Bitcoin, Small Stocks Rally On Lower Bond Yields And AI Hype — What Is Next?

Bitcoin and smaller stocks led another winning week on Wall Street, helped by lower bond yields and AI hype, ahead of another labor market report and more earnings.

The digital currency overtook the $60,000 mark, up 23% for the week, on solid demand from the newly established ETFs and prospects of a tighter supply on the upcoming halving in April.

The S&P 500 ended the week at 5,137.08, up 0.90%; the Dow Jones at 39,087.39, down 0.20%; the tech-heavy Nasdaq at 16,274.92, up 1.70%; and the Russell 2000 at 2,076.39, up 2.9%. These gains came on top of the previous week's gains, which pushed the S&P 500, the Dow Jones, and Nasdaq to new highs.

Traders and investors were encouraged by a couple of positive developments on the economy and the earnings front. One of them was moderating inflation, with the Fed's inflation gauge, the PCE released on Thursday by the Bureau of Economic Analysis, rising at an annual rate of 2.4% in January 2024, in line with market forecasts.

"The market was on edge awaiting the release of the Fed's preferred inflation index, the PCE," Steve Wyett, Chief Investment Strategist at BOK Financial, told International Business Times.

"Recent CPI and PPI reports showed the path to the Fed's 2% inflation target might not be smooth, but the PCE offered no such surprises as both headline and core readings came in as expected," he explained. "We still have core readings, .4% month over month and 2.8% year over year, above the headline data, .3% MoM, and 2.4% YoY, indicating a bit of stickiness within the less cyclical parts of the inflation picture."

Moderate inflation eased pressure on bond yields, with the benchmark 10-year U.S. Treasury bond ending the week with a yield of 4.18%, down from 4.26% in the previous week.

"Before this week's Personal Consumption Expenditure (PCE) inflation report, released on February 29th, both the January CPI & PPI inflation prints came in 'hotter,' or above expectations," added Kendall Dilley, CFA, Portfolio Manager at Vineyard Global Advisors.

He provided further insight into the implicates of the PCE report for monetary policy and Wall Street's positive reaction to it.

"Heading into the CPI and PPI reports, the market was pricing in a 70%+ probability of the Fed beginning to cut interest rates in March 2024, with six to seven cuts through year-end 2024. The hotter CPI & PPI reports led to a re-setting of market expectations, with the first cut pushed out to June 2024 and only four additional cuts through year-end," Dilley said.

Still, Dilley believes nothing in this week's PCE report suggests any earlier start to Fed rate cuts. "Instead, it increases the likelihood that the first interest rate cut will occur in June - or potentially later in 2024 - depending on the evolution of inflation data in the coming months," he stated.

But Wall Street bulls didn't seem to mind the delay. Any talk of interest rate cuts is a tailwind for speculative assets like Bitcoin and the shares of minor profitless companies' part of the Nasdaq and the Russell 2000.

Another positive development during the week was solid earnings from Dell Technologies. The Texas-based tech giant reported fourth-quarter revenue of $22.3 billion, an operating income of $1.5 billion, and a $1.5 billion operating cash flow.

That's thanks to the strong demand for AI servers, which helped push the shares of semiconductor companies that make AI chips like Nvidia and AMD higher.

In addition, higher revenues, and a smaller-than-expected loss from C3.ai, Inc. (AI) added to the hype for smaller AI-related stocks.

This week, Wall Street will get new data on the economy and earnings.

On Friday, the government will release the February labor market report. It's a closely followed report by the Fed as it sets monetary policy. The consensus forecasts call for 195,000 jobs, almost half the 353,000 in January, with the unemployment rate remaining at 3.7%. But there could be surprises in either direction, adding to uncertainty over the direction of monetary policy for the rest of the year.

Meanwhile, Target, Costco, Broadcom, Marvel Technologies, and MongoDB, Inc. are among the closely followed companies reporting earnings during the week. Any surprises here could take Wall Street for a wild ride, as equity valuations are already stretched.