Wall Street ended the week on a mixed note as a cooler September jobs data cut Fed rate hike odds even as Treasury yields climbed, with the 30 year hitting its highest level in decades. U.S. employers added just 29K jobs in September, well short of the 85K consensus figure and a sharp slowdown from August’s gain of 133K.
The selloff in the US bond market deepened on Monday after Donald Trump rejected Iran’s latest proposal to fully reopen the Strait of Hormuz, threatening to prolong the Iran war’s energy shock. The decline pushed Treasury yields higher, with the 10 year rate rising to 5.25%, a fresh 19 year high. Odds that the Federal Reserve will decide to raise rates at its October 28 meeting collapsed this week after softer payrolls and cooler PCE inflation data. As it has happened often, the bond market is doing the work for the Fed by keeping rates high in the face of higher uncertainty.
For the week, the Dow fell 1.26%, the S&P lost 0.27%, and the Nasdaq climbed 0.45%.
Future Wealth’s View
Almost from the start of the artificial intelligence boom, the only stocks that did well were stocks that related to AI. If a stock was on the wrong side of the AI trade, it got punished. If it was on the right side, the returns were astronomical. As we enter Q4, this theme is continuing to play out with the Mag 7 still holding the fort while consumer discretionary, REITs and other interest sensitive stocks continue to get hammered as treasury yields show no signs of slowing down.
The big question is what can go wrong with the AI trade? One school of thought is that higher interest rates will make borrowing costs prohibitive and slow down the data center build out that holds the key to monetizing all the AI efforts. The other way to think about this is – when will the spigot turn off? When we begin to see a slew of AI related companies delaying their IPOs, it is telling us that investor appetite is waning. Which then begs the question – can Nvidia, Softbank and others keep funding the companies to hold the AI ecosystem together?
The reason for investors to understand the AI playbook is because there is only one trade in the entire stock market that is working now and that is AI related. If it has a familiar ring to 2000, when the only trade that worked was internet related companies – Need I say anymore?