Dear Clients,
This is the finale to our 2024 year-end message. Please definitely take this one in. Feel free to skip to the summary video at the end. Thanks so much!!
Before we get to the dollar, I'd like to touch on what I'll call the "December Mess" of a market for stocks by quoting derivatives market specialist, and co-host of the uber-popular Market Huddle Podcast, Patrick Ceresna, as he charted the US equity market sector-by-sector during last week's episode:
In this year's year-end message Part 1 we touched on three investing rules to live by.
Essentially:
1. Control risk
2. Buy value
3. Be patient
So, while controlling risk may be accomplished in a number of ways, it's generally-speaking pretty easy, but it ain't free.
If we're talking diversification, cost comes by way of missing out on concentrated returns when a particular asset class, or, say, a small group of stocks realize outsized upside relative to the rest (à la recently, in record fashion!)... If we're talking insuring against massive declines in a given asset class, security or group of securities, there's the options premium we pay.
As for #2, buying value is easy enough, when you can find it, and of course you have to know how to measure it.
#3, patience, depending on who you are, can far and away be the most difficult rule to follow! Particularly when you see a given tech stock or, say, crypto currency, rocketing -- without you -- to the proverbial moon... Or, on the other hand, when it feels like the world is melting down all around you, and panic begins to grip your decision making process.
Ideally, if we satisfy #1 well enough, we can keep panic-driven reactions at bay... As they, along with greed-driven decisions, are inevitably the worst decisions investors make!
Here, in Part 3, we're going to focus primarily on rule # 2, buying value.
Dear Clients, this morning's commentary is VERY important to take in... start to finish... Thanks!
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Dear Clients, please take a few minutes and take in today's brief video commentary.
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Staying with the topic of US stocks for the moment: We can assume, with confidence, that the durability of the current bull market is largely due to the overwhelming consensus among investors that an economic "soft landing," and, with it, ever-rising corporate profits is essentially at hand.
A soft landing for stocks would presumably mean continued higher prices amid declining bond yields -- the proverbial best of both worlds, or, let's say, the ideal Goldilocks scenario.
1. Risk Control First: Focus on managing downside over chasing upside.2. Value Over Price: Buy for less than something’s worth. Quality means nothing if you overpay.3. Long-Term Patience: Success doesn’t happen on a schedule.
--Howard Marks
Or, simply:
Rule #1. Never lose money.
Rule #2. Never forget rule number #1.
--Warren Buffett
And the question we (at PWA) must answer yes to every single day:
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Attention Clients, this is an important post to take in... Thanks for reading!
The following are excerpts from the latest entries to our internal market log.
In summary.
1. Since the election:
2. Foreign equities are all-time cheap relative to the US.
3. US equities are, by themselves, at (or near) all-time expensive valuations.
3. Zip Recruiter warns about the state of the labor market and, therefore, the economy.
4. Me (via an email with a friend) on the prospects for commodities going forward, the nat'l debt, and the history of the early stages of world-changing technologies.
Bottom line, the rip-roaring rally of the past week has been the definition of concentrated. I.e., not so great for balanced portfolios that diversify across asset classes, sectors and regions... But, make no mistake, the setup, as we ultimately move into the next cycle, offers many historically-attractive opportunities for macro-centric portfolios.
Read on for context.
Dear Clients, please be sure and give this one a watch/listen when you have a few minutes.
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Of course this should go without saying, but given the season I'm compelled to remind clients that politics have unequivocally zero influence on our asset allocation decisions (and I'm certain you'd have it no other way)... Policy, on the other hand, is indeed something we need be cognizant of with regard to its longer-term economic and market (global as well as domestic) ramifications.
Clients, be sure and take a few minutes when you can and take this one in.
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As I've been pointing out in nearly every video commentary of late, the data, on balance, have indeed improved; lessening the risk of imminent recession... I've also pointed out (charted for viewers), however, the counterintuitive fact that much of the data we measure have historically-tended to see a last-gasp ramp just before the onset of recession... Hmm...
So, while, indeed, such macro improvement has us considering where to adjust allocations to take full advantage of a potentially-improving setup, history says we nevertheless need to -- at the same time -- remain on our toes, at least for the time being.
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"Goldman Sachs forecasts that over the next decade the S&P 500 will yield an annualized return of 3%..."Which jibes with our John Hussman quote from last week:
"Indicating a marked slowdown in growth, the 3% return forecast places future returns in the 7th percentile for 10-year returns since 1930."
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Briefly on gold:
Suffice to say that gold resting at all time highs amid rising long-term treasury yields, and, not to mention, a strengthening dollar isn’t what you’d call intuitive.
So, what gives?
Three possibilities come to mind:
Here’s one (among a number of) reason(s) why we are long-term bullish on emerging markets (although near-term cautious [on everything]) :
Delivering this week’s update to you in written form.
The following is the long and the short of the latest on the economy, and on financial markets.
Our PWA Index (measures overall general conditions) rose markedly for a third straight week -- moving closer to the neutral line -- denoting improved conditions (i.e., recession risk remains elevated, but notably less-so of late):
Highlights from our internal notes:
9/30/2024
Despite the notable improvement in our own macro index, the global liquidity setup (see below), etc. (i.e., recession risk has indeed abated a bit of late), we need to be very cognizant – as I’ve illustrated in recent video commentaries – of the fact that it is the norm to get a positive spike in the data just before recession ensues.“Reducing our exposure to US staples and healthcare reflects marginally better odds of a soft-landing based on the Fed’s aggressive start to the easing cycle, and recent improvement in the PWA Index… However, our base case remains that recession odds are better than 50/50 on a 6-12 month horizon… Therefore, despite the cuts, staples and healthcare remain top weightings, as do cash (t-bills) and gold.Well, I guess I should've said next 12 hours... They stepped up last night… Here are the details (HT P. Boockvar):
Increasing our emerging mkt equity exposure reflects the improved prospects for a near-term weaker-trending dollar, as well as China’s historically-weak valuations and the likelihood of Chinese policymakers to be forced to step up the stimulus over the next 12 months.”
From our internal morning note:
9/20/2024
While, based on the headline data of late, one might indeed criticize the Fed over its 50 bp cut, particularly considering how Powell cheer-leaded the “strong” economy (i.e., then why the double-cut??), our view (despite the recent less-bad reading from our own index) remains that the under-the-surface indicators point to not-small odds of recession in the not-too-distant future. So, frankly, I have no problem with the double-cut.
Noting that higher-income/asset-holding folks have been doing virtually all of the heavy-lifting for months, here’s yet another sign that we may be onto something:
Attention Clients, please consider this one a must-watch video...
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A little bonus content that I felt compelled to share this morning.
From our internal log:
9/17/2024
While the bulls will cite what retail sales say about the strength of the consumer, when you look at them in real (inflation-adjusted) terms…. well:
“While Retail Sales are up 2.1% y/y, it still isn’t enough to keep up with the impact of inflation. Once you take that into account, Retail Sales have been negative on a y/y basis for seven of the last eight months and 17 of the last 22 months.” –Bespoke
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The following got me thinking about just how unusual and unintuitive the current investment setup is.
Since this week will be mostly about the Fed, I can keep the written post very brief and to the point.
Here's from our internal Monday morning note:
9/16/2024
Nick T’s WSJ article effectively moved the needle to a 50 bps cut on Wednesday… Since the article, odds have spiked to 64% (in fed funds futures)... If that’s the case, the US central bank is clearly the most dovish among the majors, per the below:
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While our work sees a global macro setup fraught with risk-asset risk, today I want to consider what I see as some key points in the present bullish narrative; the narrative that says this is, in fact, an ideal moment to be adding to risk assets (read stocks).
Dear Clients, this week's video commentary is an important one to take in when you have a few minutes... 😎
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“The only way to make money in the markets is to be patient, disciplined and informed. You have to have the confidence to make decisions based on sound analysis and rational thought.” --David Shaw
While I believe we're less-sanguine on the economy right here than is Bob Elliott, I find his analysis to be spot on... I.e., the conditions priced into US equities are virtually untenable in the foreseeable future.
@BobEUnlimited
US stocks don't have an earnings problem, they have an expectations problem. With expectations of 3% real gdp in 2H24, earnings growth to reach 16% y/y by end of '25, and an AI boom ahead driving 21x multiples, such lofty expectations are a setup for disappointment.
"...despite the present ever-rising risk, today’s trader believes that, in pure self-interest/preservation, they must continue to rock to the infamous 2007 tune played by ex-Citi CEO Chuck Prince:
So, I'm sitting here this morning listening to the latest Market Huddle podcast, and I hear this week's guest, Louis-Vincent Gave, say the following:“... as long as the music’s playing you gotta get up and dance.”"
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As I type, stocks are rallying nicely in response to a cooler than expected Producer Price Index… The S&P, at 5398, is about to test what I, in last weekend’s video, suggested was a pretty compelling area of potential resistance (5,400)… Wednesday’s CPI print, followed by Thursday’s retail sales number will of course be key determinants as to whether stocks fold at that key technical level, or whether they blow right through it and try to recapture the S&P’s all-important 50-day moving average (currently 5450), and, not to mention, a few other technical barriers between here and the recent high.
Now, beyond all this short-term, largely technical, stuff, we have to focus on what, at this stage of the cycle – and at these equity market valuations – is the ultimate question:
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“Acting in excessive reliance on the fact that something ‘should happen’ can kill you when it doesn’t. That’s why I always remind people about the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average. You have to be able to get through the low points. And the success of your investment actions shouldn’t depend on normal outcomes prevailing; instead, you must allow for outliers.” —Howard Marks
Just a few thoughts on the latest action in equity markets.
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“Whoever wishes to foresee the future must consult the past.”
Niccolò Machiavell
Starting with the technicals, here's the 1-year daily chart for the S&P 500... Like I said last week, we'll see some nice rallies off of technical support.
Update: The following content was posted yesterday for today's distribution... In the meantime, here's an entry to our internal log this morning:
Google (Alphabet) stock is getting slammed this morning on earnings comments that very much jibe with our concerns over the AI hype… They implied that patience will be needed when it comes to justifying the massive spending they and others are devoting to AI.
Like I said yesterday:“With regard to AI, so far it’s all about companies competing to see who can spend the most on it, while seeing virtually zero offsetting profitability gains yet emerging… They’ll likely come, but there’s little evidence that said profitability will emerge to offset the bottom line hits – which tend to roil perfectly-priced markets – that’ll show up amid the heavy AI spenders in coming quarterly earnings reports.”
Context
I can't emphasize enough how all the hoopla over all-time highs in US stocks needs some serious context.
Essentially, the extent to which a mere handful of stocks have done all the lifting is historic (and, by the way, historically-unhealthy).
Here's from the 2021 peak, nearly 3 years ago... Note that while the S&P 500 and Nasdaq 100 cap-weighted indices (white and purple) have done okay since then (well, actually, since last December), the same stocks equal-weighted have produced just barely positive results for the S&P (green) and slightly negative results for the Nasdaq (yellow):
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Small Caps Rally!!!
The action over the past week in the equity market has been extraordinary… Well, okay, I’ll just say it’s been unusual (at least seemingly, until you scroll further), to put it mildly.
It certainly bolsters the bull’s narrative that this historically-bifurcated market (the 10 biggest SP500 stocks doing ~80% of the year-to-date heavy lifting, the remainder utterly languishing) will be remedied via the rest of the market playing catch up.
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Suffice to say there's historic speculation priced into today's US equity market.
Definition:
Dear Clients, here's another very important update on overall conditions to take in when you have a few minutes!
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Among the many things that have that tech bubble smell, the present valuation gap between US equities and the rest of the world is like nothing we've seen since then.
US (SP500) price to sales ratio in white, Developed Foreign Markets orange, Emerging Markets blue... Red arrow at the tech bubble peak:
Dear clients, here's a quick & easy one, but a very important one, to take in -- start to finish.
Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:Dear ALL Clients, this is for sure the one to watch, start to finish! Thanks so much for obliging, Marty 😎
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Dear Clients, despite the Nasdaq sitting at, and the S&P 500 near, all time highs, this week's highlights from our internal log will not inspire confidence in the go-forward setup for stocks... Which, by the way, in no way means that the next bear market is imminent... It simply means that the risk is historically high right here, and that liquidity, diversification, and, in our view, hedging here and there with options is these days more than warranted.
In our candid view, prudent long-term investing is all about knowing when, and when not, to add risk... Suffice to say that today's overall setup is not the sort that you find at the early stages of a sustainable equity bull market... One could argue quite the opposite, in fact.
Note, in this week’s video I mentioned gold’s Friday decline and suggested that it was likely a reaction to the May employment report… And while the notable selloff in treasuries perhaps lends credence to that view, I had missed the fact that China’s central bank announced last night that it did not add gold to its reserves in May… Not doubt that was a not-small contributor to Friday’s action.
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Dear Clients, there'll be no written post next week, as I'll be on my annual Montana excursion, which once again has me offering up the link to an old blogpost that I believe has our all time highest hit rate.
Ironically, it has nothing to do with markets, so only take it in if you're in the mood for something touchy-feely.
Here's the link to the 2020 version (disregard the days off mentioned, this time it's Tuesday - Saturday):
http://blog.pwa.net/2020/09/gods-greatest-work.html
At the end of Larry Montgomery's latest book, How to Listen When Markets Speak, he offered up the following message, which to a not-small degree concurs with our longer-term go-forward view:
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Clients, please be sure and take this one in!
Thanks! Marty 😎
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Here are some selected highlights of key global economic and market data, signals, trends, etc., from our internal log over the past few days.
Clients, if you'd like more color on any of the below, or anything else that went on in global markets/economics this past week (even if it's not featured below, there's a good chance I commented on it internally), please feel free to reach out.Last Wednesday 5/8
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Clients, please be sure and take this one in when you have a few minutes.
Have a nice weekend!
Well, I'm already breaking my own new rule, by publishing two blog posts on the same day... Can't resist it this morning... I.e., I don't want this one to get lost in the shuffle of next week's summary.
This morning's log entry:
4/27/2024
This from Grant Williams' podcast guest is, in essence, what I’ve been describing during client review meetings of late…
I.e., In terms of what he says about how policy will be implemented going forward, I couldn’t agree more!
Emphasis mine:
