@theMarket: Commodities and China Get Smoked While AI Thrives

It had to happen at some point. Gold, silver, and copper prices experienced a steep downturn this week. Profit-taking set in as traders rung the cash register after weeks of gains. However, tech got a boost from Nvidia's earnings.

 

And while tech took the lead, keeping the S&P 500 and NASDAQ up, the rest of the market did not fare as well. The strength in the economy and the early estimates of the Purchasing Managers Index called the flash PMI, indicated that prices were still increasing. The publication of the Federal Open Market Committee notes from the last Fed meeting on Wednesday didn't help.

 

Here's what the Fed members wrote: "Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee's 2 percent objective."

 

That was no surprise to the markets given that all week the members of that committee were giving interviews and making speeches arguing the same "higher for the longer" theme. What was new and concerned investors was this: "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate."

 

It was the first mention this year by the Fed that an interest rate hike might be on the table. That set investors back on their heels. Higher interest rates are like kryptonite to the markets and especially to commodities such as gold, silver, and copper. It would call into question the gold bull's narrative that we have entered a super cycle for commodities

 

But commodities weren't the only area of the markets that saw declines. China stocks, which have had a similar period of outperformance, succumbed to the same kind of selling. Overbought conditions gave traders here and in mainland China the excuse to take profits.

 

What I found interesting is that several large-cap Chinese companies that are also traded in the U.S., reported amazing earnings and sales. PDD, the parent company of Tumu (a Chinese rival of Amazon here and abroad), for example, announced revenues and earnings that were double the estimates of analysts. Trip.com. Group (travel), Bilibili, (social media), and NetEase (online gaming) are some other companies that had great earnings as well. Yet, their stock prices fell in this downturn.

 

As for the U.S. equity and bond markets, investors had pinned their hopes on the earnings announcement of Nvidia, the number one player in the artificial intelligence space. AI has supported stock prices all year and AI plays have expanded to many areas of the market from utilities to grocery stores.

 

Fortunately, the company delivered better-than-expected earnings, sales, and guidance for the third time in a row. It also announced a 10-to-1 stock split in which shareholders will receive 10 shares for every share of the company they own as of June 7.

 

The good news sent the price of Nvidia up more than 11 percent on Thursday and took the stock market up with it at first, but while Nvidia stayed strong, the averages gave back most of those gains by Thursday's close.

 

Last week, I wrote "I could see 5,340 on the S&P 500 Index," we did reach a new intraday high, of 5,341 on the S&P 500 Index and 16,996.39 on the NASDAQ. However, I also warned that "I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June."

 

The pullback in commodities and China stocks this week certainly qualifies as a pullback but one that I would buy. As for U.S. markets, I suspect next week we might see some minor profit-taking earlier in the week as traders eye next Friday's Personal Consumption Expenditures Index. The PCE is the Fed's No. 1 inflation indicator. If you are bullish on the stock market, you don't want to see an increase in that data point.

 

I wish all my readers a long weekend but do take the time to remember what the Memorial Day holiday is about. I know I will be remembering my fellow Marines who were left behind in the jungles of Vietnam. Semper Fi! 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.