Semiconductor Slow Down

The Economy and the stock market have always been a tricky thing. Long term, the American economy has always grown. You can look a 10 year snapshot at any time in history and see growth. However from year to year we have had times of downturn. Economists and investors are always analyzing conditions, situations and reports to see how we are currently doing and where we are heading. Twelve months ago as were wrapping up a very strong year, it was no secret that i was concerned about 2024.

I had started to notice some things that historically have been small indicators of potential downturn in the market or recession. Such as when some lead stocks like NVDA do so well outpacing their index, that the index looks to be rising at a higher rate than the majority of companies really are. Simply put if one or a few companies rises the average so high that the majority of companies are actually underperforming, than the average does not accurately reflect the majority performance. We saw this affect the Q4 reports this year. In the early months of this year, companies reported their Q4 earnings from last year. Though many of the numbers were good, stocks dipped as investors were unhappy. Why were they unhappy if the numbers were good? Because their expectations had become too high.

Though we saw situations like this developing in many areas of the market, it was most prominent in the Semiconductor index or PHLX. Why? Because the PHLX was outpacing the S and P 500 by 2000 basis points. Simply put the Semiconductor stocks were doing so well that they raised the entire stock market and yet you could just buy their sector and do even better. Now a mere six months later, the PHLX is only leading the S and P by 120 basis points. The large lead over the economy has nearly been lost as people claimed profits and uncertainty has crept into the market.

This week we saw a strong rally for semiconductor stocks such as NVDA before the Fed decision to cut rates next week. It is widely believed that the Fed is expected to cut rates and this would see a boost in the market. However as stocks already have high PE ratios, meaning that they are quite pricey historically speaking, it is very possible we see more profit taking soon. If we see a sell off it could trigger a slump in the semiconductors which at one point was the highest performing index. If the index pulls back it will effect the S and P 500 and the Nasdaq. A pull back in the stock market will have a ripple effect and volatility will increase. We have seen the volatility rise several times this past month and it will again.

All of this is to point out that yes, we rallied this week after a down week before it. But our market is on uneven footing. Yes, the Fed decision is arriving, but it may have consequences. Yes, semiconductors, tech, and AI have picked up some steam again, but it’s success has gradually and steadily diminished. In conclusion, wait before buying and understand that the market will continue to be volatile in the coming weeks.