'Mr. Market' Isn't Expecting a Bait-and-Switch Scenario

The Weekend Edition is pulled from the daily Stansberry Digest.

It was a day for the rate-cut crowd...

On Thursday, the U.S. Department of Commerce reported its "revised" GDP number for the first quarter.

The U.S. economy grew by 1.3%, lower than the 1.6% estimated a month ago. That's also down from the 3.4% growth in the fourth quarter of 2023.

The government publishes two estimates and then a final number for quarterly GDP, each about a month apart. This was the second estimate. And as global news service Reuters reported...

Details of the GDP report showed that consumer spending growth, revised down by half a percentage point to a 2.0% annualized rate, mostly reflected a larger-than-earlier-reported drop in household spending on goods.

Federal-funds futures traders slightly strengthened their bets on the Federal Reserve cutting rates in the second half of the year. They expect cuts will happen at the central bank's September meeting at the earliest.

New York Fed President John Williams also signaled rate cuts to come. He said this during an event at the Economic Club of New York...

I do think that monetary policy is restrictive and is bringing the economy a better balance. So I think at some point, interest rates within the U.S. will, based on data analysis, eventually need to come down.

Asked about a potential rate hike ahead rather than cuts, he said, "I don't see that as the likely case." And he also added, "I expect inflation to resume moderating in the second half of this year."

That said, the Fed's preferred inflation measure is remaining stubborn...

The personal consumption expenditures ("PCE") price index for April was released yesterday. Core inflation for the month grew 2.8% from the same period a year ago... holding at the same annual pace we saw in March. The increase was 0.1 percentage point higher than expected.

The month-over-month rise was a little better at 0.2%. That was in line with estimates, and the slowest monthly increase for the index so far in 2024.

In short, signals are mixed. The economy isn't losing ground in the battle against inflation... but it isn't necessarily gaining much ground, either.

The rate-cut crowd is encouraged by what it sees so far. But as longtime readers know, the wiser move is to be wary of the crowd...

And – as we'll discuss today – while all the bullish sentiment is setting up opportunities ahead, the best ones may be flying under the radar.

What the CEO of the world's largest bank by market cap thinks...

Last week, Jamie Dimon, CEO of JPMorgan Chase, sat down for an interview with CNBC from the bank's Global China Summit in Shanghai. And, as usual, he made a few headline-worthy comments.

Among other things, he said the worst possible outcome for the U.S. economy right now is "stagflation" – higher inflation and slowing growth. You could argue we're already seeing this in certain parts of the economy.

Dimon also said that, given the pace of inflation, interest rates could still go up "a little bit" and that the world is "not really" prepared for higher inflation. As he explained...

I think inflation is stickier than people think. I think the odds are higher than other people think, mostly because the huge amount of fiscal monetary stimulus is still in the system, and still maybe driving some of this liquidity.

When asked about the prospect and timing of rate cuts, Dimon said that while market expectations "are pretty good, they're not always right." He elaborated...

The world said was going to stay at 2% all that time. Then it says it will go to 6%, then it said it's going to go to four... It's been 100% wrong almost every single time. Why do you think this time is right?

Dimon even said that JPMorgan's method of estimating interest rates is "going to be wrong."

He also said recently that he might retire from his position as CEO earlier than expected. For financial "infotainment" reasons alone, we hope that doesn't happen...

Even if you despise big banks (for their role in the great financial crisis, for example), it's enlightening and potentially useful when the leader of the largest publicly traded bank in the world frequently shares what's on his mind without much, or any, filter.

The investment crowd's opinions get even more doubtful when real life looks so messy...

Recently, I wrote about the signs that low- and middle-income consumers are pulling back on spending at stores like Target, McDonald's, and Starbucks – and how people have been paying for essentials like food with their savings and credit cards.

Shipping costs have also been on the rise lately, as war in the Middle East continues to influence global supply chains. As the Wall Street Journal reported on May 20...

Ship diversions from the Red Sea helped push up container freight rates by roughly 30% in the past couple of weeks, with costs for importers set to rise further as they boost their volumes ahead of the busy summer season.

You may recall the initial disruption in the Red Sea was a catalyst for higher oil and freight prices late last year... which caught some by "surprise" and has been reflected in prices in the economy early this year.

Nobody can tell with certainty when the "surprises" will stop.

A reminder about Mr. Market...

The market reacts to every number relative to its expectations. And despite some signs of moderation, we're likely going to see high(er) inflation for longer than people think.

Meanwhile, as more and more people get bullish on the market, downside risk – as a result of an inflation or interest-rate "surprise" that will upset the status quo of rate-cut expectations – will grow.

However, Mr. Market doesn't care what I think. Just because we may think something should happen or might happen doesn't mean it will happen.

As always, we recommend making bets that you like for the upside... while having a plan to limit your downside.

You can be patient and make a bullish trade after a pullback in an otherwise bullish trend. Or you can own shares of high-quality businesses that reward you no matter the conditions and act as inflation protection... like energy stocks, commodities such as gold, or even bitcoin.

As my colleague Dan Ferris says, you can prepare for the possible outcomes. And you can make decisions that align with your goals, but only if you've thought about what those goals might be. That's a good place to start.

For one thing, AI is still booming...

Last week, chipmaker and AI darling Nvidia (NVDA) reported another blockbuster round of quarterly results.

Nvidia's quarterly revenue was $26 billion. That was up 262% year over year and about $1.5 billion higher than expectations.

Much of that growth was due to its data-center business, which made nearly $23 billion in revenue... a 427% gain year over year.

Nvidia continues to look like the ultimate "picks and shovels" company for AI with its data centers, which include AI chips and server components. Alphabet, Microsoft, Meta Platforms, and Amazon have all been buying a lot of Nvidia products to build their own AI offerings.

The company also announced a 10-for-1 stock split as shares traded around $1,000 per share. That split will give the appearance of more affordability, but it won't change that the stock is up around 120% this year.

So, while the AI trend is going strong, don't chase the "bait" when it comes to this stock...

The tailwinds that pushed Nvidia up a quarter ago appear to be strongly in place again. But that doesn't mean you should run out and chase shares higher.

Instead, the opportunity here is less obvious than it might seem. Again, it's all about expectations...

As Ten Stock Trader editor Greg Diamond wrote last week, this post-earnings move in Nvidia shares could be setting up a "bait and switch" scenario for buyers.

As Greg wrote on May 23...

Yesterday, I outlined a bait-and-switch scenario where Nvidia's... earnings are the bait and interest rates are the switch.

I was looking at this scenario if NVDA surprised to the downside. But even though it reported strong earnings and the entire semiconductor sector – through the VanEck Semiconductor Fund (SMH) – is hitting new all-time highs, the bait-and-switch scenario is still in play.

But instead of NVDA dropping as bait, it's topping out as bait...

Bond yields have drifted up lately, causing some profit-taking in stocks. The 10-year Treasury yield has risen to roughly 4.5%.

Greg noted that if inflation came in higher than Mr. Market preferred, it could lead to more selling and a broad pullback. But even after this latest report, we could see something similar if the Fed is slow to lower rates... And, as a result, we could see less-hyped buying opportunities appear elsewhere in the market.

To profit from those opportunities, patience will be key.

Here's the takeaway: Don't follow the crowd into Nvidia today. Instead, look out for pressure on stocks in the short term – and better buying setups.

Good investing,

Corey McLaughlin

Editor's note: AI will create long-term market winners... But some of its most impressive advances aren't grabbing headlines today.

This technology is already changing lives on the ground – in a massive, "recession proof" industry where everyone is a consumer. And while this sector is a great way to ride out market volatility, it could also lead to triple-digit upside as these companies harness the potential of AI... Get the full story here.