09 Dec 9th December 2024
Weekly Index Movement
| S&P500 | +1.0% |
| Nasdaq | +3.3% |
| Aussie All Ords | -0.1% |
More gains from US tech last week saw indexes hit new all time highs thanks to a goldilocks US employment report.
Somehow this report showed an economy that is still growing and adding jobs (October and November numbers were revised higher too) but at the same time as adding jobs unemployment ticked up from 4.1% to 4.2%.
The Fed say they watch unemployment so this uptick was enough to make traders think the Fed will cut by another 25bps next week. But then expectations are to be on hold in January and maybe another cut in March.
It got me thinking this market might be getting too excited and is looking for too much perfection. Interpreting this report as a perfect combination of a growing economy yet also reason for the Fed to cut is very bullish. Maybe too bullish.
But momentum is the strongest driver of stock market returns so I’m happy to stick with the too-bullish bulls for now.
At the other end of the spectrum we have Australia.
There was a quote in the Australian Newspaper last week from Cherlle Murphy of EY
“Sad Economy Without Much Hope”
Most of the talk has been about the seven quarters of negative per-capita growth
Headline GDP is positive, but only because of immigration and government spend.
Australian companies are just not investing in their future.
I don’t know where it ends, but I doubt it ends pretty. I can’t see a way out for Australia except that at best we just bumble along going nowhere and creating bigger and bigger divides between have and have not.
I can’t see the RBA cutting rates anytime soon. I can’t see where any growth will come from. I can’t see China suddenly decide to buy more from us either. We don’t any any tech sector to speak of.
It’s all just too hard to try and make money from Australian stocks. So I won’t. Yes, there are a few that offer dividends, but even those are not particularly consistent diviends. Any company with a consistent dividend gets bought up so the yield drops to 3% and you are better in cash.
It’s too hard to make money from Australian stocks so I’ll just stick to the US and the easy way.
Or maybe I’ll just give my money to Warren Buffet to manage.
Who would you rather have Warren Buffet manage your money or just invest it in an index?
For the sake of this little exercise I am going to use the share price of Berkshire Hathaway A Class as a proxy for giving my money to Warren Buffet. His A class shares are changing hands at over $700,000 each by the way.
An investment in BRK-A 5 years ago would have yielded a return of 103%. A 10 year investment would have returned 297%.
Increasing your wealth 4 times over a 10 year period is very impressive and is why he is acknowledged as the best in the world
Or, you could have just bought an ETF – QQQ. This tracks the Nasdaq 100 index.
Returns from doing so would have been
5 years = 248%
10 years = 500%
How can an index perform better than the world’s best?
There are a number of reasons. Chief amoung them is what is in the Nasdaq 100 index.
Today’s share price is a representation of future cash flows of a company. If one could accurately predict the future cash flows then the share price would not change, since investors would know the future and therefore there would be no surprises. There would be nothing to cause the share price to rise because rises only happen when something changes, usually a company makes more money than expected or investors expect a company to make more than expected.
Dispruptive companies are very hard to value as it is very hard to predict the future for something that is causing huge change. Investors tend to undervalue them and the Nasdaq is full of tech companies that are disrupting industries.
Another reason is the natural rebalancing that happens with an index. Most indexes are market cap weighted meaning each company that comprises that index has a different weight in the index and therefore a different impact on the index performance. As the share price of a company increases so too does it’s market cap and as that market cap increases so does its weight in the index
Consider Nvidia. 2 years ago it was the 7th highest weight in the index. Then along comes AI to disrupt things. The share price of Nvidia starts to head higher and its market cap increases with it. Today NVidia holds the number 1 spot in the Nasdaq index and therefore has the single biggest impact on the index performance.
What this means is that over time the most successful companies become a bigger and bigger part of the index. It is like running a portfolio and adjusting the weights of holdings in your portfolio to place more importance on the greatest winners.
The beauty of QQQ is all of this happens for you without you lifting a finger. You get all the best distruptive companies and the best performers get the highest weighting for you.
It is very hard to consistently beat the performance of QQQ. So hard that even Warren Buffet cannot do it. You could make a very good argument to say you are better off just buying that and not worrying about individual shares.
Update on Soundhound – SOUN
I can’t remember exactly when I first highlighted a company called Soundhound to you. It would have been around June of 2024 I think and the stock was trading around $5 to $6.
For those that do not know, Soundhound uses AI for voice and their software was being used in European cars so you can tell your car what to do instead of pressing buttons.
The stock price has been rising and took another jump last week because it announced Torchy’s Tacos has installed the SoundHound voice ordering system in all 130 of its stores.
Apparently this AI has been trained on the entire menu enabling it to understand even the most customised orders but also other information such as store hours and allergy information.
Imagine what an AI means for Torchy’s as opposed to staff. No sick days, no time off, no complaints, no need for HR etc. You can see why it is appealing to Torchy’s. It can also understand a myriad of different languages.
I do feel sorry for the people it will replace. Mainly the uneducated or students. But no job is ever 100% secure.
This deal sent the stock up to $15. Imagine where it goes if someone like McDonalds picks it up.
You can still buy it now. Yes it has jumped, but this is still the very early days of the product.
Lastly this week something that amused me from the media.
S&P500 Year End Forecasts 2025
I wonder how much these analysts get paid to make these forecasts because I feel like they are not putting much effort in. Or maybe it is because they don’t have a clue
What would your guess be if I told you the index is presently at 6095 and the long-term average is 10% per year.
Is it possible you would do a simple calculation of 6095 * 110% = 6704???
There you go, that’s all you need to know to have as good as guess as the analysts at Bank of America et al.
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.