04 Mar 4th March 2024
Weekly Index Movement
| S&P500 | +1.0% |
| Nasdaq | +2.0% |
| Aussie All Ords | +1.4% |
Another week another new closing all-time high for the S&P500 which is now at 5,137. It seems only a couple of weeks ago the index was crossing 5,000 for the first time and now we have gone through 5,100.
There’s not much to say about the market’s recent strength that hasn’t already been said. Since that low in October, the index is up over 1,000 points. 1,000 points isn’t what it used to be but I remember back in 2008, looking at the index when it was under 700. It took 50 years for the index to rise to 1,000 points and just 5 months to add the latest 1,000.
For the month of February, the S&P500 gained 5.2% and as has been the theme for around a year now, growth outperformed value and large-cap outperformed small-cap
Core inflation came in at +0.4% for the month which puts the annualised number at +2.8%.
After being somewhat stable in January, both short and long term interest rates rose noticeably in February. The two-year went from 4.25% to 4.64% and the ten-year went from 3.87% to 4.26% as markets re-priced rate cut expectations from 5 or 6 to 3 or 4. A much more realistic number.
Last year rising rates would have hurt stock prices. Now markets are convinced corporate earnings power is improving so ignores these moves in rates.
I always think of situations like this as the mid-cycle part of a bull market rally. Of course there will be little bumps, but this market can continue on for quite some time yet.
Long Run Price Returns
This week I want to take a look at long-run (3 year) price returns for US Stocks. This is a 3-year rolling S&P500 price return back to the start of 1974.
Looking at this, a few things stand out.
First, 3-year returns are very rarely negative. 89% of these data points are above zero.
If you change your outlook to 3 years, it means no matter when you buy, in 89% of instances you will be ahead after 3 years. I know you want to be ahead after 3 days, but if you can change your outlook to 3 years you will rarely be unhappy.
Second, the average 3-year return is 29%. If I told you that if you made this investment, in 3 years there would be an 89% chance you would have a profit and on average your profit would be 29%, would you want to invest in it? Pretty attractive hey?
Third, a double is a bubble. Note the 4 instances of 100% returns in a 3-year period. It is a pretty good indicator of major market tops. Watch out for it in the future.
Fourth, right now, we are only at a 3-year return of 31%. That is very close to the long-term average and nowhere near the 100% that marks a market top.
There is no evidence of a bubble and the bull market could continue a lot higher before we should be thinking of major market tops.
Apple News
For about a decade Apple has been working on producing an electric car. Last week they announced they will can the project and instead focus on AI.
Apple cited concerns about profitability and ongoing expenses as factors in the decision. This comes after the most recent news that they have changed plans to limited automated driving by 2028.
This news has a few implications. Firstly the market liked it as the stock went up 1%, but to me it signals that Apple is in retirement. Gone are the days of pushing the boundary and creating inovative products. We are not just another large industrial with decent sales from an existing product. It bit like a 3M.
I see this all the time. Some brilliant founder with great ideas starts a company. Those ideas fuel the company to great things. But at some point he retires and they put in a caretaker CEO. A caretaker CEO just keeps things ticking over without really producing something new. Here is a question for you – what new products has Apple created since Tim Cook became CEO?
Cook came in as CEO in 2011. Apple released the watch in 2015 and airpods in 2016. But as you can see from the above story, these products were probably in the design stage a decade before that. I suspect Jobs had the idea and Cook just finished the product.
It means the days of rapid growth are behind Apple. From here it will just grow slowly. And so will the share price.
The market agrees with me too, as Apple trades on a trailing PE of 28. Compare that to Nvidia which has a trailing PE of 66. You can see which company the market thinks will grow faster.
Apple could still have a place in your portfolio. It could occupy the stable blue chip that offers low volatility and average growth. But do not look to it to be a growth engine to power outsized gains.
This story also re-inforces my belief that Tesla is well overvalued. Falling profit margins, slowing sales, increasing competition and a PE of 46. No thanks. Tesla is a play on automated driving. As a just another car company, the share price should only be about 25% of what it is. If you believe automated driving is coming and Tesla will be the one who cracks it then you can justify a purchase. If, like me, you think automated driving will take a lot longer (10+ years) to become accepted then Tesla is overvalued and you would avoid it.
Doom and Gloom Dimon
Regular readers will know that I do not like the CEO of JP Morgan, Jamie Dimon. All he ever does is predict downturns and recessions. He was at it again last week, saying he sees a 50% chance the economy goes into recession this year and he thinks the market does not recognise this risk and is overbought
I shouldn’t blame him too much though. All bankers ever do is worry about who they have lent money to. They sit around boardrooms and do “what if” scenarios. All the “what-ifs” are bad scenarios. What if we do have a recession? What if Middle East tension escalates? What if the Labour government in Australia amends the enterprise bargaining agreement and then 2349 construction companies fold in a year? (That last one is true by the way)
All this negative thinking rubs off on bankers who become fearful of everything.
However, being fearful does not lend itself to successful stock market investment. You must be glass-half-full to profit from stocks. Maybe this is why Jamie sold $150million of JPM stock, just as it hit new all-time highs
But he isn’t alone.
Jeff Bezos sold $8.5 billion of AMZN
Mark Zuckerberg sold $428 million of META
The Walton family sold $1.5 billion of WMT
Do these guys know something we don’t?
No. These sales are a drop in the ocean. They have no relevance, other than planning their European summer vacation.
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.