Weekend Update #207
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“The U.S. economy is in very good shape and there’s no reason for that not to continue… the downside risks appear to be less in the labor market, growth is definitely stronger than we thought, and inflation has come in a little higher.”
— Fed Chair Jerome Powell at The New York Times DealBook Summit, December 4, 2024
The S&P 500 ended the week at a new all-time high, gaining mid-week as Fed Chair Jerome Powell remarked about the strength of the economy. Investors have come away from earnings season with more excitement than disappointment, and the market narrative that upcoming policy changes can fuel growth through next year continues to paint an optimistic picture for equity performance. Bitcoin crossed the $100,000 per coin mark on Thursday afternoon for the first time, bringing year-to-date gains to 129%. The risk-on mood has also broadened throughout the market over the past few months as optimism grows around 2025 interest rate cuts driven by steadier data. Lululemon was a notable gainer this week, up 16% on Friday for the best daily performance since 2018, as an acceleration in sales growth drove a strong report and better-than-expected outlook.
Significant news events this week included President-elect Trump’s selection of Paul Atkins to lead the SEC and Gail Slater to lead antitrust efforts at the Justice Department. Intel CEO Pat Gelsinger abruptly announced his retirement on Monday, marking the end of a disappointing 3-year stretch for the chip manufacturer. Tragically, Brian Thompson, United Healthcare’s CEO was killed by a gunman in New York on Wednesday.
Internationally, South Korea experienced a dramatic turn of events as President Yoon Suk Yeol declared martial law for the first time since 1979, which was later lifted by lawmakers and began a push to impeach Yoon. French Prime Minister Michel Barnier became the first PM to lose a no-confidence vote since Georges Pompidou in 1962. Emmanual Macron has started a search for a replacement PM as the country looks for the government to reach an agreement on next year’s spending plans. In a tit-for-tat move, Beijing banned exports of gallium, geranium, and antimony to the U.S., risking further supply complications for U.S. semiconductors.
In economic data this week, ISM Manufacturing showed a stronger-than-expected November reading with a surge in new orders and an increase in employment. JOLTS Job Openings rose to 7.744 million in October, above the consensus estimate, fueled by increasing labor demand and represented by an employee quits rate that increased for the first time since May 2023. Similarly, the November ADP jobs report showed employee wage growth accelerating for the first month since March 2024. Weighing slightly on the narrative of a strengthening labor market, Initial Jobless Claims for the final week of November showed a greater-than-expected number of unemployed workers. This was corroborated by a rise in the unemployment rate to 4.2%, which was the first increase seen since July. Overall, Nonfarm Payrolls showed that the U.S. added 227,000 jobs in November, above estimates as a rebound from October’s hurricanes and strikes aided job growth. The University of Michigan’s Consumer Sentiment jumped to a 7-month high but interestingly showed an emerging “Buy-in-Advance” behavior among consumers ahead of their anticipation of the inflationary impacts of tariffs next year. Digesting the totality of economic data this week, the market-implied probability rose to an 85% chance that the Federal Reserve will enact another 25 basis point rate cut in December.
Friday’s Close (Weekly Performance)
S&P 500 6,090.27 (+0.96%)
Nasdaq 19,859.77 (+3.34%)
Dow Jones 44,642.52 (-0.60%)
Thank you Blue Room Analyst JARED FENLEY
As the S&P 500 continues to reach new highs, our string of outperformance in Fund One continues. In fact, on Friday we achieved our highest one day return up over 4%. This came on the back of strong earnings reports, namely Lululemon (LULU) and Hewlett Packard Enterprise (HPE). LULU had been struggling this year due to weaker U.S. sales, product challenges, and increased competition. We were forecasting a turnaround in operations and during its earnings report on Friday, LULU began to deliver and its shares surged 16%. Operationally, it exceeded expectations with revenue up, led by strong growth in international markets, particularly China where revenues grew 39%. Adjusted EPS rose 13%, and the company raised its full-year guidance while announcing a $1 billion increase in its share repurchase program, signaling confidence in its financial health. Product innovation remains a key strength, with a focus on high-quality, stylish athletic wear. Despite a tough start to the year, Lululemon’s strategic investments in innovation, expansion, and customer loyalty position it for continued growth into 2025 and beyond.
Hewlett Packard Enterprise shares rose 11% today, following the release of strong fiscal Q4 results that exceeded analysts’ expectations. HPE posted a 15% year-over-year increase in revenue with server sales jumping 32% driven by high demand for AI servers. Its Hybrid Cloud business also posted impressive results, reflecting growth in cloud-based solutions. Management expects mid-teens revenue growth for Q1 with CEO Antonio Neri highlighting the company’s solid profitability and free cash flow, while CFO Marie Myers emphasized improving customer demand and disciplined execution. These results reflect HPE's strong performance and positive outlook, particularly driven by AI server demand and growth in hybrid cloud offerings, positioning the company for continued success.
Although most of our idiosyncratic biotech holdings finished the week strongly, overall for the week they were among our biggest detractors. We feel that there is a lot of upside in these names but for now, other investors are taking a pass. We feel that a catalyst for rerating will either be blowout earnings reports or a general uplift in risk-on stocks. For now, we remain patient investors.
Thank you Blue Room Investing President JOHN FENLEY
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