today after, you know, a pretty big move in the markets over the last, you know, several trading days. And that comes on the heels of a pretty poor start to September. So let's look at some of these charts. First one up. S&P 500, not the big surprise there. But what you can see in this chart is, is that really over the last year that that channel, that trend line that had been developed since October of last year, that that gap that was broken and that was broken sometime in July. And the markets the tenor of the markets have clearly changed since then. Think about what's been working. Utilities are consumer staples, dividend stocks, very defensive positioning and tech has largely been a laggard. And really until this week, the bottom rallies here and there, by and large, this has been driven by a defensive side of the market. You can also see in there, when I drill down even closer, you can see that we're getting very close to that trend line, trying to break back into that. But it's this next chart that really tells the story for this week. What you're looking at there is S&P futures for the last three days. And in the middle of that page is Wednesday, September 11th. And of course, that was the anniversary of 911. But on that day we had a CPI report. And you can see right after the open there, I'll point it out in a second, right after the open there, stocks were for sale. And by the by late morning, the market was down about 1.7% from those intraday highs. And then something interesting started to happen slowly but surely, one by one, stocks started to turn green and the volume started to pick up. And it was a methodical rise higher throughout the course of the day. And by the by the close of the day, by the close of trading Wednesday, stocks had climbed almost 3% from those lows on pretty high volume. And I think a lot of investors were taken aback by that. Let me go to this next. You know what? I'm going to stop here for a second because I'm doing this. I'm doing this live and I'm sitting in the office and some news coming over the tape. And one of the things I'm seeing here is Oracle is now trading up close to 6% in the aftermarket. That's on the heels of a pretty strong week for Oracle, a very strong earnings day, I guess, two nights ago. And they had a good follow through on Wednesday. And but this will probably drive trading up for tomorrow. But Oracle up in the aftermarket on their Analyst Day actually raising revenue guidance after they reported earnings just just two days earlier. A pretty telling. But anyway, let let me let me get back to what I was talking about. I want to go back to what the market did on on Wednesday. And and and here's where it gets interesting. This is just a snapshot of some tech stocks on my screen here. And what I've circled there and what's blown up. Those are percentages, but percentages not a price, but of volume. What you're looking at there, when you see a number like 100, what that means is that particular stock, the volume for that stock was 100% of the volume of the average volume of the last 20 days of. And it wasn't just one or two stocks, it was dozens of stocks. And that tells me that institutional money was going into the market, at least for yesterday. And then today, more carry through the market started off fairly, fairly quiet for most of the morning, but slowly but surely, markets headed higher, stocks headed higher. But on increasing volume and the numbers were quite compelling. Some stocks up 150% above their normal volume. That's institutional capital. Like I said, going in, one of the big drivers of the tape this week is, of course, the CPI up on your screen right now. And what I like about this chart is, is that that sideways movement, which had frustrated me for really the last couple of months, feeling that the Fed's work had largely not been able to, you know, push inflation down further. Well, clearly that that trend is broken and the CPI has now broken below trend. I find that I find that actually really a compelling piece of information. Next chart as well, two year yields. We've finally cracked that support level in two year yields that were set during that many bank crisis that we had in March of 2023, in large part because what you're seeing there is that that falloff in yields is an indication that the Fed is going to cut rates and the market is pretty much priced in. And frankly, this is what the Fed has, as has told us. Now, one of the negatives from yesterday, or at least at the start of the day, was that that CPI number, the perception, at least for the markets at that point was that the Fed was not going to cut 50 basis points. They were only going to cut 25. I think that's a mistake. I think they should come out of the gates swinging. I know I'm not alone in that thinking, but it's likely not to happen. Not going to happen. I'm always looking for 50. I would love to see 75. That would not happen. But now it's just going to be 25. And it is the nature of the beast. It's the nature of this Federal Reserve. They're very incremental and they want to be very cautious in what they're what they're doing. Let's look at another Fed policy chart. And what you're looking at here is is is fed fund futures. And what you're seeing here is at the bottom of that page, the terminal rate, 2.75%, that terminal rate, we're going to get to that terminal rate with Fed funds down there. At least that's what the market is pricing in over the next over the over the course of a little bit more than a year. Because what it shows here is we're going to have or let me rephrase that the market expects that the Fed is going to cut at every single meeting between now and January 2026. And that should get the real funds rate, the real, real instrument, the real Fed funds rate down to zero. How do we do that? All that would mean is that the Fed funds rate minus the inflation rate would be zero because anything above that the Fed is being restrictive. When they're below that, they're being accommodative. Right now. It's a very, very restrictive Fed and hence the concern about a possible recession. You know, my thoughts on that, I've brought it up in the past. I think the probability of a recession over the next year is high, in large part just I'm a student of history and in the last half century, every time the Fed has embarked on a cutting cycle or a recession has followed sometime in the next 12, 12 months, it it didn't happen one time, 1984. And it often happens. And the reason it happens is that the Fed usually moves in an incremental fashion. They're usually too late to start hiking rates, and they usually stay there too long. Here's what concerns me. What concerns me is the following is that I'm seeing some data out there that does not confirm some of the other data that I just showed you on your screen this this chart you're looking at right here, this is the percentage of stocks trading above their 200 day moving average. What concerns me is the following is, look what happened in August. You can see that that percentage dip, that's perfectly natural because stocks went into a free fall in August when the yen carry trade started to unwind. And then, of course, when stocks recovered, so did this indicator. Again, the beginning of September, we had a free fall in stocks last week. This indicator starts to roll over. What concerns me is the last three days have been pretty strong and pretty powerful, and yet this indicator has continued to head lower. Now I'll have to see what the data shows tomorrow, but that tells me that while the market is going up, there are less and less participants to that rally. So we're going to have to monitor that looking forward. Another negative this week, we're getting some negative data out of the financial or some financial institutions. Ally Financial Midwest Bank that deals a lot with consumer credit says that, you know, the credit metrics they're seeing in a lot of their customer base are deteriorating and they're concerned about that. That stock obviously took it on the chin. Other negative news out of the financial sector of JPMorgan, one at a Barclays conference said that profitability, the profitability for net interest margins that a lot of Wall Street was looking for for next year, they think it's a little bit too optimistic. They're not expecting that. And I think that's in large part because as rates come down, those fat spreads, those fat that that that margin that they're making on the cash sitting in those accounts, that money they're making off of your cash, that's going to that's going to decrease and they're going to make less money, not necessarily a negative for the economy, but certainly a negative for for the banking sector as a whole. I do want to talk about the cornucopia conference, because I think it it drove a lot of the action this week. The Cornucopia Conference is run by Goldman Sachs and it takes place out on the West Coast. All their analysts go out there and dozens and dozens of companies a day speak at this conference, mostly CEOs. Some CFOs are, and sometimes 20, 30 in a day. I think it goes on for four days. Most of the news was good. I think the news that drove a lot of the market rally this week was was the CEO of NVIDIA, Jensen Huang. Obviously, this is the most important stock in artificial intelligence, a driving secular theme in markets today. And what he said surprised a lot of the street and a lot of the bears on the street in terms of artificial intelligence, there's been a concern and I brought this up on the podcast that the build out of the infrastructure was the head of the profitability curve for artificial intelligence. In other words, we're spending billions to build out this this infrastructure in the form of buying these chips, building out data centers are building large language models. Certainly the hyperscalers are spending billions, but no ROI yet, no return on investment. And that's been a concern. Well, what he points out and you have to take it with a grain of salt, because remember, he's talking his own book, he's touting his company is that for every dollar invested in Nvidia infrastructure, if you're a hyperscale, it can earn $5 in revenue. That's an enormous profit incentive. And that's what drove a lot of the tape, a lot of the price action these last couple of days. I'm going have to consider that. It certainly warms me to the market a little bit more than I have been. You have to respect price movements even when it's telling you something different than what you've been thinking for the last several months, because price often leads fundamentals. So I'm going to analyze this over the next couple of days. I'll try to come back to you with a more definitive outlook as soon as I can. In the meantime, thanks for joining. If you'd like more information about the Money Runner and certainly David Nelson, go to my Substack site. DCNELSON123@SUBSTACK.COM I post my podcast there in addition to YouTube. I post my articles there a lot of charts, a lot of extra information. You can sign up there, get alerts whenever I'm going to be on air. And I also publish my my network appearances on that on my DC Nelson 123 Substack site. Again, thanks for joining. I'm David Nelson. And this is The Money Runner.