Tuesday, November 7, 2023

Morning Note: Opportunity looms, if, that is....... And a Quote to Ponder

Like I keep saying, last week’s rally in stocks comports perfectly with our present thesis… The economy will likely enter recession next year, and as the data turn down, equity markets initially turn up as traders and investors have grown to believe that stocks always rise when the Fed cuts interest rates.

Of course history tells a different story, when, that is, recession is part of the mix… Stocks at 21 times earnings (P/E), and 2.4 times sales (P/S) -- like today -- are resoundingly expensive compared to where they historically trough during recession.

For P/E, that would be 14.5 in 1990, 15.2 in 2002, 9.7 in 2008, and 14.3 during covid.

For P/S, 0.7 in 1990, 1.2 in 2001, 0.7 in 2008 and 1.6 during covid.

And, per the below, the Fed was cutting aggressively while stocks (blue line [SP500]) were selling off:

Again, it makes sense that, only for the time being, stocks rally on weak data… If/when indeed one of those red-shaded areas (recession) shows up, however, it’ll highly likely be a different story... 

Frankly, that’s opportunity, if, that is, you’re properly hedged and diversified going in.

Of course, conversely, should inflation heat back up, or simply stay sticky, stocks will likely struggle there as well... But that'll be far less actionable, as long as recession risk remains in the mix.

Asian stocks got hammered overnight, with 13 of the 16 markets we track closing lower.

Same for Europe so far this morning, with 15 of the 19 bourses we follow trading down as I type.

US equity averages are mixed (and breadth* is a mess) to start the session: Dow down 1 point (0.00%), SP500 flat, SP500 Equal Weight down 0.23%, Nasdaq 100 up 0.36%, Nasdaq Comp up 0.33%, Russell 2000 down 0.41%.

*333 of the SP500 members are red as I type, same for 60% of the Nasdaq Comp's.

As for Friday’s session, US equities were mixed: Dow up 0.1%, SP500 up 0.2%, SP500 Equal Weight down 0.58%, Nasdaq 100 up 0.4%, Nasdaq Comp up 0.3%, Russell 2000 down 0.45%.

This morning the VIX sits at 14.86.

Oil futures are down 2.46%, nat gas futures are down 3.55%, gold's down 0.67%, silver's down 2.52%, copper futures are down 1.51% and the ag complex (DBA) is up 0.07%.

The 10-year treasury is up (yield down) and the dollar is up 0.39%.

Among our 32 core positions (excluding options hedges, cash and money market funds), 12 -- led by SPTL (short-term treasuries), AT&T, LTPZ (long-term TIPs), XLK (tech stocks) and EWZ (Brazil equities) -- are in the green so far this morning... The losers are being led lower by Range Resources, XLE (energy stocks), SLV (silver), XLB (materials stocks) and XME (base metals miners).

This morning's quote is a harsh one for sure, but in an investment context, I can tell you from my 39-year experience, it, sadly, and scarily, speaks too often to market mentality:
"The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, preferring to deify error, if error seduce them. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim."
-- Denis Diderot

Have a great day!


  1. Thanks Marty! Agree! Unemployment is still very low currently. But things can change at any point with the economy. FOMO would disappear and investors would rush to safety.

    In the same token with the quote from Denis Diderot, I would add to it with a quote from Li Shimin, Tang Emperor Taizong:

    "With bronze as a mirror one can correct one's appearance; with history as a mirror, one can understand the rise and fall of a state; with good men as a mirror, one can distinguish right from wrong."

    Thanks again for the great analysis regarding the reality of the market.