Shaky Markets, Rate Uncertainty

Stocks closed in the red again on Friday, ending the week on a sour note after having reached record highs early in the week. Although stocks have been pressured for the past several days, the pullback from all-time highs should be placed in the proper context. For the S&P 500, price has only pulled back around 1.36% (as of the Friday close) from Monday’s record high, so far. The Dow Jones Industrial Average has dropped even less than that from its own highs.

As it turns out, New York Fed President John Williams’ Thursday speech, which was construed by investors as an exceptionally dovish signal that helped boost stocks, did not carry the intended message. A New York Fed spokesperson later clarified that the speech was never meant to indicate a more aggressive pace of interest rate cuts.

To make matters even less dovish, Boston Fed President Eric Rosengren told CNBC on Friday afternoon, “I don’t want to ease if the economy is doing perfectly well without that easing.” When combined with comments from other Fed members, it’s clear that there’s some real division and uncertainty within the Fed as to the path of monetary policy.

This less-dovish uncertainty helped to weigh on stocks on Friday, and it also helped prompt a sharp pullback from new multi-year highs in gold futures. Despite this pullback in gold, the trend for the precious metal remains sharply to the upside. Gold prices have just hit a high not seen in more than six years. With expectations of lower interest rates still prevailing and economic risks looming, gold is likely poised to continue this general uptrend to higher highs.

Although stocks closed significantly in the red on Friday, Microsoft Corporation (MSFT) was able to hit a new all-time intraday high at $141.02 before pulling back. Driving Microsoft’s record move was the company’s substantial earnings beat on Thursday after the market close.

The company reported earnings per share (EPS) of $1.71 against consensus expectations around $1.21 per share. Revenue also beat at $33.72 billion against a $32.77 billion forecast. This monster beat was driven in large part by a 39% year-over-year rise in revenue from the company’s Azure cloud service, as well as strong growth in its LinkedIn division.

Clearly, Microsoft has been doing things right for many years. It’s now the sole company listed on the U.S. exchanges with a market capitalization over $1 trillion. Following not too closely behind are Amazon.com, Inc. (AMZN) and former $1 trillion capitalization leader Apple Inc. (AAPL). Being the most mega of the mega caps and the only member of the trillion-dollar club is a pretty big deal.

Below is a five-plus year chart of Microsoft stock with some of the key fundamental and technical milestones along the stock’s massive run-up in price. Through the course of this chart, Microsoft has risen by more than 300%.

With all of the past and potential headwinds facing the semiconductor industry, it’s a wonder that semiconductor stocks are doing remarkably well. The VanEck Vectors Semiconductor ETF (SMH), a fund holding some of the largest companies in the industry, is telling a very bullish story. Currently, the ETF is only around 4% below its April record high after having rallied sharply since early June.

Chief among the factors threatening the industry have been the two primary risk themes of the past few months – slowing global economic growth and an ongoing U.S.-China trade war. Related to the trade war, the recent U.S. government ban on exports to Huawei was also a major blow to chipmakers. As a result, earnings estimates for semiconductor companies this earnings season have been cut sharply.

What’s been the driving force behind the recent surge in these stocks? Many of the most prominent semiconductor companies are strong growth companies and technology leaders. Also, the environment of lower interest rate expectations has given the semiconductor industry a boost, as it has for many other industries.

In any event, price doesn’t lie, and the SMH ETF is closing in on its all-time high at $120.71, as the chart shows. Any number of factors could serve to derail the highly positive trend at any moment. But for the time being, that record high remains the primary upside target.

Markets have been rocked back and forth this week on shifting perceptions of the Fed’s near-future monetary policy. Investors are constantly scrambling for position based on each nuance of language from key Fed members. Earnings season is in full gear, and results have been mixed to positive so far. But until the highly anticipated Federal Open Market Committee (FOMC) meeting at the end of this month, the Fed continues to hold the markets’ rapt attention.

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