Posts filed under ‘Earnings’
No Market Misgiving on This Thanksgiving
We’ll see if there is any gravy left for investors during the last month of the year, but so far 2024 has been a satiating feast that has stuffed investors. There has been a cornucopia of items to be thankful for, including the Federal Reserve, which is expected to provide some dessert this month in the form of its third interest rate cut this year.
Investors certainly can also be grateful for the performance of the stock market, which has had a phenomenal year thus far (see chart below):
• S&P 500: +26.5%
• Dow Jones Industrial Average:+19.2%
• NASDAQ: +28.0%
On a two-year basis, the S&P 500 results look even tastier: +57.1%
Why is there such a large appetite for stocks? For starters, we are coming off a fresh election last month, and the majority of Americans decided to vote for the new administration that has promised additional stimulative tax cuts, and deregulation. If these promises come to fruition, these changes could augur well for corporate profits and a rising stock market. Regardless of whether your candidate won or lost the election, investors can agree there is less uncertainty with an uncontested election, which is welcomed by all. In addition, the two Fed rate cuts that started in September have also buoyed enthusiasm.
What is less clear are the effects of President-elect Donald Trump’s tariff policy threats, which if enacted run the risk of increasing inflation, stifling global trade, and jeopardizing future Fed rate cuts. Combined, these negative side effects have the potential of significantly dampening economic growth. On the other hand, if the tariffs are only used as a negotiating tool with our larger trading partners (including China, Mexico, Canada, and Europe), the tariff discussion will likely have more bark than bite. Time will tell.
Dissecting Stock Performance & Valuations
A lot of pundits are pointing to an overheated market, but on a 3-year basis, returns are looking more normalized (+8.2% per year) because of the -20% hit on stocks during 2022. As you may recall, much of the 2022 decline was caused by the Fed slamming on the economic breaks with its fastest rate-hiking cycle in four decades (raising rates from 0.0% to 5.5%).
Objectively, stock values, as measured by the Price-Earnings (P/E) ratio of the S&P 500, are at elevated levels – registering in at approximately 22-times next year’s forecasted profits. As you can see from the chart below, the stock market is priced at levels not seen since 2001 and valuations are roughly double what they were at the lows of the 2008 Financial Crisis.
Source: Yardeni.com
A major reason for escalated valuations has been the concentration of performance in the largest seven companies, or the so-called Magnificent 7 stocks, which include, Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla. In fact, the index concentration is the highest it has been in more than a half century – even higher than at the peak of the 2000 Tech Bubble when Cisco Systems, Microsoft, GE, Intel, and Exxon Mobil were the five largest companies by market capitalization (see chart below).
The good news is the other 493 companies in the S&P 500 (I call them the “Absentee 493”) are priced much more reasonably. This bifurcated dynamic between the largest seven companies versus everything else, highlights the plethora of opportunities available to be harvested in Value stocks, Small-cap stocks, and Mid-cap stocks.
As is evident in the chart below, the S&P 500 index (red-line), which is skewed by the Magnificent 7, is about 30% more expensive than Small-cap and Mid-cap stocks, which are hovering near historically attractive valuation levels.
Source: Yardeni.com
Value stocks (blue-line) in the market look equally attractive (about 30% cheaper than the S&P 500), as can be seen in the chart below.
Source: Yardeni.com
As always, the future is uncertain, and risks abound for next year. But 2024 has been a blockbuster year and there has been plenty to be thankful for, especially the performance of the U.S. stock market.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 2, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, AMZN, MSFT, GOOGL, META, TSLA, NVDA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in CSCO, GE, XOM, INTC 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.
Past Elections Status Quo Means No Need for Woe
Scarier than Halloween, the current presidential election is causing people on both sides of the political aisle to be frightened by the idea of their candidate potentially losing. Uncertainty is generally petrifying to investors, resulting in downward pressure on stock prices, but with less than a week until election day, the stock market is providing more treats than tricks. Sweetness has come in the form of a stock market up +20% in 2024 (up 8 out of 10 months this year), and only off -3% from its record high reached a few weeks ago. For the month, investors experienced modest declines as they braced for the election results. The S&P 500 dropped -1.0%, the Dow Jones Industrial Average -1.3%, and NASDAQ -0.5%.
Regardless of whether the red team or blue team wins the presidential election, the good news is history reminds us the end result has little effect on the long-term results of the stock market. As you can see from the chart below, over the last century, stock prices have gone up under both Republican and Democrat presidents. As Mark Twain famously stated, “History doesn’t repeat itself, but it often rhymes.” If that’s the case, past elections teach us, there is no need to fear the status quo of a Republican or Democrat president.
Source: Yardeni Research (Yardeni.com)
More recently, over the last 26 years, the stock market has been up significantly under each president, regardless of political party. Here are the results of the S&P 500 under the last three presidents:
- President Barack Obama(November 4, 2008 – November 8, 2016 – Democrat): +137%
- President Donald Trump(November 8, 2016 – November 3, 2020 – Republican): +51%
- President Joe Biden (November 3, 2020 – Present – Democrat): +63%
No matter who wins the White House, they will be inheriting a relatively strong economy. Consider the following tailwinds benefitting the new president:
- Strong Economy: The broadest measurement of economic activity, Gross Domestic Product (GDP), registered a healthy +2.8% growth rate for Q3
- Resilient Jobs Market: The just-reported unemployment rate of 4.1% today is representative of a strong but slowing job market. The unemployment rate has climbed modestly since troughing in 2023, but unemployment is still relatively low compared to historic levels much higher.
- Declining Inflation: As I pointed out last month (see Rate Cut Adrenaline) inflation has been on a fairly consistent downward trajectory over the last two years, which has allowed the Federal Reserve to cut interest rates by 0.50% in September. Moreover, based on the current economic environment, the Fed has signaled more stimulative interest rate cuts are likely ahead – economic strategists and pundits are predicting another 0.25% cut at the next Federal Reserve meeting that occurs over the two days following the elections.
- Record Corporate Profits (see chart below): The United States economy is the envy of the world, and the reason why is evident by the 65-year chart below showing record corporate profits and GDP. If you were an entrepreneur, where would you choose to start your company? China? Japan? UK? Russia? There’s plenty of room for improvements in our country’s policies, but there’s a reason the U.S. dominates in creating the largest and most profitable multi-trillion companies in the world.
Source: Calafia Beach Pundit
One area for improvement in the U.S. revolves around our fiscal debt and deficits. Our government simply spends too much money and doesn’t collect enough (tax receipts) to cover those expenses (see chart below). Another lesson to learn from our government’s excessive spending over the last four decades is that the glut of expenditures can’t be blamed on any one political party – the slope of spending is consistently up and to the right for all serving politicians.
Source: Calafia Beach Pundit
As I have mentioned in the past, stocks do not perpetually move up forever. However, regardless of the election outcome, we know from history that up-markets (bull markets) occur about 85% of the time, if we look at the last 100 years (see chart below). Analysis by Dimensional Fund Advisors shows that from 1926 – 2023, bull markets have lasted 994 months versus much shorter bear markets of 177 months.
Source: Dimensional Fund Advisors
It is very possible that stock prices may take a breather or correct under various election outcomes, but if we follow the historic status quo, there will be no long-term reason for woe.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , 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.
Another Hot Month, Another Fresh Record
Summer is coming to a close, but the weather is not the only thing that remains hot. The stock market has been scorching hot as well. Both the S&P 500 and Dow Jones Industrial Average blazed to all-time record highs last month. In fact, both of these indexes have risen seven out of eight months this year, including gains in the last four consecutive months. More specifically, the S&P 500 was up +2.8% last month and +18.4% this year, while the Dow Jones has advanced +1.8% for the month and +10.3% for the year.
How can this surging bull market be in existence while undergoing a war between Russia and Ukraine; military conflict in Gaza; a nasty Japanese Yen Carry Trade unwind; a highly divisive upcoming presidential election; a weakening economy; and rising unemployment (see chart below)?
Source: Calafia Beach Pundit
For all investors and traders, there is never a shortage of issues to worry about, even when times are good. However, despite the long laundry list of concerns, there are plenty of opposing tailwinds supporting the upswell in stock prices, starting with growing record corporate profits with strength forecasted through 2026 (see chart below).
Source: Yardeni.com (Yardeni Research)
Another factor underpinning the strength of stocks has been the decline in the inflation rate. The latest headline inflation rate (CPI – Consumer Price Index) fell to 2.9% in July, and if you exclude shelter costs, inflation has fallen below the Federal Reserve’s 2% target rate.
Source: Calafia Beach Pundit
Conversely, the story was quite different in 2022 when the Federal Reserve began its crusade against out-of-control inflation (see chart below) by starting its first of 11 interest rate hikes that spanned from January 2022 through July of 2023. The net result was a stock market that tanked -19% in 2022. More recently, the Fed has clearly signaled that inflation is more under control with traders predicting a 100% probability of a -0.25% or -0.50% cut in the targeted Federal Funds interest rate on September 18th. The Federal Reserve Chairman Jerome Powell gave a dovish speech at the annual policy meeting in Jackson Hole, Wyoming strongly portending September action – the first cut in four years since the pandemic.
AI Arms Race on Spending
Another dynamic contributing to new stock market record highs is the boom in AI (Artificial Intelligence) spending by the technology behemoths like Amazon.com Inc. (AMZN), Microsoft Corporation (MSFT), Meta Platforms Inc. (META), and Google – Alphabet Inc. (GOOGL). As I have been talking and writing about for some time (see World of AI), there is an arms race in spending to create the next, latest-greatest large language model (LLM) like ChatGPT. The goal is to bring more efficiency and accuracy to businesses and provide consumers more pleasure and time savings at both work and home. As you can see from the chart below, the four colossal technology companies previously mentioned are currently on a run-rate of spending more than a mind-boggling $200 billion annually, much of that going to the king of AI GPU (Graphics Processing Unit) manufacturing, NVIDIA Corporation (NVDA).
Why are companies spending so much on AI? Because they agree with NVIDIA CEO, Jensen Huang, who last week stated, “Generative AI will revolutionize every industry.” Despite all the spoils migrating to NVIDIA, traders were still looking for warts on the AI supermodel when they reported 2nd quarter results last week. Nonetheless, NVIDIA still delivered its 5th consecutive quarter of greater than 100% revenue growth, while generating revenues of almost $100 billion over the last 12 months – not too shabby. Although greedy investors wanted more, the stock was still up +2% for the month and +141% so far this year.
Source: Sherwood News
While economic, political and geopolitical concerns have been boiling over around the world, the stock market continues to sizzle higher. Declining inflation and interest rates, escalating business profits, and spiking artificial intelligence expenditures across corporate America have kept stocks cooking to record highs. It’s been a sweltering summer but not yet too hot for investors to get roasted out of the stock market kitchen.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 3, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including AMZN, MSFT, META, GOOGL, NVDA, 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.
The Great Rotation
There are many styles of investing, and many ways to make money in the stock market. Just like the styles of men’s ties or women’s dresses come in and out of fashion, so too do the styles of investing. Some stick around for a long time, while other fads flop in short order, leading consumers to rotate into new fashions. I’m still waiting for my Bermuda shorts and pleated pants to come back in style. At this year’s Olympics, the broad array of styles has been on full display.
Growth & Tech in Style
The stock market has been on a one-way freight train riding on the coattails of large capitalization growth stocks, primarily technology stocks, especially those associated with technology and artificial intelligence (AI). You can see the dominance of the Growth style over Value in the 30-year chart below.
Source: Yardeni.com
When the blue line is sloping upwards, that means Growth stocks are outperforming Value stocks, and when sloping downwards, Value stocks are outperforming Growth Stocks. For most of the 1990s, Growth was dominant, and ever since the aftermath of the 2008 Financial Crisis, Growth stocks have once again overshadowed Value stocks a majority of the time (2022 being a short-lived reprieve for Value stocks).
This mega-Growth trend reversed last month (at least temporarily), and investors decided to rotate out of large winners into the previously shunned areas of the market, including Small Cap and Value stocks. You can see in the chart below that Small Caps (S&P 600) have underperformed Large Caps (S&P 500) over the last six years.
Source: Yardeni.com
Is this rotation sustainable? At this point, I’d say it’s too early to tell, but during periods like these, when Wall Street darlings like NVIDIA Corp (NVDA) suffer a large hit (e.g., down -17% for NVDA since the June peak), diversification benefits are pushed to the forefront. The lesson of the year 2000 technology bubble bursting taught a generation of investors that getting overly concentrated in a single sector of technology stocks can be seriously dangerous to your wealth and financial well-being. By selecting a diversity of eggs in your basket, like Value and Small Cap stocks, you can protect your nest egg when there are substantial rotations like we experienced last month. Diversification is a core tenet of our investment philosophy at Sidoxia.
In order to place the recent rotation in perspective, let’s look at how a range of indexes performed last month. The Dow Jones Industrial Average increased a hefty +4.4%, while the S&P 500 finished up modestly +1.1%. As investors rotated out of technology (-3.3% – Technology Select Sector SPDR Fund / XLK), a good chunk of those sales rotated into small cap stocks (+10.3% – iShares Russell 2000 ETF / IWM) and value stocks (+5.1% – iShares Russell 1000 Value ETF / IWD).
Despite concerns over global geopolitics, political election madness, and a slowing economy, investors are more focused on the positive prospect of future interest rate cuts by the Federal Reserve, starting in September with a probability exceeding 90% (see chart below).
Source: CME Group
Some investors got caught up in the dizzying rotation last month, but timing these rotations is nearly impossible and one month does not make a long-term trend. Rather than getting caught up in a fool’s errand, make sure your investment portfolio is diversified and built to withstand volatile rotations.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including NVDA, 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.
Choosing Your Favorite Dental Procedure: Recession or Inflation?
Going to the dentist can be a pleasurable or painful experience, depending on whether you have been properly brushing and flossing your teeth. If the stock market was a patient, its 2024 checkup would produce a large smile. Why so happy? Because the S&P 500 index is up a healthy +5.6% in the first four months of the year, thanks to a resilient economy, robust employment, and record corporate profits (see chart below). The smiles were even larger a month ago before the S&P 500’s five-month, almost +30% winning streak was broken from October to March.
Source: Yardeni.com
Driving the overall record profits of the stock market are the “Magnificent Seven” (see Fight the Fed or Risk Going Dead), which include mega-technology companies such as AI (Artificial Intelligence) stalwarts like NVIDIA Corp., Microsoft Corp., Alphabet Inc. (Google), and Meta Platforms Inc. As you can see in the chart below, these tech behemoths are generating gargantuan mounds of cash that are piling up at flabbergasting rate of over $300 billion per year.
Source: The Financial Times
How are these Silicon Valley titans achieving such colossal results? The short answer is: The AI Wave. As I pointed out in a previous post of mine, The World of AI, artificial intelligence projects are so large that Meta Platforms CEO Mark Zuckerberg committed to purchasing upwards of a jaw-dropping $10 billion in NVIDIA H100 chips by year-end. To put some of this AI craze into perspective, we learned over the last week that the combined 2024 capital expenditure plans of four companies (Microsoft, Alphabet, Meta and Amazon) are forecasted to exceed $200 billion – much of that driven by generative AI projects.
While many of these aforementioned companies are benefitting disproportionately from their exposure to AI, what has really been giving investors a toothache has been stubbornly high and sticky inflation (see red line on chart below), which has pushed up interest rates higher on the 10-Year Treasury Note yield by approximately +0.5% this month, near a 17-year high of 4.69%. Higher interest rates are bad for long-term bond prices (e.g., TLT down -6.8% last month) and generally troublesome for stocks as well. That’s why the S&P 500 took a breather last month with the S&P declining -4.2%, the Dow Jones Industrial Average falling -5.0%, and the technology-heavy NASDAQ index dropping -4.4%.
Source: Calafia Beach Pundit
Your Favorite Dental Procedure?
Investors definitely don’t want higher interest rates, but stock traders should be careful what they wish for. If low interest rates are really what investors want, this scenario could result in an undesirable package deal that includes a recession. So, if pain can come from different scenarios, what is your favorite economic dental procedure?
• A hot economy giving rise to high inflation/high interest rates?
• A cold economy triggering a recession with low interest rates?
I don’t know about you, but both these procedures sound painful to me.
Traders would certainly love to get some anesthesia in the form of Federal Reserve interest rate cuts to relieve the recent stock market pain. Nevertheless, Federal Reserve Chairman, Jerome Powell, has been hawkishly candid in his recent commentary, indicating he will be “data dependent” and let the forthcoming economic numbers guide the Fed’s monetary policy on future interest rate decisions.
Coming into 2024, most pundits were calling for a series of seven interest rate cuts by the end of the year. However, due to the hotter and more resilient economy, now the pendulum of investor sentiment has swung to an expectation of only one or two cuts. We will learn more today when the Fed concludes a two-day meeting with a published interest rate policy decision followed by a subsequent press conference with Jerome Powell.
Of course, not all financial scenarios necessarily have to lead to what feels like a painful root canal or tooth extraction. There is a legitimate path to a so-called “soft-landing.” This would be a goldilocks scenario in which our current elevated interest rates (i.e., Federal Funds target of 5.25% – 5.50%) gradually slow the economy to a level that continues the previous downward inflation trajectory towards the Fed’s long-term objective of 2.0%. If the “soft-landing” were achieved, the Fed could then begin cutting rates again to stimulate the economy.
Regardless of our country’s economic outcome, we can probably agree there is a lot of uncertainty out in the world. These unknowns include Russia-Ukraine, Israel-Hamas, our elections, inflation, Fed monetary policy, bond volatility, stock volatility, and a whole host of other variables. With this backdrop in mind, it’s more important than ever to ensure you have a diversified portfolio and detailed financial plan in place to achieve your long-term life goals. Do yourself a favor and get a financial check-up with an independent, experienced advisor like Sidoxia Capital Management (www.Sidoxia.com). That way, you can smile with a healthy set of pearly whites, rather than grimace in pain as you would from an undesirable dental procedure.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), including NVDA, MSFT, META, and AMZN, 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.
Dow Knocking on the Door of 40,000
The stock market rang the doorbell of the New Year with a bang during the 1st quarter. The S&P 500 index built on last year’s +24% gain with another +10% advance during the first three months of the year. And as a result of these increases, the Dow Jones Industrial Average index is knocking on the door of the 40,000 milestone – more specifically, the Dow closed the month at 39,807 (see chart below). To put his into context, when I was born more than 50 years ago, the Dow was valued at less than 1,000 – not a bad run. This is proof positive of what Einstein called the 8th Wonder of the World, “compounding”. At Sidoxia Capital Management, we view investing as a marathon, not a sprint. You cannot realize the benefits of compounding without having a long-term time horizon. The sooner you start saving and the more you save, the faster and larger your retirement nest egg will grow.
If you are one of the people who thinks the stock market is too high, then you should definitely ignore Warren Buffett, arguably the greatest investor of all-time. Buffett predicted the Dow will reach an astronomical level of one million (1,000,000) within the next 100 years. I’m not sure I will still be around to witness this momentous achievement, however, if history repeats itself, this targeted timeframe could prove conservative.
Despite the magnitude and duration of this bull market, there is still a lot of angst and anxiety over the upcoming election. Nevertheless, investors are choosing instead to focus on the strong fundamentals of the economy. Just this last week, we saw the broadest measurement of economic activity, GDP (Gross Domestic Product), get revised higher to +3.4% growth during the 4th quarter of 2023 (see chart below). On the jobs front, the unemployment picture remains healthy (3.9%), near a generational low.
Source: Trading Economics and Bureau of Economic Analysis
And when it comes to the all-important inflation data, the Federal Reserve’s preferred inflation measure, Core PCE index (Core Personal Consumption Expenditures), was also just released in-line with economists’ projections at 2.5% (see chart below), very near the Fed’s long-term 2.0% inflation target and well below the Core PCE’s recent peak near 6%.
Source: The Wall Street Journal and Commerce Department
This resilient economic data, when combined with the declining inflation figures, has resulted in the Federal Reserve sticking with its plan of cutting its Federal Funds interest rate target three times this year. If inflation reverses course or remains stubbornly high, then there is a higher likelihood that interest rate cuts will be delayed. On the flip side, if economic data slows significantly or the country goes into a recession, then the probability of sooner and/or more Fed interest-rate cuts will increase.
In other news, here are some of the other major financial headlines this month:
- Francis Scott Key Baltimore Bridge Collapse: Six people died when a large container ship crashed into the Francis Scott Key bridge in the Port of Baltimore. An estimated 50 million tons of goods valued at $80 billion flows through this port, making this one of the top 10 ports in the country. The auto and coal industry supply chains will be disproportionately affected, but the good news is much of these goods will be diverted to other larger ports (e.g., Port of New York and Port of New Jersey).
- DJT Debut: A lot of hype surrounded the trading debut of Trump Media & Technology Group, which began trading last week under the initials of our country’s former president, Donald J. Trump (Ticker: DJT). Despite only posting a few million in revenue and -$50 million in losses during the first nine months of 2023, the stock skyrocketed +65% in its first week of trading and attained a $9 billion valuation. Time will tell if Trump’s Truth Social media platform will gain traction and justify the stock’s price, or rather suffer the declining fate of other meme stocks like GameStop Corp. (GME) or AMC Entertainment Holdings (AMC).
- SBF Sentenced to 25 Years: The former CEO of cryptocurrency exchange company FTX, Sam Bankman-Fried (SBF), was sentenced to 25 years in prison due to his conviction on seven counts of fraud and what is believed to be $8 billion in stolen client funds. SBF didn’t help his own cause by perjuring himself, tampering with witnesses, and showing a lack of remorse, according to the judge.
We are only 25% of the way through the year, but the Dow is knocking on the 40,000-milestone door. The way things look now, investors are wiping their feet on the welcome doormat and ready to walk right in.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2024). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in individual stocks , certain exchange traded funds (ETFs), and notes including AMC 2026, but at the time of publishing had no direct position in DJT, GME, AMC 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.
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.
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