19th February 2024

Weekly Index Movement

S&P500-0.4%
Nasdaq-1.5%
Aussie All Ords+0.3%

Last week the US market had a little wobble when the January inflation numbers came out. Inflation in January was down to +3.1% from the +3.4% of the prior month. But core was up +3.9% yoy and is showing persistency. Most of this is down to the shelter component (which came in at +6%) and is basically responsible for the whole figure.

The shelter component is a weird calculation based on what people think it would cost to rent their own home. Does not sound very technical to me and quite why they do this I have never understood. But that is the way it is done in the land where the girlfriend of a football player in the final gets more screentime during the final than the player himself.

There is even a theory running now that Taylor Swift dating a footy player who has his own podcast is part of a psyop to get Biden re-elected. Oh, I want to believe this one so much it hurts.

Back to reality. This little stock market wobble is all because traders said “oh, maybe we won’t get 6 interest rate cuts this year” and pared back expectations. It is all rather ridiculous how far in excess the market always gets things. Then one day it has a think about how silly it has been and reverts to the mean.

Why don’t we approach things unlike the US Labor Department and try to be somewhat scientific in our approach to analysing what is happening.

First, I started to think, what happened in the past when the Fed came to the top of an interest rate cycle? (I am assuming here we are at the top. But that is a fairly safe assumption)

There have been 4 distinct interest rate tops since the early 1990’s. Here is a table of what happened to the S&P500 after the last raise.

Well, it looks like stocks generally have a good time once interest rates top out.

The S&P is presently up 8.5% since the last rate hike, 7 months ago, so is on track with history and if history is any guide then we can expect even more gains in the next 5 months.

This shows it does not take a drop in rates to lift stock prices. All it takes is rates to stop going up. Which is where we are now.

The other major impact on stock prices is earnings and FactSet just released the 2025 numbers. They put this together by taking the analyst earnings expectations for each individual company in the S&P500 and adding them up to get an index level figure.

Remember the stock market is forward-looking, so what is going to happen next year is far more important than what happened last year or even for this year.

Three points about this data

First, you can see earnings do not go up in a straight line. They move in fits and starts. It is more like a staircase than an escalator. You often have a period of 2-3 years of relatively flat earnings and then a couple of years of growth before it goes flat again etc.

Second, analysts see a significant improvement in earnings in 2024 and 2025

Thirdly, everyone knows these numbers are too high (same as the idea for 6 interest rate cuts), but the absolute number is not important. Just the direction (that is true for interest rate cuts too).

Earnings are going up next year which means stock prices will go up in advance of that, ie this year.

You will know by now that it is really Big Tech driving all the growth in these numbers. The most recent story I keep hearing is, we are in a bubble just like the 1990s and it is going to burst.

OK, thanks for that opinion based on nothing. Why don’t we try and look to see if it is like the 1990s.

It is hard to do direct comparisons because price levels are different, but we can look at rate of change to see if things are moving in a similar fashion. Here is a whole set of different rate of change comparisons to look at. I’ll let the bears pick whichever one they want and ignore the rest.

As you can see. The current moves in the Nasdaq are nothing at all like the 1990s. In fact, these charts make it seem like the index has hardly moved. And indeed, if you consider the past two years, it hasn’t done anything out of the ordinary. The Nasdaq is up 19% in the last two years. Considering 10% per year is the norm, all we have seen is the norm.

Stock prices can, and likely will, go a lot higher before we even need to start considering a bubble.

I don’t know who it is that thinks we are in a bubble. Maybe it is the same guys that came up with the wonderful idea of asking people what they think, then making it the biggest part of an official inflation number. Just imagine what would happen in Australia if our measure of inflation was to grab a few people on the way out of shops and ask them to guess how much they think what they just paid was compared to a year ago.

Or maybe it is these guys. This is an email I got this week. You have probably seen similar yourself.

U.S. Dollar to Collapse in 2024 – Secure Your Assets Now!

The writing’s on the wall: The U.S. dollar is set for a tumultuous 2024. Experts predict a consistent weakening of the dollar as the Federal Reserve winds down its interest rate hikes. This isn’t just a minor fluctuation; it would be a seismic shift in the financial landscape.

Here’s what you need to know: As interest rates drop, the allure of dollar-denominated assets fades. Investors are already on the move, seeking opportunities with better yields as the dollar loses its grip.

But what does this mean for you? Your hard-earned savings, your investments, your retirement plans – all vulnerable to the dollar’s instability.

There’s a silver lining, though. This isn’t a time for panic; it’s a time for strategic action. There are assets that not only can withstand this turbulence but actually thrive in it. The Big Banks don’t want you to know about them because they can’t profit from them. But, you can!

Want to know the secret to securing your wealth against the dollar’s decline? Click here to discover the asset that could be your financial lifeboat in 2024’s stormy economic seas.

Ooooh. Sounds serious. Maybe I should pay attention to this guy who makes outrageous claims with absolutely nothing to back up his statements. After all, the writings on the wall for the US dollar. I read it in an unsolicited email so it must be right.

Would it surprise you to hear this email came from a company that sells investments in physical gold?

The sad thing is, a lot of people will act on this because of the language patterns he has used.

Always ask – where is your proof? What happened the last time interest rates dropped? Ask for reasons and please do not let these shocking emails get you off track with your investments.

Max Brooks is famous for saying

“Turn on the TV,” he’d say. “What are you seeing? People selling their products? No. People selling the fear of you having to live without their products.” …

The email example above is a classic example of exactly what Max was saying. Anytime you see something that tries to scare you into making a purchase…….you know it is just a marketing ploy to get you to part with your funds. Hit the delete button.

The same thing is happening with the bears now. They tell you a scary message (probably because it benefits them somehow) but have no proof to back it up.

Stay positive and stay long.

Ps – interesting fact…….every one of the magnificent seven big tech stocks has a market valuation higher than the entire ASX200. Kind of puts our market in context.

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.