Posts filed under ‘Politics’
New Year, New AI Era & New Tariff Sheriff
The first month of 2025 started with a bang when newly-inaugurated President Donald Trump announced a groundbreaking AI (artificial intelligence) program led by business titan thought leaders called Stargate, which promises to spend a half trillion dollars on AI data center infrastructure projects and create hundreds of thousands of jobs. Just one week later, a wet blanket was placed on the Stargate euphoria when a Chinese AI upstart announced a technological breakthrough. Stocks moved lower on the last day of the month when Trump added insult to injury by confirming 25% Mexican/Canadian tariffs and 10% additional Chinese tariffs would be implemented immediately.
Regardless, positive economic and corporate data coupled with other pro-business fiscal policies (e.g., deregulation and lower proposed taxes) allowed the financial markets to finish the month with respectable gains. More specifically, the S&P 500 surged higher by +2.7%; the NASDAQ +1.6%; and the Dow Jones Industrial Average +4.7%.
DeepSeek = Deep AI Trouble?
Ever since OpenAI launched its ChatGPT language model (LLM) at the end of 2022, the global AI gold rush began. Just as the United States appeared to be dominating the AI race to global superiority, a bombshell was recently released, when a new Chinese AI upstart, DeepSeek, released a white paper claiming the company’s R1 large language model (LLM) rivaled competitors’ LLMs like OpenAI’s ChatGPT, Meta’s Llama (META), Anthropic’s Claude, and Alibaba’s Qwen (BABA) for a small fraction of the price spent by DeepSeek’s American rivals. The “DeepSeek Freak” caused a chain reaction of selling across a wide swath of companies (including NVIDIA Corp – NVDA) that have benefitted from hundreds of billions in AI infrastructure spending. The fear that Chinese AI competition may leapfrog U.S. companies, and potentially dramatically reduce AI-related capital expenditures caused the NASDAQ to almost fall -2% last week, and AI juggernaut NVIDIA shed more than a half trillion dollars in the company’s market value in a single day. Overall, U.S. stocks lost more than a trillion dollars in value on the day of the DeepSeek Freak unveiling.
Although investors were initially panicked by the DeepSeek revelations, not all of the Chinese claims have been substantiated. In fact, a just-released report by SemiAnalysis, a semiconductor research and consulting firm, states that DeepSeek’s costs for its R1 LLM likely exceed $500 million, much higher than the $6 million training costs stated in DeepSeek’s initial pronouncement.
Source: NBC News
New Tariff Sheriff in Town
While many investors were hoping for a delay in the implementation of President Trump’s tariffs on Mexico, Canada, and China, Trump decided to move full steam ahead with a February 1st start date. In 2023, Mexico was the U.S.’s largest trade partner and Canada was the second largest. These Mexican and Canadian tariffs are very broad based and impact many different industries, including autos, agricultural products, and crude oil. You can see the extent of the impact in the graphic below graphic below.
Source: VisualCapitalist.com
But what does this mean for the economy? In short, it will mean higher prices for U.S. consumers and businesses. The Tax Foundation, an 85-year-old, non-partisan, tax policy non-profit attempted to quantify some of the potential impacts from the proposed tariffs. The bottom-line findings from the Tax Foundation were that tariffs would “shrink economic output by -0.4% and increase taxes by $1.2 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $830 per US household in 2025.” Please, also see table below (Scenario 2).
Source: Tax Foundation
In addition to American consumers having to pay higher taxes and prices for tariffed import products, there will be an estimated -344,000 jobs lost and there could be unintended consequences from retaliatory tariffs imposed on U.S. exports (i.e., our goods shipped internationally will be priced uncompetitively). In fact, Canada and Mexico just jointly announced tit-for-tat tariffs on U.S. goods and services, which will hurt these U.S. sales abroad.
With all of that said, the bark of the 25% tariffs on Mexico and Canada, along with the 10% in additional tariffs on China could be worse than the actual bite. Especially, if Trump uses these tariffs successfully as a negotiating tool and provides foreign countries with significant exemptions.
It’s also important to keep the size of these tariffs in context. Imports of foreign good and services only represented 13.9% of the Unted States’ Gross Domestic Product in 2023. Of that small percentage of imports, Mexico, Canada, and China only represent a fraction of that. It’s true that imports subtract from our country’s economic activity, but even if tariffs on foreign goods lead to the consumption of more American manufactured products, those benefits will be somewhat offset by higher inflated prices that will pinch consumer wallets. The new year marks an exciting new era of AI and global trade, but with that comes many new threats and opportunities. Throughout our 17-year history at Sidoxia Capital Management, we have successfully navigated these pivot points, and we are excited about effectively managing through this current transitional period.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in META, NVDA, certain exchange traded funds (ETFs), but at the time of publishing had no direct position in BABA 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 the IC Contact page.
Time in the Market Beats Timing the Market
It was another great year in the stock market. But predicting the timing of a bear or bull market is more challenging. Fortunately for investors, the stock market is up a lot more of the time than it is down. More specifically, over the last century, the stock market has been up 73% of the time for one-year periods and 94% of the time for 10-year periods (see graphic below and Time is What Matters). That’s why investors’ time in the market beats the fools’ errand strategy of trying to time the market. The long-term, consistent upward trend in stock prices makes investing in the stock market akin to sailing around the world with a persistent tailwind for the whole trip.
Source: Capital Group and S&P 500 Index
Many people believe investing in the stock market is gambling, but 73% and 94% odds for stock market gains seem a lot better than the probabilities of making money in Las Vegas. I explored this concept further in one of my recent articles (see Elections Status Quo). Even with those favorable, lopsided odds, recessions do occur, albeit infrequently. As you can see from the chart below, since World War II, we have experienced a dozen recessions averaging 10 months in duration. And guess what? Successful post-recession recoveries have equaled 100% (12 for 12). Despite the short-lived bear markets, stock prices have appreciated more than 30x-fold since the end of World War II.
Source: Yardeni.com
2024 Predictions
There were plenty of pundits and talking heads who falsely predicted a recession in 2024, but the odds certainly worked in investors’ favor. For 2024, the S&P 500 index gained +23%, and this comes on the heels of a banner 2023, which was up +24%. Experiencing back-to-back +20%-years is a rare occurrence, which hasn’t occurred since the late-1990s. As we look into 2025, achieving three consecutive positive years in the stock market is not unprecedented, but as I mentioned earlier, predicting the timing of a down market can be tricky.
Case in point, predicting the outcome of stock returns, even with perfect information can be very daunting. What would have been your prediction of the 2024 stock market return, if I told you the following events were to occur this year (in no particular order)?
- Two assassination attempts on a presidential candidate
- An ongoing bloody war between Russia and Ukraine that reaches one million deaths
- Brutal Israeli-Hamas war in Gaza moves into its second year
- Nationwide Palestinian protests across college campuses
- Israeli-Hezbollah war commences in Lebanon
- Rebels in Syria topple the Assad regime
- A hotly contested presidential election triggering fears of a civil war
- A Baltimore bridge collapses killing six people and costing the overall economy upwards of $10 billion
- After crypto exchange goes bankrupt, CEO is sentenced to 25 years in prison for fraud
Most intelligently honest people would not have predicted a +23% return, but that is exactly what happened. As part of this extended bull market, some major stock market milestones were achieved: 1.) the Dow Jones Industrial average eclipsed 40,000; 2.) the main benchmark S&P 500 index surpassed 6,000; and 3.) the NASDAQ index temporarily triumphed the 20,000 level. The market took a breather in December (the Dow -5.3% and S&P -2.5%), so we have momentarily pulled back from some of these key levels.
What Next in 2025?
As I alluded to earlier, pulling off a three-peat in 2025 with a third consecutive year of gains may be a difficult feat, but not impossible. There remains some room for optimism. First of all, we have an accommodative Federal Reserve that has cut interest rates three times in 2024 (see chart below) from a target of 5.5% to 4.5% (see red line). Currently, expectations are set for the Fed to make another two interest rate cuts in 2025. All else equal, this should provide some mild stimulus for both borrowers and investors in 2025.
Source: Yardeni.com
Next, we have a new pro-business administration entering the White House that has promised lower taxes and less regulation, which should aid business profits. Tariff policies remain a wildcard, but if used judiciously for negotiation purposes, perhaps there could be more bark than bite from the rhetoric. Time will tell.
The 2024 chapter has closed, and we have started the 2025 chapter. Regardless of the outcome this year, history teaches us the time in the market is much more important than timing the market. This philosophy has served Sidoxia Capital Management and its clients well over the long-run.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 2, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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.
Fed Injects Rate Cut Adrenaline
There were a lot of injections, of the COVID vaccine variety, four years ago, but now the Federal Reserve is injecting some financial adrenaline through stimulative interest rate cuts. Expectations are for seven more -0.25% cuts over the next 12 months, but this cycle started two weeks ago when the FOMC (Federal Open Market Committee) initiated a larger -0.50% reduction in the benchmark federal funds rate target (see chart below). For now, investors have enjoyed the boost of adrenaline, which should help lower consumer interest rates on things like home mortgages, credit cards, and car loans.
Source: Yardeni.com
For the month, the S&P 500 climbed +2.0%, the Dow Jones Industrial +1.9%, and the NASDAQ index +2.7%. The monthly gains are adding to a 2024 that is shaping up to be a potentially banner year. With one quarter left in the year, the S&P has catapulted +21% higher, the Dow Jones Industrial Average +12%, and the NASDAQ index +21% for the first nine months.
Economy Strong, So Why Cut Now?
Before the Fed’s last action a couple weeks ago, the last Fed rate cut occurred in 2020 (a -1.50% cut) in the midst of a global pandemic with the aim of boosting financial activity while the brick-and-mortar economy had effectively been shut down. But compared to today, the economy is performing much better. Second quarter GDP growth came in at +3.0% with 3rd quarter GDP growth forecasts coming in at +3.1%.
So, if things look so great, why would the Fed be cutting rates to stimulate the economy now? In short, inflation has been coming down (see chart below) from a peak of 9.1% a couple years ago to 2.5% last month (near the Fed’s long-term 2.0% target). And although the current unemployment rate is low at 4.2%, it has nevertheless weakened and climbed substantially from a 3.4% level last year).
Source: Trading Economics
China Chugs Higher
While the U.S. economy has been leading developed countries during the post-COVID recovery period, China’s financial system has been struggling due to a collapsing real estate market and deteriorating consumer spending. As a result, the Chinese stock market has been drastically underperforming other foreign markets, until Beijing just recently announced a number of stimulus initiatives last week in hopes of buoying economic growth closer to its 5% target.
Here are some of the Chinese government measures:
- China plans to issue 2 trillion yuan in special sovereign bonds
- China’s central bank cut its reserve requirement ratio by 50 basis points
- Fiscal policies to focus on increasing consumer subsidies and controlling government debt
- Shanghai, Shenzhen plan to lift key home purchase restrictions
Investors cheered the announcements by binge-buying Chinese stocks, as you can see from the CSI 300 China index, which rocketed +21% higher last month – the largest monthly gain since 2008.
AI Revolution Continues
While economic headwinds and tailwinds continue to swirl, the AI (Artificial Intelligence) revolution has persisted in the background. While some traders have solely focused on AI juggernaut NVIDIA Corp. (NVDA), which has steamrolled its way into becoming a three trillion-dollar valued company, there are other tech titan companies like Oracle Corp. (ORCL), which are also riding the AI wave. Just last month, Oracle’s billionaire founder, Larry Ellison, stated, “We have 162 data centers now. I expect we will have 1,000 or 2,000 or more data centers…around the world.” Each large-scaled data center can cost in the hundreds of millions or multi-billion-dollar range. With hundreds of billions (if not trillions) of dollars to be spent on the multi-year AI infrastructure buildout, as you can imagine, there is a large, diverse ecosystem of other companies that stand to benefit. At Sidoxia Capital Management (www.Sidoxia.com), we have identified a wide swath of AI investments that have benefited our investors and stand to do so in the future.
Flies in the Ointment
By simply judging the performance of the U.S. stock market, one might think there is nothing for investors to worry about. But as is always the case, there still remain some flies in the ointment. With a tight, hotly-contested presidential election just one month away, coupled with escalated wars in the Mideast and Ukraine, future volatility or a correction in the stock market should come as no surprise to anyone, especially in light of the rich gains already registered this year. Another concern is the risk of rising inflation, which could rear its ugly head again if the Federal Reserve misjudges its rate-cutting program and overheats the economy.
Normally, interest rate cuts are reserved by the Fed for periods when the economy is headed towards a recession or there are major systemic disruptions in the financial system, which affect market liquidity and/or bank lending. That’s not the case today. Thanks to declining inflation and a robust but weakening job market, the Fed has been equipped to provide investors with a healthy injection of adrenaline through an early round of interest rate cuts, which has contributed to the powerful stock market gains. So far, the adrenaline is doing its job.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 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 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.
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.
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