Posts filed under ‘Education’
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.
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.
Mission Accomplished?
The Federal Reserve has a “dual mandate” designed to “foster economic conditions that achieve both stable prices and maximum sustainable employment.” The “dual mandate” is obviously a moving target, but it appears for now, based on the Fed’s explicit goals, Fed Chairman, Jerome Powell, has accomplished the central bank’s mission. More specifically, inflation, according to the just-reported BEA’s (Bureau of Economic Analysis) GDP Price Deflator statistics, has plummeted dramatically to the Fed’s goal of 2.0% from the sky-high inflation number of 9.1% a year ago (see chart below). Meanwhile, the economy continues to grow (+2.0% GDP growth in the 2nd quarter), and the long-awaited recession boogeyman has yet to appear.
Source: Bureau of Economic Analysis
Rate Pig Moving Through Economic Python
How has inflation plunged so quickly? For starters, in addition to the Fed’s restrictive policy of reducing the balance sheet, since the beginning of last year, the Fed has also effectively slammed the brakes on the economy by taking their target interest rate from 0% to 5.5%. The pace and scale of the interest rate increases have been reduced this year, however it is possible there might be more rate hikes ahead (currently, pundits are betting for no more rate increases this year, although a boost in November is possible if economic data accelerates). Like a pig working its way through the economic python, the large interest rate increases naturally take a while to work their way through the consumer, commercial, and government credit markets.
To put things in better perspective, a study done earlier this year showed the average 30-year monthly mortgage payment for a $500,000 home was higher by more than $800 (up +44%) versus a year ago! But wait, it’s not just consumers feeling the pinch of higher rates. Businesses and governments in all shapes and sizes have felt the pain as well from higher borrowing costs. Post-COVID supply chain constraints and disruptions have eased too, which have helped choke down the high inflation numbers. In the background, let’s not also forget about the disinflationary benefits of ever-expanding technology adoption coupled with the related productivity advantages (see also AI Revolution).
As a result of these dynamics, we are now starting to see cracks appear in our country’s employment foundation as this month’s JOLTs (Job Openings and Labor Turnover – see black line in chart below) and ADP monthly job additions data, which both came in disappointingly low compared to forecasts. Chairman Powell must be ecstatic inflation has plummeted, while the unemployment rate remains near multi-decade lows, and Gross Domestic Product (GDP) growth continues expanding (i.e., no recession in sight).
Source: Calculated Risk and U.S. Bureau of Labor Statistics
Hot Summer, Hot Stocks
Economic activity clearly can and will change, but the stock market has been like the weather this summer…hot. However, after experiencing up-months in six out of the first seven months of 2023, the S&P 500 index decided to take a small breather this month. For August, the S&P slipped -1.8%, but the month was a tale of two cities. By the middle of the month, the index had fallen by roughly -6% on fears of potentially more aggressive interest rate hikes by the Federal Reserve due to better than anticipated economic data. In other words, inflation fears were on the rise and the 10-Year Treasury Note yield temporarily climbed to a 52-week high. By the end of the month, economic data cooled, interest rates dropped a little, and stock prices rebounded smartly by +4.0% to finish the month on a strong note.
For the year, the S&P’s remain strongly positive, up +17.4%. As I have written in the past, the seven largest companies in the S&P 500 index (a.k.a., The Magnificent 7: Apple Inc.; Microsoft Corp.; Alphabet Inc.; Amazon.com, Inc.; NVIDIA Corp.; Tesla, Inc.; and Meta Platforms, Inc.) have contributed to a significant portion of the year’s gains – the average Magnificent 7 stock has skyrocketed an eye-popping +99.0% with NVIDIA being the largest winner, more than tripling in value during the first eight months of the year.
The Federal Reserve can admit they were late to the game in taming out-of-control inflation, but Fed Chair Powell has been swift in moving to preserve his legacy as an inflation fighter. Now that inflation is coming under control and the economy is beginning to cool, Powell needs to make sure he doesn’t murder the economy into recession with overzealous future interest rate increases. Time will tell if the mission has already been accomplished, but so far, the Fed has been delicately balancing an economic soft landing and stock market investors like it.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 1, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, MSFT, GOOGL, AMZN, NVDA, TSLA, META, 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.
Hollywood Shuts Down & Market Goes Uptown
According to scientists, July set a record as the hottest month in 120,000 years. In order to beat the scorching heat, millions of Americans made the pilgrimage to their local air-conditioned movie theaters to watch the combo-blockbuster “Barbenheimer” (Barbie and Oppenheimer), which has raked in sales of more than $1 billion globally in the first two weeks of its release. Thankfully, in the short-run, Barbenheimer has given a shot in the arm to the beleaguered movie industry that suffered dramatically during the pandemic. The chart below (before Barbenheimer) shows industry sales have recovered (red line) somewhat, almost to pre-pandemic averages (dashed light blue line), but still has some ground to gain before industry sales consistently outpaces pre-pandemic levels.
Source: Calculated Risk
Movie Strike Explained
If movies are your gig, you better race to the theaters now because Hollywood has come to a grinding halt, thanks to a dual strike of Hollywood acting unions (SAG-AFTRA) and the Writers Guild of America (WGA) union. The feud between the unions and the movie/television studios centers around demands for higher pay, better working conditions, and protections from AI (Artificial Intelligence) technologies, which could theoretically replace actors and writers. Combined, the unions almost carry an estimated 200,000 members, which means a broad strike like equals no new movies, tv shows, or streaming content. The last time there was a “double strike” like this occurred in 1960 when former President Ronald Reagan was running SAG. Until the dispute is resolved, you better pace your media binging consumption habits because with no new content currently being created, the dispute may begin to eat into your show backlog on Netflix and disrupt your happy couch-streaming time.
Stocks on Fire
But scorching heat and red-hot popular movies were not the only things on fire last month. The stock market continued its fiery, blistering pace with the S&P 500 boiling higher by +3.1%, making the seven-month total gain of 2023 a spicy +20% (see chart below). The Dow Jones Industrial Average joined in on the fun too. Not only did the Dow increase by +3.4% for the month, the index rose for 13 consecutive days, the longest streak of daily advances since 1987. Bubbling up to the top of the performance table, however, is the technology-heavy NASDAQ index (home of the largest Magnificent 7 technology stocks – see also Fight the Fed) with a sizzling +4.1% return for the month, and a scalding +37% rise for the year, so far. The pace of gains is not sustainable forever, so it’s important to have a disciplined process in place to manage the risk of over-extended, over-valued investments, which is exactly what we do at Sidoxia Capital Management.
Source: TradingEconomics.com
Inflation Moving in the Right Direction
After such a lousy 2022 in the financial markets, why such a searing return for 2023? The biggest reason can be summed up with three words: inflation, inflation, and inflation. More specifically, it’s the pace of “disinflation” we are witnessing that is getting people so excited. As you can see from the chart below, annualized inflation as measured by the Consumer Price Index (CPI) has declined dramatically to 3.3% (blue line), while CPI less shelter (red line) has dropped to 1.4%, which is below the Federal Reserve’s 2% target (green line). These trends have gotten investors excited because they believe Jerome Powell, the Fed Chairman, is closer to ending this year-and-a-half long interest rate hiking cycle. In fact, investors are currently betting for multiple interest rate cuts in 2024.
Source: Calafia Beach Pundit
And the disinflation phenomenon is just not limited to U.S. borders – we are witnessing the same disinflationary trends across our borders (see chart below).
Source: The Financial Time (FT)
Confident Consumers
While many economists and traders have incorrectly been calling for a recession for some two years, a more resilient U.S. economy just reported better-than-expected growth for the 2nd quarter (+2.4% – Gross Domestic Product [GDP] growth). The stronger economy along with the improving inflation dynamics mentioned previously have buoyed Consumer Confidence too, as you can see from the chart below.
Source: Calafia Beach Pundit
Everything isn’t perfect (it never is). We continue to experience geopolitical risk as a result of the destabilized war between Russia and Ukraine; growth in China has stalled and not recovered from the pandemic; complacency is beginning to filter into investor attitudes; and we live with a dysfunctional Washington political process. But the economy remains strong, inflation appears to be cooling, and short-term interest rates could be close to peaking. Your air-conditioning bill may be going up this summer, but so will your stock market portfolio, if your investments are being properly managed.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2023). 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 IC Contact page.
Investing Caffeine 
