12 Feb 12th February 2024
Weekly Index Movement
| S&P500 | +1.4% |
| Nasdaq | +1.9% |
| Aussie All Ords | -0.6% |
Another week and another new record high for US stocks. The S&P500 index finished the week over 5000 for the first time ever.
Stocks are certainly not cheap, but there is still room for them to continue higher.
This chart from FactSet is a way of valuing the index using a PE ratio and 12-month forward earnings
Using this method the average PE ratio of the last 25 years in 16.4. Right now the index is sitting on a forward PE of 20.3. But, history shows that this index can see a forward PE of over 22 in the bull markets of 1999 and 2021. So, even though stocks are relatively highly priced does not mean they cannot go higher. Indeed, we could go 10% higher and still be within prior valuations.
Despite the market experiencing a relentless march higher since October, institutional money has been mainly on the sidelines according to State Street.
This measure of risk appetite of institutional money by State Street shows the big money followed the market higher from October to December, but has become less willing to buy in January. That means there is still money sitting on the sidelines that can come in and push stocks higher. The fear of missing out must be growing in this crowd and I doubt they can afford to stay on the sidelines for long.
But this rally has not occurred in all sectors. It is mainly just Technology, Health Care and Industrials. One way to measure how many stocks are participating in a rally is to look at how many are trading above their 50-day moving average. When you look at the S&P500 index constituents, only 60% of them are above their moving average. That means fully 40% of stocks are trading sideways to down and shows the importance of getting your sectors right.
If you are wondering why your portfolio isn’t making new highs at the same time as the market, it is because you don’t hold the right stocks. You need to be heavy tech. You could add Health Care in for some diversity and the only other place to really look is Consumer Discretionary.
That being said, I do like to maintain an allocation to Energy because it forms a beautiful hedge against geopolitical shocks. Like what we are seeing in Gaza and the Red Sea. The Houthi rebels have disrupted shipping through the Suez Canal. That means ships must go the long way round and days rates for vessels are soaring.
You might recall one of my recommendations from last year being Ardmore Shipping (ASC). That is a good way to take advantage of this and you could also take a look at International Seaways (INSW). This is an interesting sector as there is little to no investment in new ships. Limited supply keeps prices high, and as you can see, it doesn’t take much to disrupt global shipping and send prices soaring.
Talking of soaring, we saw a few stocks do just that last week.
First was META. Their numbers were good showing increasing ad spend and also improvements in monthly users. That sent the stock 20% higher in a single day. This is a one trillion dollar company behaving like a meme stock on some good news.
Then we had Palantir (PLTR). A 50 billion dollar company that jumped 42% last week when they announced earnings and said AI will drive further revenue next quarter.
Lastly, ARM Holdings, maker of computer chips that can be used in AI. It is a 120 billion dollar company that jumped 53% on earnings. ARM achieved revenues of $824 million, marking a 14% increase YoY compared to the same period one year earlier. ARM puts this down to the demand for AI chips and forecasted higher sales next quarter.
A 53% increase in value based on a 14% increase in revenue does not add up. It should not have gone so high and only did so because of the markets obession with buying anything AI related. Bubble? Maybe. But these bubbles can last a lot longer than you expect and AI is still very new.
You need to have exposure to it. But I wouldn’t be buying ARM after that jump. Stick with Big Tech and you can’t go far wrong.
American politics is getting interesting. Special Counsel Robert Hur released his report on the investigation into Biden holding classified documents in his home. Basically the same as Trump was criminally charged with. Except, this time, they are not bringing criminal charges againt Biden. Why? Because Biden would probably be found not guility due to………….
“Mr Biden would likely present himself to a jury, as he did during our interview of him, as a sympathetic, well-meaning, elderly man with a poor memory”.
In remarks at the White House Thursday evening, Biden denied that he improperly shared classified information and angrily lashed out at Hur for questioning his mental acuity, particularly his recollection of the timing of his late son Beau’s death from cancer.
Biden then promptly gave a speech and confused the presidents of Mexico and Egypt.
It is too late for the demoncrats to change Biden as their nomination for the upcoming election in October. Unless he resigns now and Kamala Harris takes the helm. Which I suspect is likely to happen soon.
It won’t make any difference to stock markets but it is an interesting story.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.