Posts tagged ‘recession’
As We Give Thanks, AI and Mag 7 Take Cash to the Bank
Market volatility resurfaced last month as speculation intensified over whether an AI bubble may be forming—and potentially bursting. Yet despite the jitters, equity markets remain solidly positive for the year (S&P 500 +16.5%, NASDAQ +21.0%, Dow +12.2%) – see S&P 500 chart below. A significant portion of the gains have been powered in large part by ongoing strength in the Magnificent 7. Standouts such as NVIDIA (+31.8%) and Alphabet (+68.1%) have been instrumental in carrying the broader indices higher.
Even with these sizable year-to-date gains, memories of the 2000 Tech Bubble and 2008 Financial Crisis resurfaced and prompted investors to temporarily tap the brakes. Mid-month, the NASDAQ retreated roughly -9% from its October peak. After a month-end bounce, the S&P 500 finished essentially flat (+0.1%), the NASDAQ slipped -1.5%, and the Dow eked out a +0.3% increase.
OpenAI and the $1.4 Trillion Question
At the center of the AI controversy sits OpenAI, parent of the three-year-old technology toddler, ChatGPT (Generative Pre-trained Transformer), which now boasts more than 800 million global users (see chart below). The company reportedly runs at a $20 billion annual revenue pace, yet faces difficult questions about how it intends to fund its staggering $1.4 trillion AI infrastructure commitments.
Those concerns came to a head when tech investor Brad Gerstner pressed CEO Sam Altman on his podcast last month. Instead of answering how OpenAI plans to underwrite such an enormous buildout, Altman childishly shot back defensively:
“If you want to sell your shares, I’ll find you a buyer.” (See clip here — or full interview here)
Source: Digital Information World
OpenAI is a key player, but just one component in the vast—and rapidly expanding—web of global AI infrastructure. Gartner, a global research and advisory firm, forecasts $2 trillion of AI investment in 2026, while NVIDIA CEO Jensen Huang recently said:
“Over the next five years, we’re going to scale into… effectively a $3 to $4 trillion AI infrastructure opportunity.”
These provocative “Is this a bubble?” questions make for great headlines, but to truly evaluate AI sustainability, it’s wise to follow the classic Watergate guidance from of All the President’s Men character, Deep Throat (FBI Associate Director, Mark Felt), who tells journalist Bob Woodward to “follow the money,” if he wants to get to the bottom of the Watergate scandal.
The same principle applies to investors who follow the money – the picture looks very different from past bubbles.
Forget Pets.com—Today’s AI Buildout Is Being Funded by Cash-Rich Titans
Unlike the flimsy, profitless internet startups of the late 1990s—companies that raised billions based on “eyeballs” and cocktail-napkin business plans—the current AI buildout is being financed largely by profitable cash-generating giants.
Yes, some firms like Oracle (ORCL) are leaning on debt financing for data-center expansion. But the overwhelming majority of AI capex is being funded by customers and by the cash flow of the Magnificent 7, a group with the financial firepower to sustain multi-year spending without relying heavily on capital markets.
This dynamic alone separates today’s environment from classic bubble conditions.
Do the Magnificent 7 Really Deserve a $22 Trillion Valuation?
The Mag 7 represent only 1% of S&P 500 constituents yet account for a massive 35% of the index’s market value. That concentration understandably raises eyebrows, evoking historical parallels to the “Nifty Fifty” of the 1970s or the “Four Horsemen” of the 1990s.
But headline concentration can be misleading—because the fundamentals tell a very different story. Here are some of the major disparities:
1.) Mag 7 Share of Profits Matches Their Share of Market Value: The Mag 7 collectively contribute $22 trillion of the S&P 500’s $58 trillion total value (below). Said differently, the market values and weightings of the Mag 7 equate to about $22 trillion and 37% of the S&P 500, respectively:
· Nvidia Corp: $4.3T & 7.0%
· Apple Inc.: $4.1 T & 6.7%
· Alphabet Inc.: $3.9 T & 6.3%
· Microsoft Corp.: $3.7 T & 5.9%
· Amazon.com Inc.: $2.5 T & 4.0%
· Meta Platforms Inc.: $1.6T & 2.6%
· Tesla Inc.: $1.4T & 2.3%
· TOTAL: $22T / 37%
Source: Slickcharts
Conveniently (and importantly), the Mag 7’s roughly $747 billion in annual cash flow (see table below) is a good proxy for their profit contribution to the $2 trillion in S&P profits.
Source: SEC Filings & MarketSurge
The $747 billion in Mag 7 cash flows divided by the $2 trillion in S&P 500 coincidentally also equates to 37% ($747B/$2T).
These calculations of the Mag 7 are not bubble math—these calculation comparisons are rational math. Arguments could be made that Mag 7 market values are actually undervalued (not in bubble territory) and should appreciate to a higher percentage of the S&P 500 weightings because these 7 stocks are growing sales and profits faster than compared to the other “absentee” 493 stocks in the index.
2.) Mag 7 are Swimming in Cash: That $747 billion in annual cash flow is on track to hit a jaw-dropping $1 trillion, giving these firms ample capital to fund AI buildouts without substantially accessing the equity or credit markets. The ability to self-fund a multi-trillion-dollar infrastructure expansion is the opposite of bubble behavior.
3.) Valuations Are Elevated—but Far from Bubble Territory: During the 2000 Tech Bubble, many leading tech names traded at 100x+ earnings (See also: Rational or Irrational Exuberance. Today, the Mag 7 trade at a median forward P/E around 30x. Expensive? Historically, yes, versus long-term averages, but nowhere near historical extremes. Relative to growth, profitability, and cash flow, valuations are far more grounded today than during prior manias.
The bottom line is there is plenty to be thankful for and bubble fears are overstated. Despite pockets of AI froth, the underlying economic engine powering AI adoption is real, profitable, and well-capitalized. When investors follow the money, they discover:
· The Mag 7 generate over one-third of S&P 500 profits
· They generate and hold hundreds of billions in cash
· They largely fund their own AI capital expenditures
· Valuations remain far below bubble-era extremes
Investors have a lot to be thankful for. And while volatility will likely continue, the ingredients for a classic, catastrophic AI bubble are noticeably absent. For disciplined, long-term investing strategies like those employed at Sidoxia Capital Management, this environment still offers abundant opportunity—without the need to fear a pricked AI balloon anytime soon.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (Dec. 1, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in NVDA, AAPL, MSFT, GOOGL, AMZN, META, TSLA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in ORCL 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.
Markets Surge Higher Despite Shutdown Anxiety Fire
Wars rage on in Ukraine and Gaza, political violence is on the rise at home, tariff-driven inflation remains debated, and anxiety over a looming government shutdown is intensifying. On the surface, this might sound like the perfect recipe for a market meltdown. But Wall Street seems unfazed. In fact, U.S. equities pushed to new record highs again this month, continuing the bull market’s relentless advance in the face of these concerns.
Here is a market performance snapshot for the month:
- S&P 500: +3.5% (+13.7% year-to-date)
- Dow Jones Industrial Average: +1.9% (+9.1% year-to-date)
- NASDAQ Composite: +5.6% (+17.3% year-to-date)
What’s fueling the optimism?
• A Strong Economy: The economy just produced a final +3.8% GDP growth for the 2nd quarter, and the Atlanta Federal Reserve is forecasting an even stronger economy for the 3rd quarter of +3.9% (see below).
• Robust Corporate Earnings: S&P 500 corporate profits surged by +11.8% in the 2nd quarter and consensus estimates call for 3rd quarter growth of +7.9%. Historically, CEOs tend to set conservative forecasts, therefore actual results often exceed low-bar expectations. Therefore, it’s very possible that Q3 earnings growth could achieve double-digit growth levels once again.
• A.I. Drive Still Alive: With trillions of dollars in A.I. spending plans already announced, hungry investors once again gobbled up A.I. tech stocks last month. For instance, Oracle Corp’s (ORCL) stock jumped +24% for the month in large part driven by a $317 billion increase in backlog orders during the company’s first fiscal quarter. Reportedly, the majority of the massive increase in orders came from one customer, OpenAI – the brains behind the A.I. juggernaut, ChatGPT. The rise in Oracle’s share price temporarily propelled CEO Larry Ellison past Tesla’s (TSLA) CEO Elon Musk as the world’s richest person, before markets began critically questioning whether OpenAI’s CEO (Sam Altman) can ultimately fund the hundreds of billions of dollars in Oracle commitments.
Source: Atlanta Federal Reserve
Shutdown Jitter History
Market anxiety has shifted from a hypothetical government shutdown nightmare to a scary reality, given the funding deadlines have already lapsed. Many investors are asking what this means for stocks. Fortunately, government shutdowns are nothing new. Our country has flourished over the last 50 years despite experiencing around two dozen shutdowns, many of which only lasted a few hours, a few days, or a few weeks. According to Kiplinger, since the 1970s, the stock market has averaged a +0.3% return during shutdown periods (see chart below).
Source: Kiplinger
In fact, the longest shutdown on record occurred most recently from December 2018 to January 2019 (35 days during President Trump’s first term) and resulted in a sharp +10% gain (see chart below).
Source: Kiplinger / YCharts
The partisan finger-pointing will continue, but history suggests that shutdowns are short-term noise with little bearing on long-term market direction. Long-term investors understand there is never a shortage of concerns during bad times (e.g., potential recessions, job losses, credit defaults, bankruptcies, etc.), or good times as well (e.g. fear of inflation, restrictive monetary policy, politics, etc.). Turning off the TV is often the best course of action (see also – Turn Off the TV).
What’s Next? Looking Ahead After more than 30 years of investing—including weathering the dot-com tech sense of purpose collapse in 2000—I’ve learned that markets always have a tendency of climbing a wall of worry, so it’s better to not react emotionally to daily news headlines. Rather, it’s better for investors to stay focused on those market leading, innovative companies and concentrate on those sectors experiencing long-term secular trends.
As we enter Q4 and head toward 2026, A.I. remains the defining theme. Since the launch of ChatGPT in November 2022, the S&P 500 has surged +24% in 2023, +23% in 2024, and +14% so far in 2025. Unfortunately, trees do not grow to the sky forever.
At Sidoxia Capital Management, we understand that valuations currently are stretched on a historic basis and that markets never move in a straight line. As a result, a correction at some point in stock prices should not come as a surprise to anyone. Nevertheless, whether you’re bullish on the productivity gains from large language models (LLMs) or skeptical of over-investment and hype, one thing is clear: A.I. is here to stay, and it doesn’t matter if you believe the government shutdown flames will grow into an inferno or fizzle out in smoke, which is usually the case.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in ORCL, TSLA, 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.
Trade & OBBB Deals Sealed, Fed Dread, and AI/Meme Dreams
As the stock market reached new all-time highs, investors had plenty to juggle—both in Washington, D.C., and on Wall Street. The S&P 500 climbed +2.2%, the NASDAQ surged +3.7%, and the Dow Jones Industrial Average edged higher by +0.1% for the month.
The One Big Beautiful Bill
What has fueled the rally? A major catalyst was President Trump’s signing of the One Big Beautiful Bill Act (OBBB) on July 4th. The nearly 900-page legislation spans a broad range of economic issues including tax reform, healthcare, energy policy, and national security.
According to the Congressional Budget Office (CBO), the combined impact of tax cuts, new spending, and spending reductions will result in a net cost of $3.4 trillion over 10 years (see chart above). Supporters of the bill argue that this projection underestimates the long-term stimulative effects of tax relief and strategic investments. Whether the deficit widens as the CBO projects, or narrows thanks to a stronger, growing economy, remains to be seen.
Trade Deals Sealed
Since Liberation Day on April 2nd, trade negotiations have progressed unevenly. The administration’s reciprocal tariff hikes were paused through August 1st to allow final agreements to be reached. Following months of tough rhetoric, multiple major trading partners ultimately signed deals before the deadline—including the European Union, Japan, the United Kingdom, Vietnam, and South Korea—thereby avoiding punitive tariffs.
Talks with our two key trading partners, Mexico and Canada, remain ongoing. While Mexico was granted a 90-day extension amid constructive dialogue, Trump slapped a 35% tariff on Canada (from 25%) due to what the White house said was “continued inaction and retaliation.” The tariff pause with China stops on August 12th.
Here’s a list of the new country tariffs released by the president late yesterday: CLICK HERE
Regardless of all the tariff uncertainty, investor sentiment improved last month as the terms of the signed deals were significantly milder than originally feared.
Adding to the optimism:
- Core inflation in June remained modest at 2.8% (Reuters), and
- Tariff revenues collected through July reached $126 billion, beating initial estimates (Politico) – see chart below. Strategist Ed Yardeni forecasts that 2025 tariff revenues could surge to between $400 billion and $500 billion (Barron’s).
Source: Politico
Fed Dread
Of course, when it comes to financial markets, everything can’t just be rainbows and unicorns without something for investors to worry about—and this month, a key concern remains Federal Reserve policy. Critics, including the president, argue that interest rates are too high, with the Federal Funds Rate currently set at 4.25%–4.50% (Yardeni Research) – see chart below.
By comparison:
- The European Central Bank’s Deposit Facility Rate stands at 2.00%, and
- The Bank of Japan’s overnight rate is only 0.50%.
Source: Yardeni Research
Fed Chair Jerome Powell has held off on further cuts, citing the need for more clarity on inflation and labor market data, especially in light of recent tariffs. Ironically, when the Fed last cut rates by -1.00% late last year, the 10-year Treasury yield rose by roughly +1% (see chart above), reflecting fears of rising inflation.
This week, the Fed held rates steady for the fifth consecutive meeting (YouTube). Notably, two FOMC members—Christopher Waller and Michelle Bowman—dissented, voting in favor of a rate cut. It was the first dual dissent by Fed governors in over 30 years—a clear signal of division inside the central bank.
Meme Dreams
With the major indexes at new highs, speculation has returned in full force. Money-losing, struggling companies like Opendoor Technologies, GoPro Inc., and Kohl’s Corp. saw their shares double, triple, or even quadruple over a short span (WSJ) – see chart below. We saw similar trends occur during the GameStop and AMC meme craze in 2021.
Source: The Wall Street Journal
Adding fuel to the fire:
- Cryptocurrency prices are on the rise again.
- Euphorically priced IPOs (Initial Public Offerings) like Figma, Inc. (FIG), which more than tripled in value ($115 per share) on its first trading day above its offering price ($33 per share) valuing the company above $50 billion – more than 30 times next year’s forecasted revenues.
- SPACs (Special Purpose Acquisition Companies)—often criticized for poor governance—are staging a comeback.
Combined, all these trends raise concerns about froth, which investors have experienced at previous peaks.
Climb in AI Stocks Persists
No discussion of this rally would be complete without highlighting the AI mega-cap giants. Companies like Alphabet (Google), Meta (Facebook), Microsoft, and Amazon all recently announced capital expenditures for 2025 that will likely exceed an astounding $350 billion —most of it allocated to AI infrastructure.
Meanwhile, NVIDIA Corp., the AI-chip juggernaut and major beneficiary of all the AI capex, has seen its share price soar +63% in just three months, reaching a staggering $4.4 trillion market value.
Source: Yardeni Research
Valuations High but Fundamentals Remain Strong
While stock valuations remain elevated above historical averages (the S&P 500 red line trades at 22x forward earnings, according to Yardeni) – see chart above, the macro backdrop remains supportive:
- The economy is strong,
- Unemployment is low,
- Corporate profits are growing, and
- Monetary policy may turn more accommodative in coming months.
In this momentum environment, the market should continue its productive juggling, but if the frothy or economic winds worsen, investors should be prepared for a dropped ball.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2025). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GOOGL, META, AMZN, MSFT, NVDA, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in OPEN, GPRO, KSS, GME, AMC, FIG 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.
Turn Off TV – Emperor Media Has No Clothes!
Famous Danish author Hans Christian Andersen told a renowned fairy tale of an emperor who was conned into believing he is wearing an invisible suit. The crowd was too embarrassed to acknowledge his nakedness, so they pretend to not notice – until a young boy shouted, “The emperor has no clothes!”
Much like the fairy tale, when it comes to pointing out the many shortcomings of the financial media, I have no problem yelling, “The Emperor Media has no clothes!”
Media Spreads Fear and Misinformation
Mark Twain famously stated, “If you don’t read the newspaper, you’re uninformed. If you read the newspaper, you’re misinformed.” That sentiment rings especially true amid today’s swirl of alarming headlines. Here’s a sampling of recent media-induced worries:
- Global trade war caused by tariffs
- Declining value of the U.S. dollar
- Rising interest rates due to foreign debt sales
- Doubts over the U.S. dollar’s global reserve currency status
- Recession anxiety
- Stagflation fears
- Concerns about Executive Branch overreach
- Threats to remove the Federal Reserve Chairman
Is the sky falling? Is now the time to sell stocks, as the media often implies? Or are these risks being overstated and distorted by media outlets that chase monetary gains?
Issues are More Gray Than Black or White
Journalists – most of whom have little investing experience – like to authoritatively paint economic issues in black-or-white terms. But most reasonable people understand that these matters are complex, and the truth lies somewhere in the gray. To claim the media offers a balanced view of both the positives and negatives of complicated financial topics would be disingenuous.
I have been investing for over 30 years, and while I’ve never faced a global rebalancing of trade impacting trillions in economic activity, I’ve lived through far more uncertain times. Not only have my investments survived those volatile periods, but they have also thrived – repeatedly hitting new record highs.
F.U.D. Sells!
Does the media want you to believe the accurate, long-term stock market prosperity story? Hardly. As the saying goes, “If it bleeds, it leads.” Fear, uncertainty, and doubt (F.U.D.) sell more ads, subscriptions, newspapers, and magazines. The more blood, sweat, and anxiety in the headlines, the more money the media makes from distressed readers.
Behavioral finance pioneers, Nobel Prize winner Daniel Kahneman and Amos Tversky, showed that losses feel twice as painful as the pleasure of gains (see the Pleasure/Pain diagram below). Their Prospect Theory remains just as relevant today as when it was introduced in the late 1970s.
The greatest investor of all-time, Warren Buffett, once said, “Be fearful when others are greedy, and greedy when others are fearful.” Unfortunately, the media pushes the opposite mantra: “sell fear and buy greed.” When markets fall, they sell Armageddon. When markets soar, they sell nirvana. During periods of over-optimism, they also exploit FOMO (Fear of Missing Out) by feasting on investors’ emotional cycle of excitement.
Reassuring long-term investors that everything will be okay—or that dips are buying opportunities—doesn’t generate as much media profits and ad sales. Fear does.
History Doesn’t Repeat Itself, But It Often Rhymes
Too many investors suffer from short-term thinking and goldfish-like memory. But as Mark Twain wisely stated, “History doesn’t repeat itself, but It often rhymes.” And history has shown that listening to the media during times of extreme market volatility often leads to poor decisions.
Let’s take a look at some key examples where media-driven fear was more misleading than helpful over the decades:
The Nifty Fifty Collapse (1973-1974)
In the early 1970s, long before the “Magnificent 7” stocks came to the fore, we had the “Nifty Fifty” stocks. These large-cap blue chip stocks traded at lofty P/E (Price-Earnings) ratios and were seen as invincible before they came crashing down in 1973-1974. Suffice it to say, the media headlines were horrific during this period.
Here is some context for this period:
- The U.S. was exiting the Vietnam War
- Economy was undergoing a major recession
- Watergate scandal and presidential resignation
- 9% unemployment
- The Arab Oil Embargo
- Surging inflation
The media’s response? Doom and gloom. Here’s an example of this sentiment from the Newsweek cover, “The Big Bad Bear,” published on September 9, 1974.
For those who sold in fear, the results were disastrous. The Dow bottomed shortly after the magazine was released and the market rebounded +61% in less than two years. Panic was the wrong move.
“The Death of Equities” (1979)
Inflation plagued the 1970s, and just before one of the longest bull markets in history, BusinessWeek declared “The Death of Equities” on its now-infamous September 1979 cover. Once again, the media acted as a perfect contrarian indicator with the Dow quadrupling over the next decade.
Dot-Com Bubble: “The Hottest Market Ever” (2000)
In March 2000, at the peak of the tech bubble, Money magazine ran a cover story: “How to Invest in the Hottest Market Ever.” Weeks later, the bubble burst. Suboptimal timing once again.
In that same timeframe, Newsweek captured the essence of FOMO with its July 5, 1999 cover: “Everyone Is Getting Rich but Me.” Right when risk was at its peak, most investors were blind to it and got sucked into the downdraft.
Source: NewsWeek
Financial Crisis – Depression 2.0 (2008)
In October 2008, the Time magazine cover encapsulated the zeitgeist of the period with a 1929 photo that included a line of desperate people waiting for food donations at a soup kitchen. Many feared a second Great Depression. Yet it was one of the best times in history to buy stocks with the Dow tripling over the next decade.
Brexit Panic (2016)
Media coverage around the U.K.’s Brexit vote to leave the EU (European Union) painted a picture of imminent recession and contagion. Instead, the media blitz surrounding Brexit turned out to be more molehill than mountain. Markets rebounded strongly and reached new highs in the subsequent months.
“Rocketman” and North Korea Missiles (2017)
Tensions flared in 2017 as North Korea tested missiles and President Trump threatened retaliation against dictator Kim Jong Un by bombing Pyongyang and “Rocket Man”. The media went into overdrive regarding the nuclear unease, but the market brushed it off and continued climbing +58% over the next few years.
COVID-19 Pandemic (2020)
With over 3 million deaths worldwide and a grinding halt to the global economy, markets initially fell roughly -35%. But as consumers stockpiled toilet paper, fast vaccine development and stimulus sparked a powerful rebound, with stocks finishing the year up +16%. Over the next two years, the Dow almost doubled.
Hostage to Our Lizard Brain
Why are we so susceptible to the sensationalist tendencies of the media? Evolution holds the answer. Humans’ DNA and brains are hard-wired to flee prey. The small almond-shaped tissue in our brain called the amygdala—or what author Seth Godin calls the “lizard brain”—evolved to respond instantly to danger. When headlines scream “crash” or “war,” our emotional brain overrides our logical one, which leads to poor long-term results. As Seth Godin explains, we’re wired to react, not reflect (Watch here). And the media knows it.
Headlines Change but the Long-Term Market Trend Doesn’t
Despite a barrage of negative headlines, stocks have remained resilient over the long run. The market has overcome wars, assassinations, currency crises, banking failures, terrorist attacks, pandemics, natural disasters, impeachments, tax hikes, recessions, restrictive Fed policies, debt downgrades, inflation, and yes, even tariffs (see chart below). Since WWII, we’ve had 12 recessions—each followed by a full recovery to new record highs. In baseball terms, the economy has batted a perfect 1.000 (12-for-12) with recession recoveries.
How to Survive the Avalanche of Media Headlines
Here are five key strategies:
- Turn off the TV: Don’t obsess over headlines. Emotional reactions result in poor decisions.
Buying high (greed) and selling low (fear) is not a recipe for long-term investment success.
- Diversify Your Investments: A well-balanced portfolio across asset classes helps reduce panic.
- Invest According to Time Horizon: Are you young? Assuming more risk and higher exposure to the stock market is generally fine. Are you near retirement? Don’t jeopardize your retirement goals – de-risk accordingly.
- Ignore Talking Heads: Most pundits don’t invest and their credibility is compromised by monetary conflicts of interest. It’s much more beneficial to follow seasoned professionals with real track records through multiple bull and bear markets.
- Avoid the Herd: Continually following the herd into the most popular investments often leads to underperformance. The grass is greener, and the food sources are more plentiful, off the beaten path trampled by the herd. Contrarian thinking works even though it can feel scary.
In the age of constant connectivity, headlines and the 24/7 news cycle are addictive. But if you’re tired of being a pawn in the media’s game, I invite you to join my fight by acknowledging that the Emperor Media has no clothes.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 1, 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 the IC Contact page.
Animal Spirits to Animal Hibernation
Investor mood or sentiment can change rather quickly. Immediately after the 2024 presidential elections, positive animal spirits catapulted the stock market higher due to hopes of stimulating tax cuts and deregulation legislation. However, those warm and fuzzy feelings soured last month, as investor focus shifted to on-again, off-again tariff talks, and stagflation concerns, which have converted animal spirits into gloomy feelings of hibernation.
As a result, the advancing bull market took a breather and transformed into a weary bear during March. For the month, the S&P 500 (-5.8%), NASDAQ (-8.2%), and the Dow Jones Industrial Average (-4.2%) all fell significantly in the wake of tariffs, inflation, and recession worries.
Lovely Liberation Day or Tariff Trouble?
Since the President took office in January, he has announced, reversed, and implemented tariffs across a wide range of countries and sectors, including China, Canada, Mexico, the EU, Colombia, Venezuela, steel, aluminum, oil, automobiles, digital services taxes, and more.
The day of reckoning begins on April 2nd, designated Liberation Day by the president. This is when the president and the White House officially announce global reciprocal tariffs on foreign countries in an attempt to reverse the nation’s large trade deficit (see chart below) and bring manufacturing back to the United States. For example, if Germany subsidizes BMW cars sold in the U.S. while simultaneously placing tariffs (i.e., additional taxes) on American Ford Explorers sold in Germany, the president wants to impose equivalent reciprocal tariffs on those same BMWs sold in the U.S. in an effort to level the trading playing field. On the surface, a $131 billion trade deficit sounds very significant, but when compared to a $30 trillion economy (Gross Domestic Product – GDP), this negative trade balance represents less than 0.5% of GDP – effectively a rounding error. I have previously written how tariffs represent more of a molehill than a mountain (see Tariff Sheriff), in part because consumer spending and services make up the vast majority of our country’s economic activity, whereas trade and manufacturing are relatively smaller segments.
Source: Trading Economics
Driving home the point that tariffs are more bark than bite, Senior White House trade and manufacturing counselor Peter Navarro recently stated the 2025 tariffs could add $700 billion annually to U.S. revenues, including $100 billion from the recently announced 25% auto tariffs. Many economists believe this collection estimate is too optimistic. However, even if this target is achievable, $700 billion only represents a measly 2% of overall GDP.
Tariffs = Recession or Stagflation?
With the recent stock market downdraft and growing concerns related to tariffs, some economists and pundits are raising the probability of a recession and the possibility of inflation accompanying an economic downturn (i.e., stagflation).
Economic data should clear some of the fog. Fresh employment numbers will be released this Friday, which should shine some light on the health of the economy. Irrespective of this month’s results, the most recent 4.1% unemployment rate (see chart below), though slightly higher over the last two years, does not strongly indicate a recession.
Source: Trading Economics
Other “hard” data, such as GDP, also suggest a slowing economy rather than a recession. For instance, a recent survey of 14 economists estimates the economy is growing at a paltry +0.3% rate in Q1 – 2025 versus +2.3% in Q4 – 2024. Data is continually changing, but if a looming recession were imminent, corporate earnings would likely be trending downward, not upwards, as evident in the chart below.
Source: Yardeni Research
Tariff Inflation Has Yet to Arrive
There is no doubt tariffs function as a tax hike on consumers because U.S. companies that pay the tariffs on imported goods are eventually forced to raise prices to maintain profit margins or limit margin degradation.
Nonetheless, inflation did not spike under President Trump’s first term. Even if the president’s new policies result in more aggressive tariff actions this go-around, inflation will likely remain in check due to the point mentioned earlier – imported goods represent a small percentage of overall consumer and business purchases.
Tariff implementation is just beginning, so only time will tell how pervasive inflation will become. However, what we do know now is that inflation has declined dramatically over the last couple of years and has not yet spiked (see Consumer Price Index chart below).
Source: Calafia Beach Pundit
Where Could I Be Wrong?
I have explained how some of the lagging “hard” data does not signal recession or stagflation, but what could I be missing? For starters, some of the leading “soft” data (e.g., surveys) indicate various cracks in the economic foundation are forming. Take the recent Consumer Confidence data (see chart below), which has weakened dramatically from pre-COVID and even post-COVID levels.
Source: Trading Economics
It’s not just consumers who are feeling uneasy about the economic environment; businesses are as well. Another soft data point flashing red is the NFIB Small Business Uncertainty index, which recently reported its second-highest reading in 48 years (see chart below). Even if my argument that tariffs are too small to materially impact the economy holds, if the psychological effects of tariff uncertainty paralyzes consumer and business economic activity to a standstill, then tariffs could indeed become a substantial factor.
Source: National Federation of Independent Business (NFIB)
What Comes Next After Liberation Day?
Liberation Day is unlikely to trigger an immediate and sustained V-shaped recovery in the stock market because international trading partners will be forced to announce retaliatory tariffs in response to President Trump’s reciprocal tariffs, potentially leading to additional reactionary tariffs by the U.S.
Additionally, the reciprocal tariffs announced on April 2nd will likely serve as a starting point for subsequent negotiations with trading partners. Without a comprehensive resolution, investor sentiment will likely remain somewhat unresolved and unsettled. Regardless of your views on the size and impact of tariffs, Liberation Day will at least bring some clarity and reduce the uncertainty surrounding the current murky and chaotic environment.
The multi-year bull market continued its charge after the presidential election, but investor sentiment has weakened the bull run due to tariff uncertainty. In response, the excited bull has temporarily turned into a sleepy bear. Depending on how these tariff events unfold, we will soon find out whether Liberation Day will awaken the bear to hunt for bulls or send it into deep hibernation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 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 F 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.
Par for the Course
Stocks have been in a multi-year bull market, but just as investors cannot earn positive returns every month, golfers also cannot achieve a hole-in-one or birdie on every hole, either. A challenging performance is exactly what happened last month when stocks recorded a bogey on the scorecard.
More specifically, this is how far out-of-bounds the major indexes were last month:
- S&P 500: -1.4%
- Dow Jones Industrial Average -1.6%
- NASDAQ: -4.0%
Technology stocks and the Magnificent 7 stocks felt the largest brunt of the force last month as tariffs and the impact of Chinese AI (Artificial Intelligence) competition gave investors heartburn as they digested the information (see New Year, New AI ERA & New Tariff Sheriff).
Tariffs – More Molehill Than Mountain
As mentioned, a large part of last month’s volatility can be explained by the policy uncertainty surrounding the impending tariffs on China, Canada, and Mexico. Despite the absence of new tariffs being implemented, in an attempt to lock in cheaper imported goods, U.S. corporations and consumers have been stockpiling foreign goods before prices move higher due to tariffs. The 25% proposed tariffs on Canadian and Mexican goods are set to be applied as soon as March 4th. A flat 25% tariff on imported steel and aluminum products is expected to begin on March 12th – these particular tariffs are expected to have a disproportionately negative impact on the automotive industry.
Regarding other proposed reciprocal trade agreements, the White House’s analysis on tariffs for all other countries (beyond China, Canada, and Mexico) is expected to arrive on the president’s desk on April 2nd.
All these proposed changes are having an immediate economic impact whether intended or not. Not only are consumers buying more overseas products now, as they brace for higher prices, but businesses are also shifting supply chains to countries outside of China, Canada, and Mexico, in hopes of finding temporary tariff loopholes.
The bottom-line is our country’s imports have been spiking up recently, especially in the first quarter. Imports by definition subtract from America’s economic activity, so if businesses and consumers are rationally stockpiling foreign goods before prices go up from tariffs, investors should not be surprised that GDP (Gross Domestic Product) growth is set to go negative in the first quarter (-1.5%), according to the Federal Reserve Bank of Atlanta.
This short-term spike in foreign product purchases should be temporary until the tariffs are officially put in place. Subsequently, demand for relatively cheaper U.S. goods should rise because foreign goods will be pricier. In other words, buyers may begin purchasing more American-made t-shirts on Amazon because those shirts could be cheaper than the Chinese-made t-shirts after the additional tariffs commence on China.
How large are these overall tariffs? When it comes to Mexico and Canada, the size of these countries’ imports is estimated at $918 billion (see the 2023 import breakdown below for the two countries). On the surface, this sounds like a very large number, and it is. However, if you consider the size of the U.S. GDP ($29.4 trillion), these tariffs will mathematically have less than a 1% impact on the direction of our country’s economic activity.
However, if demand for American products goes up after the tariffs begin, as mentioned above, then it is perfectly logical to expect the drag from imports can be diminished or possibly completely reversed, if consumers decide to buy more American goods.
Source: Visual Capitalist
Also worth noting, as I documented last month in my Investing Caffeine blog, imports only account for 13.9% of our country’s economic activity (see New Tariff Sheriff). So, while tariffs make for great scary headlines, the reality of the numbers paints a different picture. Overall, the uncertainty surrounding the discussion of tariffs is having a much larger economic impact than the actual tariffs themselves. In other words, what we are discussing is more molehill than mountain. We saw this same movie before during the administration’s first-term when tariffs did not crater the economy into recession or create disproportionately high inflation.
War at the White House
A geopolitical soap opera played out on global television last Friday during a meeting between Ukraine’s President Volodymyr Zelensky and President Trump in the Oval Office. The meeting was designed to be a celebratory signing of a minerals deal in which the U.S. would gain access to strategically important Ukrainian rare earth metals in exchange for continued U.S. aid and military support. A signed deal would increase the probability of a peace deal between Russia and Ukraine dramatically. What actually happened was a war of words at the White House, which resulted in Zelensky getting kicked out of the White House with no signed deal.
Both sides have economic and strategic incentives to reengage in peace and mineral deal negotiations, but if the U.S.-Ukraine relationship totally crumbles, Europe and the other NATO (North Atlantic Treaty Organization) countries will need to pick up the slack in their military and economic aid to Ukraine. Regardless, increased European support is required to stave off a broader incursion by Russia and Vladimir Putin into a wider portion of Europe.
Tariffs, the Russia-Ukraine war, and AI issues may have heightened investor anxiety last month, but long-term investors understand that annual -5% and -10% corrections in the equity markets are considered par for the course. In fact, over the last 12 months, the S&P 500 index has declined -5% five times, and -10% one time, yet the stock market is still up +16% on a trailing 12-month basis (see chart below).
Source: Trading Economics
Financial markets end up in the rough plenty of the time, which often results in performance scorecard bogeys. However, long-term investors and Sidoxia Capital Management clients have won more often than not because the benefits of American capitalism have created many more birdies and pars over time.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 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.
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.
Bad News is Good News?
Remember that global pandemic back in 2020 called COVID-19 that killed over 350,000 people in the U.S.? That same year, the unemployment rate reached a sky-high level of 14.9% (vs. 3.9% most recently) and the economy went into recession with GDP (Gross Domestic Product) declining by -2.2%. With the whole population locked in their homes and 9.4 million businesses closed, this debacle doesn’t sound like a real great environment for the stock market. What did the stock market actually do in 2020? The S&P 500 surged +16.3% (see chart below). Bad economic news turned out to be good news for stocks.
On the flip side, during 2022, the economy was firing on all cylinders. GDP was advancing at a reasonable +1.9% growth rate, and the unemployment rate stood at a near generationally low rate of 3.6%. What did the stock market do? It fell -19%. This time around, good economic news meant bad news for stock prices, primarily because the Federal Reserve was slamming the brakes on the economy by increasing the Federal Funds interest rate target.
These examples are powerful reminders that the direction of economic trends does not necessarily move in tandem with the direction of the stock market. Just this last month, investors experienced this same phenomenon when GDP growth figures were revised lower from +1.6% to +1.3%, and pending home sales dropped by -7.7% to the lowest level in four years during the pandemic. What did the stock market do last month? The S&P climbed +4.8% and the NASDAQ soared +6.9%. Once again, bad news has equaled good news due to higher hopes for Fed interest rate cuts.
For the year, the S&P has already appreciated a very respectable +10.6%. This stellar performance has come despite heated election concerns, persistent wars overseas, nervousness over the Federal Reserve’s monetary policy, and wild volatility in the cryptocurrency markets.
Fighting against these headwinds has been the tsunami of corporate investing dollars piling into the Artificial Intelligence (AI) spending tidal wave. I have been writing about this trend for a while (see AI World) and NVIDIA Corp (NVDA) confirmed this trend a couple weeks ago, when the AI juggernaut reported its fiscal first quarter financial results. Not only did NVIDIA more than triple its revenue above $26 billion for the three-month period compared to last year, but the company also increased its net profit by more than seven-fold to almost $15 billion for the quarter, in addition to announcing a 10-for-1 stock split (see chart below).
What these examples teach you is that it is a fruitless effort for investors to try to time the market based on economic news headlines. Yet, every day you turn on the television or comb through the avalanche of news headlines through various media outlets, there is always some Armageddon story about an impending market crash, or some other speculative, get-rich-quick scheme. As Warren Buffett states, “Investing is like dieting. Easy to understand, but difficult to execute.”
In other words, there is no simple solution to investing. It requires patience, discipline, and financial emotional wherewithal to allow the power of long-term compounding to grow your retirement nest egg. Short-term news cycle headlines shouldn’t drive portfolio decision-making, but rather your personal objectives, goals, and risk tolerance. These items are not static, and can change over time, therefore it’s important to revisit your asset allocation periodically as financial circumstances and life events change your objectives.
Of course, improving economic news can also lead to rising stock prices, just as deteriorating economic news can result in declining prices. Regardless, attempting to time the market is a fool’s errand. Rather than trying to maneuver in and out of the stocks, long-term investors should focus more intently on the four key factors that drive the direction of the stock market: corporate profits, interest rates, valuations, and investor sentiment (see also Don’t Be a Fool, Follow the Stool). If you understand the stock market doesn’t logically follow the daily headlines, and instead you follow the key fundament factors driving equity markets, then your investment portfolio should be blessed with plenty of good news.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 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 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.
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.
Air Bags Deployed to Cushion Bank Crashes
In recent years, COVID and a ZIRP (Zero Interest Rate Policy) caused out-of-control inflation to swerve the economy in the wrong direction. However, the Federal Reserve and its Chairman, Jerome Powell, slammed on the brakes last year by instituting the most aggressive interest rate hiking policy in over four decades.
At the beginning of last year, interest rates (Federal Funds Rate target) stood at 0% (at the low end of the target), and today the benchmark interest rate stands at 5.0% (at the upper-end of the target) – see chart below.
Source: Trading Economics
Unfortunately, this unparalleled spike in interest rates contributed to the 2nd and 3rd largest bank failures in American history, both occurring in March. The good news is the Federal Reserve and banking regulators (the Treasury and FDIC – Federal Deposit Insurance Corporation) deployed some safety airbags last month. Most notably, the Fed, FDIC, and Treasury jointly announced the guarantee of all deposits at SVB, shortly after the bank failure. Moreover, the Fed and Treasury also revealed a broader emergency-lending program to make more funds available for a large swath of banks to meet withdrawal demands, and ultimately prevent additional runs on other banks.
Investors were generally relieved by the government’s response, and the financial markets reacted accordingly. The S&P 500 rose +3.5% last month, and the technology-heavy NASDAQ index catapulted even more (+6.7%). But not everyone escaped unscathed. The KBW Bank Index got pummeled by -25.2%, which also injured the small-cap and mid-cap stock indexes, which declined -5.6% (IJR) and -3.5% (IJH), respectively.
Nevertheless, as mentioned earlier, slamming on the economic brakes too hard can lead to unintended consequences, for example, a bank failure or two. Well, that’s exactly what happened in the case of Silicon Valley Bank (SVB), the 2nd largest bank failure in history ($209 billion in assets), and cryptocurrency-heavy Signature Bank, the 3rd largest banking collapse in history – $110 billion in assets (see below).
Source: The Wall Street Journal
How did this Silicon Valley Bank failure happen? In short, SVB suffered a bank run, meaning bank customers pulled out money faster than the bank could meet withdrawal requests. Why did this happen? For starters, SVB had a concentrated customer base of financially frail technology start-ups. With a weak stock market last year, many of the start-ups were bleeding cash (i.e., shrinking their bank deposits) and were unable to raise additional funds from investors.
As bank customers began to lose confidence in the liquidity of SVB, depositors began to accelerate withdrawals. SVB executives added gasoline to the fire by making risky investments long-term dated government bonds. Essentially, SVB was making speculative bets on the direction of future interest rates and suffered dramatic losses when the Federal Reserve hiked interest rates last year at an unprecedented rate. This unexpected outcome meant SVB had to sell many of its government bond investments at steep losses in order to meet customer withdrawal requests.
It wasn’t only the large size of this bank failure that made it notable, but it was also the speed of its demise. It was only three and a half weeks ago that SVB announced a $1.8 billion loss on their risky investment portfolio and the subsequent necessity to raise $2.3 billion to fill the hole of withdrawals and losses. The capital raise announcement only heightened depositor and investor anxiety, which led to accelerated bank withdrawals. Within a mere 24-hour period, SVB depositors attempted to withdraw a whopping $42 billion.
Other banks, such as First Republic Bank (FRB), and a European investment bank, Credit Suisse Group (CS), also collapsed on the bank crashing fears potentially rippling through other financial institutions around the globe. Fortunately, a consortium of 11 banks provided a lifeline to First Republic with a $30 billion loan. And Credit Suisse was effectively bailed out by the Swiss central bank when Credit Suisse borrowed $53 billion to bolster its liquidity.
While stockholders and bondholders lost billions of dollars in this mini-banking crisis, financial vultures swirled around the remains of the banking sector. More specifically, First Citizens BancShares (FCNA) acquired the majority of Silicon Valley Bank’s assets with the assistance of the FDIC, and UBS Group (UBS) acquired Credit Suisse for more than $3 billion, thereby providing some stability to the banking sector during a volatile period.
Many pundits have been predicting the U.S. economy to crash into a recession as a result of the aggressive, interest rate tightening policy of the Federal Reserve. So far, Mark Twain would probably agree that the death of the U.S. economy has been greatly exaggerated. Currently, the first quarter measurement of economic activity, GDP (Gross Domestic Product), is estimated to measure approximately +2.0% after closing 2022’s fourth quarter at +2.6% (see chart below). As you probably know, a definition of a recession is two consecutive quarters of negative GDP growth.
Source: Trading Economics
Regardless of the economic outcome, investors are now predicting the Federal Reserve to be at the end or near the end of its interest rate hiking cycle. Presently, there is roughly a 50/50 chance of one last 0.25% interest rate increase in May (see chart below), and then investors expect at least one interest rate cut by year-end.
Source: CME Group
Last year was a painful year for most investors, but stocks as measured by the S&P 500 have bounced approximately +18% since the October 2022 lows. Market participants are still worried about a possible recession crashing the economy later this year, but hopefully last year’s stock market collision and subsequent banking airbag protections put in place will protect against any further financial pain.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (Apr. 3, 2023). Subscribe Here to view all monthly articles.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in SIVB, FCNA, UBS, FRB, CS, 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.
Investing Caffeine 
