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WEEK AHEAD
December 18-22, 2023
Helped by the positive momentum and breadth of the recent equity rally, Sowell’s technical indicators have remained constructive and grounded in full position (100%).
Equity markets finished their 7th week of gains, with some market indices hitting all-time highs during the week. Whether due to Jerome Powell's comments or the continued positive momentum, there seems to be a distinct change in the rally. Despite the obvious performance of the Magnificent 7 for the year, this week's performance highlights a broadening in the participation in the rally. In fact, over the last month, small caps and the Russell 2000 have done 11%, the S&P Real Estate Sector up over 12%, and even bonds beat the S&P 500 up 6%. The latter is the most important indicator in that this rather abrupt pullback in interest rates is a good indicator of the prospects of inflation and upcoming FED policy. And to be sure, the FED and Chairman Powell's comments were front and center this week.
The biggest takeaway from the December FOMC meeting was the FED signaling that not only would it seem that the likelihood of any more rate hikes was now close to zero, but almost a certainty that there would be rate cuts sometime next year. Of course, this is gleaned from the most recent dot-plot of the FED's projections, and we all know how good those are!
That said, any rate cut or cuts (does it really matter how many?) spurred the market segments that would or could benefit the most from lower rates. For example, economic bellwethers like Nordstrom, Pulte Homes, United Airlines, and Caterpillar were up 7 to 10% after the FED remarks were released. Lastly and not less important was the affirmation that the employment and job supply-demand dynamics support the notion of a steady unemployment rate, also lending itself to a less heavy-handed FED policy in the future.
As we close out 2023, Christmas has come early for the markets, and putting both the recent economic data together with the FED comments, it looks like no lumps of coal in our stockings this year. We at Sowell wish all of you a Happy Holiday, and may Health and Happiness await us all in 2024!
"While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table."
December 13th, 2023, Jerome Powell
The Broad shoulders of Broadcom
On Monday, December 11th, Broadcom (AVGO) emerged as a standout performer, experiencing a notable surge of 9% that propelled its stock price to reach its new annual zenith. This surge was triggered by the successful completion of Broadcom's acquisition of VMware (VMW), marking a strategic milestone that elevated the company's earnings target and enhanced its standing within the competitive market hierarchy.
Broadcom has been experiencing steady growth over the past several years and is renowned for its extensive portfolio, spanning semiconductor and infrastructure software solutions. The following visualization demonstrates the healthy growth trend in its financial data, including a roughly 8% growth in net revenue and a 10% growth in EBITDA. The completion of VMware acquisition is expected to result in a "strength in the core business and accretion," reported by Citigroup on Monday.
The driving force behind the anticipated profitability of this strategic move lies in VMware's adaptation to industry dynamics. The company has transitioned its business model from permanent licensing to a subscription-based framework, aligning itself seamlessly with prevailing standards in the dynamic cloud industry. This strategic pivot is poised to unlock a steady stream of recurring revenue for Broadcom, which makes the company more attractive to investors with steady and predictable future profitability.
Beyond the immediate gains, Broadcom's acquisition of VMware leverages its expertise to capitalize on emerging opportunities within the rapidly evolving tech landscape. With VMware expanding its offerings to include software solutions and adapting to AI technologies, Broadcom is expected to widen its exposure and catch up with the uptrends and fast growth boom in such industries. However, despite not ruling out such a possibility in the future, Broadcom must exhibit a clear intent to compete directly with industry giants such as NVIDIA (NVDA). Broadcom has not yet entered NVIDA's well-known domains, such as Graphics Processing Units (GPU), and appears, at present, to seek shared exposure rather than direct competition. As time passes, it will be interesting to monitor how Broadcom reacts. Whether it maintains its current strategy, focuses on steady growth with the AI boom tailwinds, or chooses to seize more opportunities in the rapidly expanding industry and take additional strategic actions. The company's decisions in the evolving tech landscape will likely shape its trajectory and influence its positioning within its dynamic markets. Investors and industry observers will be keenly watching for any indications of further strategic moves as Broadcom navigates the ever-changing currents of the semiconductor and technology sectors.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.