Posts filed under ‘Currency – Foreign Exchange’
Mideast War an Investor Bore as Markets Soar
If I told you at the beginning of the year that the U.S. would bomb key nuclear sites in Iran, would you have guessed that Middle East stability would follow—and that global financial markets would soar to record highs? Personally, I wouldn’t have bet on that outcome. But that’s exactly what happened last month. While geopolitical dynamics remain fluid, markets shrugged off the chaos. The S&P 500 rallied +5.0%, the Dow Jones Industrial Average climbed +4.3%, and the NASDAQ catapulted +6.6%, powered largely by artificial intelligence stocks like NVIDIA Corp., which surged +16.9% for the month to a market value of $3.9 trillion (more on AI below). This is an important reminder that trading off of news headlines is a fool’s errand.
Economy Resilient Despite Tariffs and Geopolitical Turmoil
Source: Calafia Beach Pundit
Credit Default Swaps (CDS) act as insurance contracts that protect investors against corporate debt defaults. During financial stress—like the 2008 crisis or the COVID crash in 2020—CDS prices surge as investors seek protection. Today, however, CDS prices are falling across both high-yield (junk bonds) and investment-grade (Blue Chip) debt. As seen in the chart above, the cost to insure corporate bonds has declined steadily over the past two years. This signals bond investors aren’t worried about a recession or a wave of defaults, despite tariff policy uncertainty, geopolitical risk, and modest GDP growth.
Inflation Tame as Tariffs Loom
President Trump has repeatedly criticized Fed Chair Jerome Powell for not cutting interest rates, calling him everything from a “dummy” to a “major loser” and a “stupid person” to a “numbskull”. While the name-calling is colorful, the economic pressure is real: U.S. GDP contracted -0.5% in Q1 2025. Powell, however, wants to see the full impact of upcoming tariffs before making a move. . A new tariff deadline looms on July 9th, and the market is anxiously awaiting clarity. But even if tariffs are implemented, many economists believe the inflationary impact will be temporary—what’s known as a one-time price shock.
Source: Calafia Beach Pundit
The Fed’s preferred inflation gauge—the Personal Consumption Expenditure (PCE) index—has been easing and is now near the 2% target (see chart above). With inflation cooling, Trump’s case for rate cuts gains credibility. Still, the Fed appears in no rush. It will take time to understand the lasting effects of the tariff rollout.
AI Wave Fueling Markets
For a generation, the semiconductor revolution has quietly powered innovation, guided by Moore’s Law—the principle that chip performance doubles roughly every two years (see my article The Traitorous 8). Sixty years after Gordon Moore wrote his seminal article, “Cramming More Components onto Integrated Circuits”, the power of software is catching up. NVIDIA’s Grace Blackwell GB200 chip contains an astronomical 208 billion transistors, supercharging AI software models like ChatGPT.
The AI revolution is fueling trillions in global investment and rapidly transforming industries – from data centers and self-driving cars to robotics and drug discovery. It’s important to realize that this AI arms race is not just occurring in the United States. AI investment spending extends way beyond Silicon Valley to countries like Saudi Arabia, Singapore, and China.
The AI boom is not a U.S.-only phenomenon. Countries like China, Saudi Arabia, and Singapore are pouring capital into AI, creating a global arms race in tech. In the U.S., the four biggest hyperscalers—Amazon, Microsoft, Google, and Meta—are projected to spend over $300 billion on capital expenditures in 2025 alone (see chart below).
To illustrate the scale: Amazon is forecasted to spend more than $100 billion in CapEx this year. For context, that’s 40% more than the company spent over the entire 2000–2020 period combined.
Source: The Financial Times
The Stargate Initiative: AI Infrastructure on a Galactic Scale
A prime example of the AI gold rush is the $500 billion Stargate initiative, with Phase 1 already underway in Abilene, Texas (see rendering below). The initial construction includes two buildings totaling 1,000,000 square feet. Ultimately, the full project will cove about 1,000 acres and be powered by an on-site natural gas facility generating 360 megawatts—enough to support 300,000 homes.
A huge portion of the project costs are dedicated to the budget for NVIDIA super chips. Oracle Corp. has committed $40 billion to purchase 400,000 of NVIDIA’s GB200 chips, making this project a centerpiece of the global AI infrastructure boom. Just this week, Oracle also announced a new $30 billion cloud deal, which will soak up a good chunk of the data center supply created by the database and enterprise software company.
Source: CoStar
The Big Picture: Volatility and Opportunity
There’s no shortage of risk—geopolitics, inflation, Fed uncertainty, tariffs. But the economy is showing surprising resilience. If tariff clarity improves, interest rate cuts materialize, and AI capital spending accelerates, a “boring” market could rapidly turn into a soaring one.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.
How to Profit from the Trump Crypto Wave
We were honored to have our white paper on the cryptocurrency market published by the California Business Journal last month. Please enjoy the article below.
Newly inaugurated President Donald Trump has wholeheartedly embraced the multi-trillion dollar cryptocurrency and digital asset industry. This is a seismic shift from the anti-crypto stance harbored by the previous administration. In the first week of his second term, President Trump not only appointed crypto-friendly Paul Atkins as the SEC Chairman, but Trump also named David Sacks as the first-ever White House Crypto Czar. If that was not a strong enough signal, Trump issued an executive order on his third day in the Oval Office, entitled, “Strengthening American Leadership in Digital Financial Technology.”
With this massive political and legislative tailwind behind the cryptocurrency industry, what is the best way to profit from this cryptocurrency wave? Is it just as easy as buying Bitcoin? Not exactly, if history repeats itself. Since Bitcoin was introduced in early 2009, the value of the cryptocurrency has fallen by more than -50% seven times. There have been many causes for Bitcoin’s historical volatility, including the hacking of the largest Bitcoin exchange in 2011 (Mt. Gox); China banning Bitcoin in 2013; and the COVID pandemic crash in 2020. Matters got worse for the cryptocurrency industry when FTX, one of the world’s largest crypto exchanges went bankrupt in 2022, and its founder and CEO, Sam Bankman-Fried, was subsequently arrested and convicted for fraud and money laundering.
Investing in a currency or asset class with that much volatility is very challenging. To compensate for volatility and risk, investors require the potential for higher returns backed by robust fundamentals. Unfortunately, to date, many of the broadest use cases for cryptocurrencies have been limited to illicit and illegal activities. There certainly are some speed and security advantages to the blockchain technology and the associated ledger structure of the major cryptocurrencies. However, the benefits have not been so clear-cut that Fortune 1000 companies and mass consumers have adopted it. A relatively small 15.5% of Americans (and 6.9% worldwide) are estimated to own a cryptocurrency, and a smaller fraction of that actually transact in a crypto.
Even though the practical use cases for cryptocurrencies over the last two decades have been extremely constrained, the speculative fervor surrounding this asset class has grown exponentially to the point there are over an estimated 10,000 cryptocurrencies that exist today, including speculative meme coins such as Dogecoin, the Trump coin, and other crude joke coins.
In my more than three decades of investing, I have repeatedly encountered extensive segments of the financial markets that would qualify as speculative bubbles, whether it was subprime mortgages and credit default swaps (CDS) in the 2008 Financial Crisis, or dot-com companies in the 2000 bursting of the technology bubble.
Today, in 2025, the current cryptocurrency wave definitely qualifies as another bubble. But depending on an investor’s time horizon, there is still potential to make significant profits during these frothy investment waves. For example, take Amazon.com, which was at the epicenter of the dot-com bubble as it saw its stock price crater approximately -95% in the 2000-2001 timeframe. Before Amazon’s stock collapsed, its price peaked at $5.65 per share at the end of 1999 – today, the stock price in 2025 has exceeded $240 per share (a more than 40-fold increase). Despite the bursting of the tech bubble, a tremendous amount of money has been made by long-term investors in Amazon and a select few other long-term technology winners.
I believe the same opportunity exists today in the cryptocurrency market. There are a few historical parallels that inform our crypto investment strategy at my investment firm, Sidoxia Capital Management. Let’s begin with the gambling industry that flourished in Las Vegas during the 1940s after the end of Prohibition. It was not the gamblers and speculators that made all the money, but rather the casinos, including some remaining today like the Flamingo and the Golden Nugget.
Currently, the dominant casino in the cryptocurrency industry is Coinbase Global Inc. (COIN). Coinbase is the 800-pound gorilla in the U.S. cryptocurrency exchange space, handling transactions that total more than $4 billion in daily trading volume across hundreds of cryptocurrencies, stable coins, meme coins and other digital assets. And the company is highly profitable with substantial growth. More specifically, the company has generated more than $5 billion in sales and greater than $1 billion in profits over the last year. Just like Las Vegas casinos make money off every gambler’s bets, so too does Coinbase make profits off every crypto speculator’s trades, whether those transactions in Bitcoin, Tether, Ethereum, or meme coins go up or down in value.
Another lucrative way for investors to look at the nascent cryptocurrency industry is to compare it to the California gold rush that occurred from 1848 – 1855. Hundreds of thousands of “forty-niners” (the peak year of gold rush immigration – 1849) flocked out west in hopes of discovering perceived limitless riches – an attitude held by many cryptocurrency purchasers presently. Unfortunately, it was not the forty-niners digging and panning for gold who made most of the money, it was the merchants selling all the picks and shovels to the gold rush speculators that profited the greatest.
The contemporary merchants in today’s cryptocurrency world are companies like NVIDIA Corp. (NVDA), the creator of the graphics processing unit (GPU) semiconductors that power the critical mining operations of cryptocurrencies like Bitcoin. The GPUs serve as the picks and shovels for crypto miners who receive rewards in the form of cryptocurrencies (i.e., Bitcoin) in return for performing computationally intensive calculations, which are necessary to verify transactions on a digital decentralized crypto ledger. NVIDIA GPUs have a broad range of applications beyond crypto mining, including data center applications for artificial intelligence (AI), video games, gene sequencing, virtual-augmented reality, and other large-scale markets. Over the last year, NVIDIA has produced more than $110 billion in sales and created more than $60 billion in net profits. Not only was NVDIA successful commercially, but equity investors were also rewarded handsomely last year with an appreciation of +171% in the share price.
There are plenty of reasons to remain skeptical about the euphoria surrounding the cryptocurrency industry, especially due to the lack of legitimate use cases across the avalanche of digital assets endlessly introduced. However, the pro-crypto wave of Trump regulations and policies allow plenty of ways for investors to profit from this digital gold rush, especially if you can find the winning crypto casino and leading merchant of digital picks and shovels.
By Wade W. Slome, CFA, CFP®, Exclusive to California Business Journal
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, COIN, IBIT, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Quickly Out of the Gate
The race into 2024 has begun, and the U.S. market is off to a quick start. The S&P 500 jumped out of the gates by +1.6%, and the technology and AI (Artificial Intelligence) – heavy NASDAQ index raced out by +1.2%. The bull market rally broadened out at the end of 2023, but 2024 returned to the leaders of last year’s pack, the Magnificent 7 (see also Mission Accomplished). Out front, in the lead of the Mag 7, is Nvidia with a +24% gain in January.
Inflation dropping (see chart below), the Federal Reserve signaling a decline in interest rates, low unemployment (3.7%), and healthy economic growth (+3.3% Q4 – GDP) have all contributed to the continuing bull market run.
Source: Yardeni.com
Consumer spending is the number one driver of economic growth, and consumers remain relatively confident about future prospects as seen in the recently released Conference Board Consumer Confidence numbers released this week (see chart below).
Source: Conference Board
But the race isn’t over yet, and there are always plenty of issues to worry about. The world is an uncertain place. Here are some of the concerns du jour:
– Red Sea conflict led by the Yemen-based, rebel group, Houthis
– Gaza war between Israel and Hamas
– Anxiety over November presidential election
– Ukraine – Russia war
Money Goes Where It is Treated Best
There are plenty of domestic concerns regarding government debt, deficit levels, and political frustrations on both sides of the partisan aisle remain elevated. When it comes to the financial markets, money continues to go where it is treated best. Sure, we have no shortage of problems or challenges, but where else are you going to put your life savings? China? Europe? Russia? Japan?
Well, as you can see in the chart below, anti-democratic, anti-American business, and confrontational military policies instituted by China have not benefitted investors – the U.S. stock market (S&P 500) has trounced the Chinese stock market (MSCI) over the last 30 years.
Source: Calafia Beach Pundit
For years, market critics and pessimists have been screaming doom-and-gloom as it relates to the United States. The story goes, the U.S. is falling apart, government spending and debt levels are out of control, politicians are corrupt, and we’re going into recession, thanks in part to higher interest rates and inflation. Well, if that’s the case, then why has the value of the U.S. dollar increased over the last 10 years (see chart below)? And why is the stock market at all-time record-highs?
Source: Calafia Beach Pundit
Global investors are discerning in which countries they invest their hard-earned money. Global capital will flow to those countries with a rule of law, financial transparency, prudent tax policy, lower inflation, higher profit growth, lower interest rates, sensible fiscal and monetary policies, among other pragmatic business practices. There’s a reason they call it the “American Dream” and not the “Chinese Dream.” Our capitalist economy is far from perfect, but finding another country with a better overall investing environment is nearly impossible. There’s a reason why venture capitalists, private equity managers, sovereign wealth funds, hedge funds, and foreign institutions are investing trillions of their dollars in the United States. Money goes where it is treated best!
As money sloshes around the world, the 2024 investing race has a long way before it’s over, but at least the stock market has quickly gotten out of the gate and built a small lead.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Sidoxia Webinar: The Keys to ’23 & What’s in Store for ’24 – Market Update
Unlock valuable insights at our upcoming webinar:
The Keys to ’23 & What’s in Store for ’24!
Tuesday, January 30th at 12:00 PM
Click the Zoom link below to register:
https://sidoxia.link/Webinar-Registration
Don’t miss out on the latest trends and expert discussions.
We will delve into a comprehensive market update. Register now!
The Douglas Coleman Show Interviews Wade Slome
Wade Slome, President and Founder of Sidoxia Capital Management, recently had the pleasure of being featured on The Douglas Coleman Show hosted by Douglas Coleman.
Drawing from professional and personal life lessons, Wade shares his knowledge about navigating market trends, building investment strategies, and also discuss the books he has authored.
If you are interested in learning more about the books Wade has authored, please visit: https://www.sidoxia.com/wades-books
This Baby Bull Has Time to Grow
You may have witnessed some fireworks on New Year’s Eve, but those weren’t the only fireworks exploding. The last two months of 2023 finished with a bang! More specifically, over this short period, the S&P 500 index skyrocketed +13.7%, NASDAQ +16.8%, and the Dow Jones Industrial Average +14.0%. The gains have been even more impressive for the cheaper, more interest-rate-sensitive small-cap stocks (IJR +21.8%), which I have highlighted for months (see also AI Revolution).
For the full year, the bull market was on an even bigger stampede: S&P 500 +24%, NASDAQ +43%, and Dow +14%.
Although 2023 closed with a festive explosion, 2022 ended with a bearish growl. Effectively, 2023 was a reverse mirror image of 2022. In 2022, the stock market fell -19% (S&P) due to a spike in inflation. Directionally, interest rates followed inflation higher as the Fed worked through the majority of its 0% to 5.5% Federal Funds rate hiking cycle.
To sum it up simply, the last two years have been like riding a rollercoaster. For the year just ended, much of the year felt like a party, but 2022 felt more like a funeral. When you add the two years together, it was more of a lackluster result. For 2022-2023 combined, results registered at a meager +0.1% for the S&P, +3.7% for the Dow, and -4.0% for the NASDAQ (see chart below).
For those saying the good times of 2023 cannot continue, investors should understand that history paints a different picture. As you can see from the stock market cycles chart (below) that spans back to 1962, the average bull market lasts 51 months (i.e., 4 years, 3 months), while the average bear market persists a little longer than 11 months. This data suggests the current one-year-old baby bull market has plenty of room to grow more.
Source: Visual Capitalist
Why So Bullish?
What has investors so jazzed up in recent months? For starters, inflation has been on a steady decline for many months. With China’s stagnating economy, it has helped our inflationary cause by exporting deflationary goods to our country. As you can see from the Personal Consumption Deflator chart below, this broad inflation measure has declined to the Federal Reserve’s 2% target level. Jerome Powell, the Federal Reserve Chairman has been paying attention to these statistics, as evidenced by the central bank’s forecast at the Fed’s recent policy meeting last month on December 13th for three interest rate cuts in 2024. This so-called “Powell Pivot” is a reversal in tone by the Fed, which had been on a relentless rampage of interest rate hikes, over the last two years.
Source: Calafia Beach Pundit
This interest rate cycle headwind has turned into a tailwind as investors now begin to discount the probability of future rate cuts in 2024. The relief of lower interest rates can be felt immediately, whether you consider declining mortgage and car loan rates for consumers, or credit line and corporate loan rates for businesses. This trend can be seen in the benchmark 10-Year Treasury Note yield, which has declined from a peak of 5.0% a few months ago to 3.9% today (see chart below).
Source: Trading Economics
Declining inflation and interest rates explain a lot of investor optimism, but there are additional reasons to be sanguine. The economy remains strong, unemployment remains low, AI (Artificial Intelligence) applications are improving worker productivity, trillions of potential stock market dollars remain on the sidelines in money market accounts, and corporate profits have resumed rising near all-time record levels (see chart below).
Source: Yardeni.com
What could go wrong? There are always plenty of unforeseen issues that could slow or reverse our economic train. Geopolitical events in Russia or the Middle East are always difficult to predict, and we have a presidential election in 2024, which could always negatively impact sentiment. This new bull market had a great start in 2023, but in historical terms, it is only a baby. Time will tell if 2024 will make this baby cry, but whatever the market faces, declining inflation and interest rates should act as a pacifier.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 2, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
No Market Roar Due to War
The devastating damage to humanity from the Israeli-Hamas war that is in and around the Gaza strip should not be diminished or understated – innocent lives on both sides suffer in any conflict. However, the economic impact should not be overstated either. In other words, the hundreds of billions of dollars in financial stock market losses this month are not proportional to the Mideast economic losses incurred thus far.
To put the events in perspective, the population of Israel approximates 10 million people and the population located in the Gaza Strip is about two million people. There are more than eight billion people on the planet, so Israel/Gaza represents roughly 1/7 of 1% of the global population.
From an economic standpoint, the combined economic output of Israel/Gaza Strip accounts for around ½ of 1% of global GDP (see chart below – small slivers in the blue section).
And let’s not forget, economic activity is not dropping to zero. From an economic standpoint, the war’s financial impact is even smaller – a rounding error.
Source: Visual Capitalist
However, wars do not exist in a vacuum, and tensions in the Middle East have the potential of having a ripple effect. Whenever rumblings occur in the Mideast, one of the largest global sectors to be first impacted is the oil market. Approximately 20-30% of the world’s oil is trafficked through the Strait of Hormuz in the Persian Gulf, so it was not surprising to see a short-term spike in oil prices to almost $90 per barrel in early October after the Gaza invasion of Israel. By the end of the month, oil has settled back down to about $81 per barrel, almost precisely the same price right before the war started. On a year-over-year basis, oil prices are actually down approximately -5%, thereby providing minor relief to gas-powered car drivers.
If Iran, or Iran-backed militant group Hezbollah, throws their hat into the Israel-Hamas war ring, the U.S. and other Western allies may retaliate and escalate tensions in the region, which would unlikely be received well by the financial markets.
As a result of these domino effect fears in the region, the stock market took another leg down last month with the S&P 500 index declining -2.2%, the Dow Jones Industrial Average -1.4%, and the NASDAQ index fell the most, -2.8%. The world is a dangerous place, but we have seen this movie before – this is nothing new. We would all prefer world peace, but unfortunately, wars and skirmishes have gone on for centuries.
As Interest Rates Soar, Bonds Offer More
Source: Wall Street Journal
No, TINA is not the name of my high school girlfriend or wife, but rather the acronym TINA (There Is No Alternative) existed in recent years during the Federal Reserve’s zero-interest rate policy days. More specifically, TINA referred to the lack of investment alternatives to equities (i.e., stocks) when money effectively earned 0% in the bank and close-to-0% in many fixed income securities (i.e., bonds). In fact, at one point, although it is still hard to believe, there were more than $16 trillion in bonds paying negative interest rates – pure insanity.
TINA Turns into FIONA
Given the large increase in interest rates by the Federal Reserve over two years (from 0% to 5.50%), investors have been given a short-term gift. As you can see from the chart above, yields on 10-Year Treasury Notes have risen to almost 5.0%. And believe it or not, shorter term bonds are currently providing yields even higher than this. The three-month, six-month, one-year, and two-year Treasuries are all yielding higher rates than 10-Year Treasury yields (i.e., inverted yield curve) – see table below. So, TINA has changed to FIONA – Fixed Income Opens New Alternatives. What’s more, for individuals with taxable accounts, the interest earned on Treasuries is tax-free at the state level, thereby making this short-term gift in yields even more attractive for investors.
Source: Trading Economics
Stock prices were down again for the month, and investment sentiment has been souring due to the war in the Middle East, but there is still plenty of reasons to remain constructive. Not only is the economy strong (e.g., 3rd quarter GDP of +4.9%), but the consumer also remains strong (see Consumer Wallets Strong) in large part because the unemployment rate remains near record lows (+3.8%). While anxiety rises due to the war, stock prices get cheaper, and opportunities increase. And although interest rates remain elevated, the Federal Reserve is signaling they are closer to a rate hiking end, inflation is cooling and FIONA is offering more attractive yields than during the TINA era. It’s true, this month stocks did not roar due to the war, but patient and opportunistic investors will be rewarded with more.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Consumer Wallets Strong, Rate Hikes Long, What Could Go Wrong?
Consumer wallets and balance sheets remain flush with cash as employment remains near record-high levels. Cash in consumer wallets and money in the bank help the economy keep chugging along at a healthy clip. More specifically, as you can see in the chart below, the net worth of U.S. households has reached a record $154.3 trillion dollars in the most recent month, thanks to appreciation in stocks, gains in real estate, and relatively stable levels of debt.
Source: Calafia Beach Pundit
Unemployment Remains Low
In addition, the unemployment rate is sitting at 3.8%, near multi-decade lows (see chart below).
Source: Trading Economics
As long as consumers continue to hold a job, they will continue spending to buoy economic activity – remember, consumer spending accounts for roughly 70% of our country’s economic activity. Case in point are the most recently released GDP (Gross Domestic Product) forecasts by the Atlanta Federal Reserve, which show 3rd quarter GDP growth estimated at a 4.9% rate (see chart below).
Rates Up, Housing Prices Up?
Yes, it’s true, despite a dramatic surge in mortgage rates over the last few years, the housing market remains strong due to a very tight supply of homes available for sale. Most homeowners with a mortgage have refinanced to a rate in the range of 3% (or in some cases even lower), so selling and moving into a new home with a mortgage at current rates of 7.3% is not that appealing. In other words, if you decide to move, your monthly mortgage payment could potentially go up by more > 50%, which could equate to thousands of dollars per month. Under this scenario, you are likely to stay put and not sell your home.
Source: Trading Economics
The embedded economic disincentive of selling a home with a mortgage has really put a real crimp on the supply of homes available for sale (chart below). As you can see, the inventory of homes has dramatically collapsed from a peak of about four million homes, circa the 2008 Financial Crisis, to around one million homes today.
Source: Trading Economics
In the face of this mixed data, the stock market finished a hot summer with a cool whimper last month, in large part due to a 0.49% increase in the 10-Year Treasury Note yield to 4.58% (see chart below). The S&P 500 index fell -4.9% for the month, the technology-heavy NASDAQ index dropped even further by -5.8%, while the Dow Jones Industrial Average outperformed, down -3.5% for the month. Worth noting, however, the Dow has significantly underperformed the other indexes so far this year.
Source: Trading Economics
Inflation on the Mend
The Fed continues to talk tough about fighting inflation after taking interest rates from 0% to 5.5% over the last two years, nevertheless inflation continues to come down. The Fed’s go-to Core PCE inflation datapoint that came out last Friday at +0.1% is consistent with the downward inflation trend we have been witnessing for many months now (see chart below). As you can see, inflation on annualized basis has reached 2.2%, nearly achieving the Federal Reserve’s target of 2.0%.
Source: The Wall Street Journal and Commerce Department
There is never a shortage of investor concerns. Today, worries include Federal Reserve policy; restarting of school loan repayments (after a three-year hiatus); a potential government shutdown; an auto and Hollywood strike; higher oil prices; and a presidential election that is heating up. Many of these worries are nothing new. The bull market took a pause for the month, but consumer wallets remain fat, the economy keeps chugging, the employment picture remains strong, and stock prices remain up +12% for the year (S&P 500). For the time being, betting on a soft economic landing over an imminent recession could be a winning use for that cash in your wallet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 2, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Bad Weather Coming: Hurricane or Drizzle?
It was a stormy month in the stock market, but the sun eventually came out and the Dow Jones Industrial Average rallied more than 2,300+ points before eking out a small gain (up +0.04%) and the S&P 500 index also posted an incremental increase (+0.005%). But there are clouds on the horizon. Although the economy is currently very strong (i.e., record corporate profits and a generationally low unemployment rate of 3.6% – see chart below), some forecasters are predicting a recession during 2023 as a result of the Federal Reserve pumping the brakes on the economy by increasing interest rates, in addition to elevated inflation, supply chain disruptions, COVID lockdowns in China, and a war between Russia and Ukraine.
UNEMPLOYMENT RATE (1997 – 2022)
But like weather forecasters, economists are perpetually unreliable. While some doomsday-er economists are expecting a deeply destructive hurricane (deep recession), others are only seeing a mild drizzle (soft landing) developing. The truth is, nobody knows for certain at this point, but what we do know is that the correction in stock prices this year (-13% now and -20% two weeks ago) has already significantly discounted (factored in) a mild recession. In other words, even if a mild recession were to occur in the coming months or quarters, there may be very little reaction or negative consequences for investors. Similarly, if inflation begins to be peaking as it appears to be doing (see chart below), and the Fed can orchestrate a soft landing (i.e., raise interest rates and reduce balance sheet debt without crippling the economy), then substantial rewards could accrue to stock market investors. On the flip side, if the economy were to go into a deep recession, history would suggest this stormy forecast might result in another -10% to -15% of chilliness.
INFLATION RATE (%)
Due to trillions of dollars in increased stimulus spending and Federal Reserve Quantitative Easing (bond buying), we experienced an explosion in the government deficit and surge in money supply growth (i.e., the root cause for swelling inflation). Arguably, some or all of these accommodations were useful in surviving through the worst parts of the COVID pandemic, however, we are paying the price now in sky-high food costs, explosive gasoline prices, and expanding credit card bills. The good news is the deficit is plummeting (see chart below) due to a reduction in spending (due in part to no Build Back Better infrastructure spending legislation) and soaring income tax receipts from a strengthening economy and capital gains in the stock market.
MONEY SUPPLY GROWTH% (M2) VS. GOVERNMENT DEFICIT
For many investors, getting used to large multi-year gains has been very comfortable, but interpreting downward gyrations in the stock market can be very confusing and counterintuitive. In short, attempting to decipher the reasons behind the short-term zigs and zags of the market is a fool’s errand. Not many people predicted a +48% gain in the stock market during a global pandemic (2020-2021), just like not many people predicted a short-lived -20% reduction in the stock market during 2022 as we witnessed record-high corporate profits and unemployment rates hovering near generational lows (3.6%).
Stock market veterans understand that stock prices can go down when current economic news is sunny but future expectations are too high. Experienced investors also understand stock prices can go up when the current economic news may be getting too cloudy but future expectations are too low.
Apparently, the world’s greatest investor of all-time thinks that all this gloomy recession talk is creating lots of stock market bargains, which explains why Buffett has invested $51 billion of his cash at Berkshire Hathaway as the stock market has gotten a lot more inexpensive this year. So, while the economy will likely face a number of headwinds going into 2023, it doesn’t mean a hurricane is coming and you need to hide in a bunker. If you pull out your umbrella and rain gear, just like smart investors do during all previous challenging economic cycles, the drizzle from the storm clouds will eventually pass and blue skies shall reappear.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2022). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BRK.B/A or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Insane Gain After Fed & Ukraine Pain
After a painful start to 2022, the stock market surged last month, with the S&P 500 index gaining a respectable +3.6%, while the technology-heavy NASDAQ index rose by +3.4%. With volatility on the rise, getting caught up in the emotions of the headlines can be challenging for some investors. At Sidoxia, we are determined to objectively stick to the facts and migrate investments to the areas of the market that provide the best risk-reward opportunities to our clients, based on their unique objectives and constraints. There certainly are some headwinds for investors to contend with, but for long-term investors, it’s also important to recognize the positive tailwinds and not miss the forest for the trees.
As I pointed out last month, we are coming off a heroic advance over the last three years (2019/2020/2021) with the S&P 500 soaring +90%. The hangover from COVID has created significant supply chain disruptions and widespread economic shortages. Adding the Russian invasion of Ukraine to the mix has been like pouring gasoline on the flames of inflation, especially when it comes to the energy and food sectors. As you can see from the CRB index below (a basket of 19 commodities ranging from aluminum to orange juice and live cattle to wheat), in recent years the index has been highly volatile in both directions, but is up +27% this year. Since the COVID-driven trough, prices have about tripled over the last two years, but that does not mean prices will fly to the moon forever.
Many traders have short-term memories. People forget that commodity prices approximately doubled after the 2008 Financial Crisis, only to experience a subsequent slow bleed over the next decade until prices were essentially chopped in half. As the saying goes, “price cures price.” In other words, as prices skyrocket, greedy capitalists and businesses then decide to take advantage of the high pricing environment by investing to produce more supply, which eventually leads to deflation. This supply expansion process takes time and will not happen overnight.
With gasoline prices exceeding $4/gallon nationally, and breaching $6/gallon in my Southern California backyard (see chart below), it should come as no surprise that oil companies are taking advantage of the lucrative environment by drilling for more oil.
The rising Baker Hughes drilling rig count below reflects the miracle of supply-demand economics operating in full force. As prices rise and accelerate during geopolitical shocks like we have experienced in Ukraine, naturally supply rises, which eventually depresses prices until an equilibrium is reached. Even our government is now attempting to increase supply by releasing up to 180 million barrels of oil from our country’s Strategic Petroleum Reserve (the largest release in the almost 50-year history of the reserve), while also pushing for penalties on those energy companies sitting on unused permits (i.e., not producing oil on leased oil land). High energy prices will most certainly become a hot-button political issue in the upcoming midterm elections.
Adding to investor anxiety, our Federal Reserve is embarking on an interest rate hiking cycle that is expected to take the targeted Federal Funds interest rate from effectively 0% to a range around 2.5% over the next couple of years. The Fed’s goal is to increase the cost of borrowing, thereby slowing down the economy and reducing inflation. On the surface this sounds scary, but do you remember what happened the last time the Fed tapped the interest rate brakes during 2015 – 2018? Despite the Fed raising interest rates from 0% to 2.5%, the stock market increased dramatically over that timeframe. The current Fed interest rate cycle may more closely resemble 1994 when the Fed aggressively hiked rates from 3% to 6%. Similar to now, back then stock prices swung wildly throughout the year to eventually finish the year flattish.
If Things Are So Bad, Why Are Prices Going Up?
In the face of such horrible and scary headlines, how can prices still go up? The short answer is that companies are making money hand over fist and the economy remains strong (3.6% unemployment rate; record 11.3m job openings; 3% forecasted growth in 2022 GDP) in a post-COVID recovery world, where consumers remain financially healthy and are now looking to spend their shelter-in-place savings on vacations, houses, and cars (all healthy industries).
Not only are corporate profits at record levels, they are also expected to grow at a healthy rate (+10% in 2022, +10% in 2023) after mind-boggling growth of +50% in 2021 (see chart below).
Could the headwinds previously described cause prices to go lower? They certainly could, but valuations remain attractive given where interest rates currently stand. If interest rates rise dramatically, all else equal, then that will be challenging for all asset pricing. Moreover, discounting or forecasting future Russian military actions is a difficult chore as well, which could also potentially throw a curve ball at investors.
In the meantime, what are companies doing with this flood of growing cash? Well, besides combing the job boards in search of hiring a scarce number of qualified workers, investing in technology to improve productivity, and expanding geographically to grow revenues, companies are also returning gobs of cash to investors in the form of record, swelling dividends and share buybacks (see charts below).
Darling Dividends
The gift that keeps on giving. Dividends now amount to more than half a trillion dollars and they are still growing.
Beautiful Buybacks
As you can see, the trajectory of buybacks are more volatile and discretionary than dividends, but record profits are driving more than $1 trillion in share buybacks on an annualized basis – not too shabby.
Although there are plenty of reasons for investors to rationalize a run for the hills, there remains some extraordinarily strong fundamental tailwinds intact. In spite of the economic pain caused by Ukraine, the Fed, and inflation, there are plenty of reasons to remain optimistic. The strong economy, impressive profit growth, historically low interest rates (even though slowly rising), cash-rich corporations, and attractive valuations mean there is still ample room for future market gains.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2022). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Investing Caffeine 
