“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:
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Dear Clients, here's yet another important one to take in!
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Key highlights from our latest messaging herein:
Stocks continued to advance over the past month, despite the notable headwinds outlined in our February report.
While sector leadership remains bullish – and breadth has improved notably – valuation, sentiment and the technicals, in particular, continue to reflect significant downside risk going forward.
Bottom line: Per the above, and the entirety of this report, current overall conditions leave us uninspired to add measurable equity market risk, or to hedge less, at this juncture.
I mentioned in a recent video commentary that we are probably spending more time of late assessing narratives that don't jibe with our present view of general conditions, versus those that do -- as open-mindedness and objectivity are absolute musts for us... Well, I'm definitely not doing that in this post when it comes to the present risk/reward setup for US stocks.
Those of you who've been taking in our latest messaging will find the following very familiar... I.e., Peter Boockvar shares our present concerns:
Clients, this one's a must watch, start to finish!
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There's essentially very little to add this morning to our last two video commentaries.
In a nutshell:
1. Fed Chair Powell is comfortable setting market expectations at 3 rate cuts this year -- in essence dismissing the latest inflation data -- no longer, for the moment, concerned with an early 80s repeat... I will, however, add that not all on his team are on board, as we'll likely hear from some select commentary this week.
2. The economic data are improving, particularly in the manufacturing space -- notably reducing the odds of near-term recession -- i.e., likely, at a minimum, pushing the start-date further out.
3. Equity market technicals, and sentiment, point to increasing odds of an equity market pullback sometime over the next few weeks.
4. Given reduced recession odds, and an on-balance accommodative Fed, all things equal, odds would favor a buying of any decent near-term dip in equities.
5. #4 notwithstanding, there is large leverage (in the derivatives space in particular) underpinning these levels, which means a cracking of certain levels to the downside could indeed spark something far more meaningful than simply a buyable dip... That said -- and, again, all things equal -- odds favor #4.
6. We nevertheless -- given certain elements of the overall setup (present macro dynamics, risks highlighted above, historically high valuations) -- need to accommodate (via liquidity, diversification, and hedging) for the fact that, in markets, all things are indeed not always equal.
In case you missed them:
Stocks, at historically high valuations, seemed a bit jittery heading into yesterday's Fed rate decision and Powell’s press conference... And, per the below, rightfully so.
YTD % change in the price of a gallon of gas:
So, the "magnificent seven" stocks that pretty much explain 2023's rally now represent a greater market cap than every equity market on the planet, save for only the US's:
The odds of this ultimately not ending well are, well... let's just say they're too high for comfort!
As is -- as we've been pointing out of late -- sentiment right here:
“The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. This is especially true at the market extremes. The result is mistakes—frequent, widespread, recurring, expensive mistakes.” —Howard Marks
Dear Clients, in today's snapshot I touch on the typical, and historically-dangerous-to-chase, pull-forward nature of parabolic moves.
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To be sure,
"if patience is a virtue in life, it is an absolute must in trading and investing."
--Randy Finney (technical analyst and trader)
If you tend to think of stocks and your long-term portfolio synonymously, well, if you're a PWA client, I'd say don't! But recognizing that Wall Street has done such a masterful job of engraining such thinking into investor-psyche, the following is intended for those who do.
This morning's inflation data, in the aggregate, came in a touch hotter than expected, but not to the point -- at least in pre-market action -- to derail the equity market's expectation of a mid-year rate cut.
Meanwhile, here are a few key highlights from our latest messaging herein:
Attention clients, please be sure and take this one in when you have a few minutes.
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In our latest economic update I entertained the notion that the recent strengthening in manufacturing sector sentiment might prove to be a head fake.
On Monday, BCA suggested that that may indeed be the case:
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I couldn't agree more with the first line in the following quote.
"Wall Street forecasts what it wants, it doesn't forecast necessarily what's going to happen.
Now, sometimes, what it wants happens and their forecasts are prescient.
What Wall Street wants right now is lower interest rates.
They want lower rates because they see 5% money market rates as competition for the stock market."
--Jim Bianco
Dear Clients, here's a very brief, yet important, assessment to be sure and take in.
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The following from BCA's narrative around this week's US Leading Economic Indicators (LEI) release should sound very familiar to clients and regular readers:
"Indeed, the US economy has been robust and the data do not point to an imminent recession. Financial conditions have eased, home prices have risen and consumer sentiment has rebounded. All these factors are supporting economic activity.
However, our base case remains that a recession is likely in late 2024 or early 2025. Beneath the surface of the resilient labor market, some of the leading indicators are weakening. Similarly, default rates on credit cards and auto loans have risen and the tailwind from excess pandemic savings is fading.
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Not much to add this morning to our weekend video update, except perhaps the following on objectivity, and humility (absolute must-have qualities if one is to be a successful investor) from William Bernstein's outstanding volume The Delusions of Crowds: Why People Go Mad in Groups:
“…the more points of view a group brings to bear on an estimate, the more accurate that estimate is liable to be. Diversity of opinion also benefits the individual as well; as put by F. Scott Fitzgerald, “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”
Over the past three decades, psychologist Philip Tetlock has examined the forecasting accuracy of hundreds of well-regarded experts; he found that those who took into account a wide variety of often contradictory viewpoints performed better than those who viewed the world through a single theoretical lens. In plain English: beware the ideologue and the true believer, whether in politics, in religion, or in finance.”
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In our last video commentary I mentioned the term “stagflation” — a stagnating economy amid sticky, or rising, inflation — as a distinct go-forward possibility.
Well, this morning’s data releases certainly don’t conflict with that concern.
As for the economy side of that narrative*:
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BCA chief strategist Peter Berezin was not in the heavily-crowded recession camp last year... He estimated -- correctly! -- that, despite the plethora of leading indicators screaming otherwise, the consumer's momentum and resources would keep the economy chugging along throughout 2023.
Per the below, his 2024 analysis paints an altogether different picture:
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In thinking through the dynamics of the past few months, I come up with 2 key observations/assumptions.
1. The impressive rally in the equity market last November and December reflexively showed up in some improved data, as it clearly reignited animal spirits among businesses and consumers (the latter in particular).
For example, here are the latest sentiment readings on the consumer:
Conference Board Consumer Confidence:
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