Wall Street’s Triple Trouble

Last Week

Wall Street’s three-ring circus of AI developments, Fed Policy, and the war continued to capture traders’ attention, with the latest acts driving a downturn in financial markets.

Concerns over the vast sums firms are spending on AI development have weighed on technology stocks as analysts question the return on those investments. Oracle has been front and center in the debate, and the company’s strong earnings report was unable to assuage shareholders.

The odds of the Fed raising rates at the upcoming meeting jumped after the consumer price index report came in slightly hotter than expected, as Treasury yields jumped across the curve, with the 10-year climbing nearly 20 basis points to 4.97%. Much of the inflationary stickiness comes from elevated energy prices tied to the war, not the money supply, so we are not convinced higher interest rates are a logical remedy. Indeed, the situation in the Middle East continued to deteriorate as Iran-backed Houthi rebels cut off a key Saudi oil route, the Strait of Hormuz remained closed, and the U.S. maintained its blockade on Iranian ports. Oil prices jumped 10% and topped $100 a barrel. Diesel fuel hit $6 a gallon for the first time in history, which could add inflationary pressure in the coming month.

Whereas the indexes suffered only minor losses, with the S&P 500 and Nasdaq Composite falling 0.8% and 0.7% respectively, the damage was more widespread. The number of declining issues more than tripled the number of advancing issues; the Russell 2000 slid 2.4%, while only the Oil & Gas sector finished comfortably in the green.

Speaking of sliding, the White Sox have lost 5 games in a row and are in danger of slipping out of the playoff picture. The Cubs will probably make the playoffs, but with 12 games left, they hold only a 4-game lead over the Diamondbacks for the final wild-card spot. The good news this week was the Bears’ 59-37 thrashing of the Panthers in their NFL season opener. Time to make your Valentine’s Day plans to travel to SoFi Stadium in Los Angeles for the Super Bowl, Bears Fans!

This Week

Stocks fell around the world to kick off trading after leaders of major artificial-intelligence firms proposed slowing development, citing safety concerns. Additionally, oil and gas prices surged again after more chaos in the Middle East, while the 10-year Treasury yield topped 5% for the first time since October 2023.

Once again, the Fed will be in focus with Wednesday’s interest-rate decision set to dominate trading. Fed Fund futures suggest an 85% probability of a 25-basis-point hike following the recent strong jobs and elevated inflation data. Fed Chair Kevin Warsh will be under intense scrutiny as analysts try to understand his vision for future interest rate adjustments. There is no doubt that if the Fed raises rates, the administration will vigorously object, creating conflicting policies between the Fed and the Treasury.

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