Posts filed under ‘Financial Markets’
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.
Fight the Fed… Or Risk Your Account Going Dead!
Throughout history the prominent Wall Street mantra has been, “Don’t fight the Fed.” In essence, the credo instructs investors to sell stocks when the Federal Reserve increases its Federal Funds interest rate target and buy stocks when the Fed cuts its benchmark objective. The pace of interest rate increases since early 2022 has increased at the fastest rate in over four decades (see chart below). Unfortunately for those following this overly simplistic guidance of not opposing the Fed, investor portfolio balances have been harmed dramatically during 2023 by missing a large bull market run. Despite this year’s three interest rate hikes and an 87% probability of another increase next month by the Federal Reserve, the S&P 500 index surged +6.5% last month and has soared +15.9% for 2023, thus far.
Source: TradingEconomics.com
The technology-heavy NASDAQ index has skyrocketed even more by +31.7% this year, thanks in part to Apple Inc. (AAPL) surpassing the $3 trillion market value (+49.3%), thereby exceeding the total gross domestic product (GDP) of many large individual countries like France, Italy, Canada, Brazil, Russia, South Korea, Australia, Mexico, and Spain.
But Apple’s strong performance only explains part of the technology sector’s impact on stock returns this year. The lopsided influence of technology stocks can be seen through the performance of the largest seven mega-stocks in the S&P 500 (a.k.a., The Magnificent 7), which have averaged an eye-popping return of +89%. Artificial intelligence (AI) juggernaut, NVIDIA Corporation (NVDA), has led the way by almost tripling in value in the first six months of the year from $146 per share to $423.
GDP & Profits Growing
Economists and skeptical investors have been calling for a recession for well over a year now, however GDP growth and forecasts remain positive, unemployment remains near generationally low levels (below 4%), and corporate profit forecasts are beginning to creep higher (see chart below – red line). You can see, unlike previous recessions, profits have not collapsed and actually have reversed course upwards.
Source: Yardeni.com
These factors, coupled with the cooling of inflation pressures have contributed to this bull market in stocks that has soared +27% higher since the October 2022 bottom in the S&P 500. With this advance in stock prices, we have also seen green shoots sprout in the Initial Public Offering (IPO) market for new publicly traded companies (see chart below) like Mediterranean fast-casual restaurant chain CAVA Group, Inc. (CAVA), which has catapulted +86% in its opening month and thrift store company Savers Value Village, Inc. (SVV) which just recently climbed over +31% in its debut week.
Source: The Financial Times (FT)
Dumb Rules of Thumb
Wall Street is notorious for providing rules of thumb and shortcuts for the masses, but if investing was that easy, I’d be retired on my private island consuming copious amounts of coconut drinks with tiny umbrellas. Case in point, following the guideline to “sell in May and go away” would have cost you dearly last month with prices gushing higher. And although the “January Effect” has been documented by academics as a great period to buy stocks, this so-called phenomenon has failed in three of the last four years. Which brings us back to the Fed. It is true that “not fighting the Fed” worked well last year, given the shellacking stocks took after a steep string of Fed interest rate increases, but following the same strategy this year would have only resulted in a large bath of tears. As is the case with most things investing related, there are no cheap and easy rules to follow that will lead you to financial prosperity. The best recommendation I can provide when it comes to investing advice squawked by the media masses is that the true path to wealth creation often comes from ignoring or disobeying these unreliable and inconsistent rules of thumb. Therefore, contrary to popular belief, fighting the Fed may actually lead to knockout returns for investors.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 3, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, AAPL, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in CAVA, SVV, or anyother 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.
AI Revolution and Debt Ceiling Resolution
On the surface, last month’s performance of the stock market as measured by the S&P 500 index (+0.3%) seemed encouraging, but rather pedestrian. Fears of sticky-high inflation, more potential Federal Reserve interest rate hikes, contagion uncertainty surrounding a mini-banking crisis, along with looming recession concerns led to a -3.5% monthly decline in the Dow Jones Industrial Average (-1,190 points). The good news is that inflation is declining (see chart below) and currently the Federal Reserve is expected to pause from increasing interest rates in June (the first time in more than a year).
Source: Calafia Beach Pundit
Overall stock market performance has been a mixed-bag at best. Adding to investor anxiety, if you haven’t been living off-the-grid in a cave, is the debt ceiling negotiations. Essentially, our government has maxed out its credit card spending limit, but Republicans and Democrats have agreed in principle on a resolution for an expanded credit line. More specifically, the House of Representatives just approved to raise the debt ceiling by a resounding margin of 314 – 117. If all goes well, after months of saber rattling and brinksmanship, the bill should be finalized by the Senate and signed by the President over the next two days.
Beyond the Washington bickering, and under the surface, an artificial intelligence (AI) revolution has been gaining momentum and contributed to the technology-heavy NASDAQ catapulting +5.8% for the month and +23.6% for 2023. At the center of this disruptive and transformational AI movement is NVIDIA Corp., a leading Silicon Valley chip manufacturer of computationally-intensive GPUs (graphics processing units), which are used in generative AI models such as OpenAI’s ChatGPT (see NVIDIA products below). Adoption and conversations surrounding NVIDIA’s AI technology have been spreading like wildfire across almost every American industry, resulting in NVIDIA’s stratospheric stock performance (+36% for the month, +159% for the year, +326% on a 3-year basis).
Source: NVIDIA Corp. – the computing engines behind the AI revolution.
Why Such the Fuss Over AI?
Some pundits are comparing AI proliferation to the Industrial Revolution – on par with productivity-enhancing advancements like the steam engine, electricity, personal computers, and the internet. The appetite for this new technology is ravenous because AI is transforming a large swath of industries with its ability to enhance employee efficiency. By leveraging machine learning algorithms and massive amounts of data, generative AI enables businesses to automate repetitive tasks, streamline processes, and unlock new levels of productivity. A study released by MIT researchers a few months ago showed that workers were 37% more efficient using ChatGPT.
If you have created an account and played around with ChatGPT at all you can quickly realize there are an endless number of potential applications and use-cases across virtually all industries and job functions. Already, application of generative AI systems is disrupting e-commerce, marketing, customer service, healthcare, robotics, computer vision, autonomous vehicles, and yes, even accounting. Believe it or not, ChatGPT recently passed the CPA exam! Maybe ChatGPT will do my taxes next year?
Other industries are quickly being disrupted too. Lawyers may feel increased pressure when contracts or briefs can be created with a click of the button. Schools and teachers are banning ChatGPT too in hopes of not creating lazy students who place cheating and plagiarism over critical thinking.
At one end of the spectrum, some doomsday-ers believe AI will become smarter than humans, replace everyone’s job, and AI robots will take over the world (see Elon Musk warns AI could cause “civilization destruction”). At the other end of the spectrum, others see AI as a transformational tool to help worker productivity. As generative AI continues to advance, its impact on employee efficiency will only grow, optimizing processes, driving innovation, and reshaping industries for a more productive future. Embracing this transformative technology will be critical for businesses seeking to thrive in the new digital age.
2023 Stock Performance Explained – Index Up but Most Stocks Down
Although 2022 was a rough year for the stock market (i.e., S&P 500 down -19%), stock prices have rebounded by +20% from the October 2022 lows, and +9% this year. This surge can be in large part attributed to the lopsided performance of the top 1% of stocks in the S&P 500 index (Apple Inc., Microsoft Corp., Amazon.com Inc., NVIDIA Corp., and Alphabet-Google), which combined account for almost 25% of the index’s total value. These top 5 consumer and enterprise technology companies have appreciated on average by an astounding +60% in the first five months of the year and represent a whopping $9 trillion in value. It gets a little technical, but it’s worth noting these larger companies have a disproportionate impact on the calculation of the return percentages, and vice versa for the smaller companies. To put these numbers in context, Apple’s $2.8 trillion company value is greater than the Gross Domestic Product (GDP) of many entire countries, including Italy, Canada, Australia, South Korea, Brazil, and Russia.
On the other hand, if we contrast the other 99% of the S&P 500 index (495 companies), these stocks are down -1% each on average for 2023 (vs +60% for the top 5 mega-stocks). If you look at the performance summary below, you can see that basically every other segment of the stock market outside of technology (e.g., small-cap, value, mid-cap, industrial) is down for the year.
2023 Year-To-Date Performance (%)
S&P 500: +8.9%
S&P 500 (Equal-Weight): -1.2%
S&P Small-Cap Index: -2.3%
Russell 1000 Value Index: -2.0%
S&P Mid-Cap Index: -0.7%
Dow Jones Industrial: -0.7%
While most stocks have dramatically underperformed technology stocks this year, this phenomenon can be explained in a few ways. First of all, smaller companies are more cyclically sensitive to an economic slowdown, and do not have the ability to cut costs to the same extent as the behemoth companies. The majority of stocks have factored in a slowdown (or mild recession) and this is why valuations for small-cap and mid-cap stocks are near multi-decade lows (12.8x and 13.0x, respectively) – see chart below.
Source: Yardeni.com
The stock market pessimists have been calling for a recession for going on two years now. Not only has the recession date continually gotten delayed, but the severity has also been reduced as corporate profits remain remarkably resilient in the face of numerous economic headwinds. Regardless, investors can stand on firmer ground now knowing we are upon the cusp of an AI revolution and near the finish line of a debt ceiling resolution.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, AAPL, MSFT, GOOGL, AMZN 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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