Posts filed under ‘Interest Rates’
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
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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.
The Rocket Science of Investing – Armageddon Yet to Arrive
In the face of an incredibly scary global pandemic, the stock market completed a phenomenal year (S&P 500 rocketed +27%) closing at a new all-time monthly record high, after also posting incredible results in 2020 (+16%) and 2019 (+29%). Naturally, the follow-on question I get most is, “What about next year?” And to this question, I annoyingly provide the same answer as the most successful long-term investor of all-time, Warren Buffett, “I have no idea.”
But with that said, despite lacking the skill of 100% clairvoyance, my investment firm Sidoxia Capital Management and our strategies have performed quite well over the long-run for numerous reasons. As it turns out, the power of compounding, coupled with low-cost, tax-efficient investing can produce quite spectacular results. Throw in some good stock picking, and that is frosting on a cake recipe of success. Thank you Amazon.com Inc. +5,544%, Apple Inc. +2,394%, and Alphabet Inc. 880%, among many other fruitful investments since Sidoxia’s inception in 2008.
Lessons Learned Over 30 Years
I’ve been doing this thing called investing for about three decades now and I’ve learned a few things over the years, most prominently that investing is not rocket science. Warren Buffett has correctly described investing as similar to dieting. In other words, both are easy to understand but difficult to execute because they require discipline.
If you want your investments to succeed, consider some of these investing nuggets:
- Invest for the Long-Run: Markets move in all directions, but if you can avoid myopia and short-termism, you will be much better positioned for investment success.
- Avoid Investment Fads: Invest where you get the most bang for your buck – stick to sound investments selling at reasonable prices. Stay away from expensive, speculative, frothy areas, or at least keep that exposure of your portfolio to a minimum.
- Turn off the TV and Silence your Phone: Regardless of what you hear, the world is not ending. COVID, inflation, and Federal Reserve monetary policies may dominate the headlines du jour but this is nothing new. The stock market has increased more than 7-fold in value since the 2009 stock market lows, even in the face of many frightening news stories (see Ed Yardeni’s list of panic attacks since 2009).
- Understand Stock Prices Do Go Down: We have been spoiled in recent years with above-average returns, but that does not mean you need to panic when prices do decline or that you need to try to time the market. There can be years when stock prices do not appreciate (reference the post-2000 and post-2008 periods), however, those who wisely rebalanced and dollar-cost-averaged positions in their portfolio were handsomely rewarded for their discipline and patience over the long-run.
- Volatility Can Be a Good Thing: Periods of volatility offer you the ability to rebalance your portfolio and take advantage of opportunities that disruption creates.
- Optimize Your Investments Based on Your Time Horizon and Risk Tolerance: At Sidoxia, we customize investment portfolios to meet our clients’ unique circumstances and risk appetite. It’s important to have your investments diversified across a broad array of asset classes in a low-cost, tax efficient manner.
- Get Assistance: If you don’t have the time, discipline, or interest to manage your investments, find an experienced professional who is a fiduciary (i.e., someone who legally places your interests first) and implements time-tested investment strategies. Sidoxia should be able to assist you in identifying an appropriate investment manager. 😉
What Now for 2022?
As I made clear earlier, at Sidoxia, we do not attempt to predict the directions of markets, but rather we look to opportunistically take advantage of many different dynamic areas that we believe provide the best risk-adjusted return potential for our clients.
However, although we freely admit we are not Nostradamus, we do closely follow a wide spectrum of areas in financial markets to best position our investments. Here are some thoughts on some hot-button issues that are top-of-mind as we enter 2022.
Stocks Remain Attractive: Stocks are still attractively priced broadly considering where interest rates stand today. Most people don’t realize that stock prices are actually cheaper today than they were a year ago because earnings will be up roughly +50% in 2021 (see chart below) and stock prices are only up +27%. Stated differently, the price of the market as measured by the forward price-earnings ratio (P/E) has declined, even though the stock market has melted up. Under a different lens, stocks are also attractively priced if you consider bonds are generally yielding 1-2% versus the 4-5% on stocks as measured by the earnings yield of the S&P 500 index (corporate earnings/price of the index), which can be calculated as an inverse P/E ratio. Regardless, if stock prices do indeed decline this year, while bond yields remain in the same general ballpark, then stocks will only become even more attractive.
Federal Reserve Tightening Doesn’t Mean Game Over for Stocks: We have seen this movie before (see chart below). What happened the last time quantitative easing (QE) stopped and the Fed raised its Federal Funds interest rate target? Ten-year interest rate yields went down, and stock prices went up – not necessarily immediately, but ultimately investors were compensated for not knee-jerk selling.
Inflation Does Not Appear to Be Spiraling Out of Control: Just take a look at the paltry yield of the 10-year Treasury Note, currently at 1.51%. And please do not just consider the low interest rates here in the U.S., but also internationally in markets like Germany with negative 10-year interest rates (-0.18%) or near-0% interest rates in Japan (0.07%). If inflation were indeed considered a systemic risk, global yields in large developed markets would not be hovering around 0%. Furthermore, COVID-related supply chain bottlenecks appear to be abating. As you can see from the chart below, the average business delivery times have been coming down in recent months as supply disruptions subside – an improving trend for overall prices.
The Global Pandemic Deserves Watching: There are plenty of reasons to remain concerned, however science and natural immunity may have brought us closer to neutralizing this health crisis. A worldwide focus on creating vaccines, antiviral drugs, monoclonal antibodies, and other COVID treatments has allowed the global health community to more effectively treat those infected with COVID, while simultaneously lowering the number of related hospitalizations and deaths. There is even hope for areas that have lower vaccination rates than the U.S., for example India (see chart below), which you can see has experienced a dramatic fall-off in COVID cases in part because of the large number of previous infections and subsequent natural immunity created.
There are always talking heads and so-call pundits predicting Armageddon in the stock market, but as you can see from the facts presented, record highs in the stock market aren’t currently painting this picture for 2022. Profits have been gargantuan, interest rates remain near generational lows, valuations remain reasonable, and there are reasons to be optimistic regarding the COVID pandemic. Investing is never easy, but it is not rocket science, if you remain disciplined and patient. Follow this advice and your portfolio should benefit in 2022 and beyond.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 3, 2022). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE 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 Red Blood, Just Green Flood
Normally, investors equate the month of October with scary, blood-curdling screams because horrifying losses during the 1929 and 1987 crashes occurred during this month. Fortunately, for those invested in stocks, they experienced the opposite this last month – a flood of green (new all-time record highs), despite a whole host of frightening factors, including the following:
· Inflation
· Supply chain disruptions
· Federal Reserve monetary policy
· COVID variants
· Evergrande’s impact on China and commercial real estate
· Cryptocurrency volatility
· Expanding government deficits and debt (stimulus/infrastructure)
· Government debt ceiling negotiations
· Declining corporate profit margins
· Meme stocks
· And more…boo!
Even though this Halloween season has introduced these many spooky fears, investors still experienced a sugar-high during October. More specifically, the S&P 500 catapulted +6.9% this month (+22.6% Year-to-Date), Dow Jones Industrial Average +5.8% (+17.0% YTD); and NASDAQ +7.3% (+20.3% YTD). With the COVID Delta variant subsiding (see chart below), economic activity rising (Q4 GDP is estimated at +4.8%), and corporate profits going gang busters (33% growth and 84% of corporations are beating Q3 estimates), it should come as no surprise that stock market values continue to rise.
As I mention regularly to my readers, there is never a shortage of things to worry about when it comes to your investments, money, and savings. Emotions tend to highjack rational reasoning as non-existent boogeymen scare people into do-nothing decision-making or suboptimal choices. Investing for the long-run requires dedication and discipline, and if you do not have the time and fortitude to do so, it behooves you to find an experienced, independent professional to assist you.
Rather than getting spooked by supply chain fears and inflation plastered all over the newspapers and media outlets, the real way to compound wealth over the long-term is to do what Warren Buffett says, and that is “buy fear, and sell greed.” Unfortunately, our Darwinian instincts embedded in our DNA are naturally designed to do the contrary…”buy greed, and sell fear.” The goal is to buy low and sell high (not buy high and sell low).
Yes, it’s true that over the last year, semiconductor lead times have almost doubled to 22 weeks, and Chinese container shipping costs have about increased 10-fold to over $20,000 (see charts below). However, the economic laws of supply and demand remain just as true today as they did in 1776 when Adam Smith wrote Wealth of Nations (see also Pins, Cars, Coconuts & Chips). Chip makers are building new fabs (i.e., manufacturing plants) and worker shortages at the ports and truck driver deficiencies are slowly improving. Supply scarcity and higher prices may be with us for a while, but history tells us betting against capitalism isn’t a wise decision.
Not worrying about all the economic goblins and witches can be difficult when contemplating your investments and savings. Nevertheless, as I have consistently reminded my investors and readers, the key pillars to understanding the health of the investment environment are the following (see also The Stool):
· Interest rates
· Earnings (Corporate profits)
· Valuations (How cheap or expensive is the market?)
· Sentiment (How greedy or fearful are investors?)
The good news is that a) interest rates are near historically low levels; b) corporate profits are on a tear (+33% as mentioned above); c) valuations have come down because profits have grown faster than stock price appreciation; and d) sentiment remains nervous (a good thing) as measured by the massive inflows going into low (negative) yielding bonds. If you consider all these elements, one should not be surprised that we are at-or-near all-time record highs. Obviously, these investment pillars can reverse directions and create headwinds for investors. Until then, don’t be startled if there is more green flood rather than red blood.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2021). Subscribe on the right side of the page for the complete text.
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.
Cash Is Trash
The S&P 500 stock market index took a breather and ended its six-month winning streak, declining -4.8% for the month. Even after this brief pause, the S&P has registered a very respectable +14.7% gain for 2021, excluding dividends. Nevertheless, even though the major stock market indexes are roaming near all-time record highs, FUD remains rampant (Fear, Uncertainty, Doubt).
As the 10-Year Treasury Note yield has moved up to a still-paltry 1.5% level this month, the talking heads and peanut gallery bloggers are still fretting over the feared Federal Reserve looming “tapering”. More specifically, Jerome Powell, the Fed Chairman and the remainder of those on the FOMC (Federal Open Market Committee) are quickly approaching the decision to reduce monthly bond purchases (i.e., “tapering”). The so-called, quantitative easing (QE) program is currently running at about $120 billion per month, which was established with the aim to lower interest rates and stimulate the economy. Now that the COVID recovery is well on its way, the Fed is effectively trying to decrease the size of the current, unruly punch-keg down to the volume of a more manageable punch bowl.
Stated differently, even when the arguably overly-stimulative current bond buying slows or stops, the Federal Funds Rate is still effectively set at 0% today, a level that still offers plenty of accommodative fuel to our economy. Although interest rates will not stay at 0% forever, many people forget that between 2008 and 2015, the Fed Funds Rate stubbornly stayed sticky at 0% (i.e., a full punch bowl) for seven years, even without any spike in inflation.
Because the economy continues to improve, current consensus projections by economists show the first interest rate increase of this cycle (i.e., “liftoff”) to occur sometime in 2022 and subsequently climb to a still extraordinarily low level of 2.0% by 2024 (see “Dot Plot” below). For reference, the projected 2.0% figure would still be significantly below the 6.5% Fed Funds Rate we saw in the year 2000, the 5.3% in 2007, or the 2.4% in 2019. If history is any guide, under almost any scenario, Chairman Powell is very much a dove and is likely to tap the interest rate hike brakes very gently.
Low But Not the Lowest
In a world of generationally low interest rates, what I describe as our low bond yields here in the United States are actually relatively high, if you consider rates in other major industrialized economies and the trillions of negative-interest-rate bonds littered all over the rest of the world (see August’s article, $16.5 Trillion in Negative-Yielding Debt). Although our benchmark government rates are hovering around 1.5%, as you can see from the chart below, Germany is sitting considerably lower at -0.2%, Japan at 0.1%, France at 0.2%, and the United Kingdom at 1.0%.
Taper Schmaper
As with many government related policies, the Federal Reserve often gets too much credit for successes and too much blame for failures, as it relates to our economy. I have illustrated the extent of how globally interconnected our world of interest rates is, and one taper announcement is unlikely to reverse a four-decade disinflationary declining trend in interest rates.
Back in 2013, after of five years of quantitative easing (QE) that began in 2008, investors were terrified that interest rates were artificially being depressed by a money-printing Fed that had gone hog-wild in bond buying. At that time, pundits feared an imminent explosion higher in interest rates once the Fed began tapering. So, what happened after Federal Reserve Chairman Ben Bernanke broached the subject of tapering on June 19, 2013? The opposite occurred. Although 10-Year yields jumped 0.1% to 2.3% on the day of the announcement, interest rates spent the majority of the next six years declining to 1.6% in 2019, pre-COVID. As COVID began to spread globally, rates declined further to 0.95% in March of 2020, the day before Jerome Powell announced a fresh new round of quantitative easing (see chart below).
Obviously, every economic period is different from previous ones, and fearing to fall off the floor to lower interest rate levels is likely misplaced at such minimal current rates (1.5%). However, panicking over potential exploding interest rates, as in 2013 (which did not happen), again may not be the most rational behavior either.
What to Do?
If interest rates are low, and inflation is high (see chart below), then what should you do with your money? Currently, if your money is sitting in cash, it is losing 4-5% in purchasing power due to inflation. If your money is sitting in the bank earning minimal interest, you are not going to be doing much better than that. Everybody’s time horizon and risk tolerance is different, but regardless of your age or anxiety level, you need to efficiently invest your money in a diversified portfolio to counter the insidious, degrading effects of inflation and generationally low interest rates. The “do-nothing” strategy will only turn your cash into trash, while eroding the value of your savings and retirement assets.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2021). Subscribe on the right side of the page for the complete text.
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.
Consumer Confidence Flies as Stock Market Hits New Highs
As the economy starts reopening from a global pandemic that is improving, consumers and businesses are beginning to see a light at the end of the tunnel. The surge in the recently reported Consumer Confidence figures to a new one-year high (see chart below) is evidence the recovery is well on its way. A stock market reaching new record highs is further evidence of the reopening recovery. More specifically, the Dow Jones Industrial Average catapulted 2,094 points higher (+6.2%) for the month to 32,981 and the S&P 500 index soared +4.2%. A rise in interest rate yields on the 10-Year Treasury Note to 1.7% from 1.4% last month placed pressure on technology growth stocks, which led to a more modest gain of +0.4% in the tech-heavy NASDAQ index during March.
Comeback from COVID
With a combination of 150 million vaccine doses administered and 30 million cumulative COVID cases, the U.S. population has creeped closer toward herd immunity protection against the virus and pushed down hospitalizations dramatically (see chart below).
Also contributing to investor optimism have been the rising values of investments and real estate assets thanks to an improving economy and COVID case count. As you can see from the chart below, the net worth of American households has more than doubled from the 2008-2009 financial crisis to approximately $130 trillion dollars, which in turn has allowed consumers to responsibly control and manage their personal debt. Unfortunately, the U.S. government hasn’t been as successful in keeping debt levels in check.
Spending and Paying for Infrastructure Growth
Besides focusing on positive COVID trends, investors have also centered their attention on the passage of a $1.9 trillion stimulus bill last month and a new proposed $2.3 trillion infrastructure bill that President Biden unveiled details on yesterday. At the heart of the multi-trillion dollar spending are the following components (see also graphic below):
- $621 billion modernize transportation infrastructure
- $400 billion to assist the aging and disabled
- $300 billion to boost the manufacturing industry
- $213 billion to build and retrofit affordable housing
- $100 billion to expand broadband access
With over $28 trillion in government debt, how will all this spending be funded? According to The Fiscal Times, there are four main tax categories to help in the funding:
Corporate Taxes: Raising the corporate tax rate to 28% from 21% is expected to raise $730 billion over 10 years
Foreign Corporate Subsidiary Tax: A new global minimum tax on foreign subsidiaries of American corporations is estimated to raise $550 billion
Capital Gains Tax on Wealthy: Increasing income tax rates on capital gains for wealthy individuals is forecasted to raise $370 billion
Income Tax on Wealthy: Lifting the top individual tax rate back to 39.6% for households earning more than $400,000 per year is seen to bring in $110 billion
Besides the economy being supported by government spending, growth and appreciation in the housing market are contributing to GDP growth. The recently released housing data shows housing prices accelerating significantly above the peak levels last seen before the last financial crisis (see chart below).
Although the economy appears to be on solid footing and stock prices have marched higher to new record levels, there are still plenty of potential factors that could derail the current bull market advance. For starters, increased debt and deficit spending could lead to rising inflation and higher interest rates, which could potentially choke off economic growth. Bad things can always happen when large financial institutions take on too much leverage (i.e., debt) and speculate too much (see also Long-Term Capital Management: When Genius Failed). The lesson from the latest, crazy blow-up (Archegos Capital Management) reminds us of how individual financial companies can cause billions in losses and cause ripple-through effects to the whole financial system. And if that’s not enough to worry about, you have rampant speculation in SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (e.g., GameStop Corp. – GME), cryptocurrencies, and NFTs (Non-Fungible Tokens).
Successful investing requires a mixture of art and science – not everything is clear and you can always find reasons to be concerned. At Sidoxia Capital Management, we continue to find attractive opportunities as we strive to navigate through areas of excess speculation. At the end of the day, we remain disciplined in following our fundamental strategy and process that integrates the four key legs of our financial stool: corporate profits, interest rates, valuations, and sentiment (see also Don’t Be a Fool, Follow the Stool). As long as the balance of these factors still signal strength, we will remain confident in our outlook just like consumers and investors are currently.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2021). Subscribe on the right side of the page for the complete text.
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 GME 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.
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