A Jay Powell Mini-Bear, AI Monkey Business, and the Dangers of a “Narrow Rally”

Peter's Market Rap for the Week Ending February 2nd, 2024

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Hi.  Peter Navarro here with our market rap for the week ending February 2, 2024.  If one picture is worth a thousand words, take a look at this chart of the S&P 500 -- and I’ll just shut up.

Okay, the chart may actually need a little interpreting, particularly if you are getting this only on the podcast rather than the substack.  So, yes, another bullish week on Wall Street when you gauge it from start to end as the chart shows.  But it was hardly a straight line up.

The big drop you see in the middle of the week was after Fed Chair Jay Powell opened his big fat mouth and threw ice water on the idea that the Fed will cut rates anytime soon.

Of course, the big rally over the next two days occurred because nobody on Wall Street really believes Powell is at the wheel of Biden economic policy.  Powell is just along for the Keynesian over-stimulus ride in the hopes he’ll get another term from Biden when his is up in 2026.  Memo to Jay: Biden ain’t winning and Trump is going to get rid of your sorry derriere long before 2026.

As for what’s driving the bullish trend, my thesis has been that a large portion of the stock market is actually in the doldrums but being lifted by the strength of some narrow leaders in the tech/AI sector which is undergoing one of the most massive – and potentially destructive – innovations in our nation’s history.

My broad and obvious fear is that as the AI secular boom accelerates, we will hit a threshold that will lead to the biggest mass layoffs this side of the Great Depression.  Unlike in the Great Depression, it won’t be manufacturing workers and farmers, although they will take a hit; the biggest casualties will be white collar folks across the board.

To understand the problem, suppose you pitted a monkey with the latest AI search engine against a freshly minted college grad from Harvard or Princeton in knowledge and writing tests.  The  monkey would win every time.

As further evidence of my “it’s an AI secular boom” stupid theory, go no farther than an article in the Wall Street Journal.  Notes the WSJ, which I wish would stay the Hell out of politics and just do this stuff:

“The S&P 500 is back at record levels for the first time in two years. Information technology is the only one of the index’s 11 sectors that can say the same. The mania over artificial intelligence “has propelled the broader market to a record close in five of the last six trading sessions. … The 10 other sectors are trading an average of 15% below their all-time highs, and none has set a new record in January.”

Now here’s the punchline: When you equally weight the S&P 500, by giving the same status to the smallest and largest companies in the index, the market is actually down. This is by definition a very “narrow rally,” the most dangerous kind.

Just two years ago, this was not the case.  Notes the WSJ: “ Seven other sectors—industrials, financials, consumer staples, real estate, healthcare, utilities and materials—joined tech to trade at new highs in the two weeks preceding the S&P 500’s January 2022 record.”  And here’s the coup ’de grace: “ When just a handful of big stocks are responsible for most of the market’s gains, it becomes more vulnerable to a downturn if a few of those heavyweights stumble… if six of the biggest tech stocks were to pull back to their 200-day moving averages, it would knock about 5% off the S&P 500.”

Not that you should expect Big Tech to falter at this point – other than Tesla and Apple which are about to get eaten alive (as I discussed in an earlier column).  AI is here.  Just hope it doesn’t run us all over.  Stay tuned.