Why the ‘bad news is good news’ trend didn’t work with Monday’s economic data

By News Room Last updated Jun 3, 2024

Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. (We’re no longer recording the audio, so we can get this new written feature to members as quickly as possible.) Industrials lead the decline: Stocks are down to start the week and the trading month of June — giving back some of Friday’s gains — as investors worry about economic growth. The industrial sector got slammed after the Institute for Supply Management’s manufacturing PMI index fell 0.5% percentage points to 48.7% and contracted for the second consecutive month. A reading below 50% indicates a contraction. The data also showed a contraction in new orders and backlogs, a sign of weakening demand. The respondent survey across nearly every sector was pretty downbeat too. More recently, softening economic data, or “brown shoots,” has been viewed positively by the market. This idea works under the idea that a cooling in the economy could help tame inflation and allow the Federal Reserve to start lowering interest rates. But there needs to be a balance: We don’t want to see the economy weaken too much too fast. There’s a lot of data heading our way this week that could shape the central bank’s thinking heading into its next rate decision at the June 11-12 FOMC meeting. Healthy pullback : The AI infrastructure build-out trade is getting hit for the second session in a row. Dell , Super Micro , Vertiv , and Club stock Eaton all fell. Utilities that fulfill the growing power demands of AI data centers, such as Vistra and Constellation Energy Corp , were also lower. Dell’s quarter last week started the sell-off, with many pointing out that its server backlog only grew by more than 30% quarter over to quarter to $3.8 billion. We joke about “only” because on its own a sequential increase of 30% is an impressive feat. But Dell’s backlog failed to meet the expectations, otherwise known as the “whisper number,” of the most bullish investors. As a close technology partner of Nvidia , Dell plays a critical role in the AI ecosystem and its backlog shows the strength of the demand. And Dell’s numbers not living up to the extreme hype isn’t a sign that AI spending is slowing. This is a case where expectations got ahead of themselves, creating a healthy pullback that puts expectations more in line with reality. Interestingly, Nvidia is bucking the trend of these AI buildout beneficiaries, rallying more than 3% Monday and back toward its all-time high. After listening to CEO Jensen Huang over the weekend , we’re reminded again that ” the more you buy, the more you save ” when it comes to its accelerated computing platform, and that the biggest beneficiary of AI is still … Nvidia. Up next: It’s a quiet week of corporate earnings. Bath & Body Works and Ferguson report Tuesday morning before the opening bell. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Truck transmissions sit on pallets at the Eaton Corp. manufacturing facility in San Luis Potosi, Mexico, on Wednesday, May 27, 2020.

Mauricio Palos | Bloomberg | Getty Images

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