What Happened:
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) jumped 6.8% in the afternoon session after markets rebounded (Nasdaq up 1.8%, S&P 500 up 0.8%) after shaking off the initial negative reaction to the August inflation report by the Bureau of Labor Statistics. The report revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of August 2024 came in line with expectations, growing 0.2% month on month.
A concerning aspect of the report lies in the core CPI (which excludes food and energy prices), which revealed a 0.3% increase from the previous month, slightly exceeding the expected 0.2%. Despite this, annual inflation seemed to be easing, rising by 2.5%, the lowest level since February 2021. The improved market sentiment suggests investors still very strongly believe that the Fed will cut rates later this month.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
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What is the market telling us:
Nvidia’s shares are very volatile and over the last year have had 23 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 5 days ago, when the company dropped 5.9% as market volatility increased (Nasdaq down 2.5%, S&P 500 down 1.5%) following the underwhelming jobs report, which raised more questions about the health of the economy. The Bureau of Labor Statistics reported that non-farm Payrolls for the month of August 2024 revealed that the US economy added 142,000 jobs. While the growth represented a significant improvement from the previous month (+89k additions), it fell below the 161,000 consensus forecast.
In addition, the unemployment rate clocked in at 4.2%, roughly in line with expectations. Following the report, the consensus expectation continued to point to a higher probability of a 25 basis points (0.25%) rate cut during the September 2024 Fed policy meeting.
Overall, the report offered limited clarity on how the new data might influence the Fed's policy decisions in the coming months, as it presented arguments that could support both bullish and bearish perspectives.
Nvidia is up 143% since the beginning of the year, but at $116.83 per share it is still trading 13.8% below its 52-week high of $135.58 from June 2024. Investors who bought $1,000 worth of Nvidia’s shares 5 years ago would now be looking at an investment worth $25,348.
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