Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+1.2%

Welcome to 2023.

Thank goodness 2022 is behind us and we can all reset our investing clocks and get excited about making profits this year.

The US S&P500 was down 19.4% in 2022. Mind you it was up 26.8% in 2021 and 16.2% in 2020 so let’s all try and remember that after big gains some kind of easing was always going to be likely.

The Australian All Ordinaries index has given us +0.7% in 2020, +13.5% in 2021 and -7.1% in 2022. Same direction, just smaller moves.

Since 1957, the S&P500 has produced 17 negative years. The good news is the year after a down year has seen gains 14 times and a second year of losses just 3 times.

The odds favour the bulls in 2023.

So why is everyone still so negative? Blah, blah, recession, blah blah is all I am hearing.

I don’t agree. You simply cannot have a recession when employment is so strong.

US employment numbers on Friday were very strong. The economy added 223,000 more jobs in the month of December. That is a lot and comes on the back of 2 years worth of incremental gains. The unemployment rate is now at 3.5% – an all-time low.

Until something changes here, the US will not have a recession. Even if a change comes, we will have plenty of warnings. The world’s largest economy will not go from record employment to 5% unemployment overnight. We will have more than enough time to adjust should things start to weaken. We will keep our eye on this in case we are wrong, but for now, there is no reason to worry.

The positive start to 2023 seems to have come about from China reopening. Chinese equities have already added 10%.

The strange part is oil hasn’t increased. China is the world’s largest importer of oil and I expected to see Oil march higher as they got back to normal. This has not happened. Oil is still down at $74 / barrel.

The reason is probably due to the number of Chinese Covid cases. As we saw here in Australia, it takes a couple of months of before cases peak and citizens return to normal activity, restrictions or not.

Covid causes fear. Fear stops activity. I caught up with an old friend from the mother country over Christmas. He has sold his house and returned home to care for his aging parents. But he is so scared of Covid, he refuses to enter any building other than his house and only meets people outside where he can maintain a safe distance.

I can’t decide if he is sensible or overdoing it. But either way, he is not operating as usual. Australia did a similar thing and even now as I look out of the office window, the city is not what it once was. But it is livelier than I have seen it also.

China quiet for another couple of months would not surprise anyone. But they will eventually overcome their fear and activity will increase. When this happens the oil price will go with it.

I am still very bullish energy. It was this view that saved my portfolio last year and I see no reason to change yet.

Take a look at your portfolio and add some oil/coal exposure if you don’t have any. If you do already, well done, now go out and buy more as you won’t regret it.

On Thursday this week the US will announce Consumer Inflation for December. Last month it came in at 7.1%. Consensus for December is +6.6%.

I was thinking about these numbers and why we measure inflation compared to a year ago. If inflation does come in at +6.6% it means prices are up +6.6% since before the war started in Ukraine and sanctions were imposed.

But that war changed many things all over the world.

Maybe a better way of measuring inflation would be compared to six months ago. If we do that then this inflation number would be +1.0%.

The US has basically had very little inflation since July 2022.

You can see that in the month-on-month graphic above.

Yes, we had lots of inflation in the first half of last year. But then it stopped.

The Fed has increased interest rates 7 times.

Looking at the chart above, do you feel they have an inflation problem or would you say that problem has gone away?

Given the recent trend of low month-on-month numbers, inflation will be back to 2%, or near enough, by July this year.

I think inflation was a 2022 story and will not be a problem in 2023.

As I stated at the start of this Catch-Up, it is rare for markets to have two consecutive down years. Everything points to a positive 2023.

Except valuations.

Let’s take Apple (AAPL). Apple is a company that everyone should own in their portfolio. Or should I say, that everyone should have owned for the last 10 years.

Apple stock fell 31% last year. Does that mean it is cheap now? It was $170. Now it is $130. That’s cheap right?

Well, actually, no. Apple is not cheap. Cheaper than it was, yes. But not cheap. Apple has been a lot cheaper than it is right now and can easily become cheaper over the next six months.

The price of a stock does not really tell you anything on its own.

When you buy a stock you are buying the future earnings of that company. To work out if something is cheap or not you need to work out how much you are paying for those earnings.

That’s where the PE ratio comes in.

To work out how expensive or cheap a stock is, you take the price of 1 share and divide it by the Earnings Per Share for the last 12 months. That is the PE ratio.

Here is how the PE ratio of Apple has changed over the last 15 years or so.

For 10 years Apple stock traded for a PE of around 14. During that time the stock price actually rose by 25% per year for a decade.

Then along came the pandemic and zero interest rates. The PE ratio rose significantly. it averaged 26 between 2020 and 2022.

Today it sits at 21. That is a lot better than it has been, but for it to get back to that 10 year average of 14, the stock price would need to fall by another 24%.

It’s worth remembering that, unlike the mid-2000s, Apple is growing much slower today. Over the past three years, revenue has risen at a 10% annual growth rate and EPS by 16%. During 2006-2009 period of comparable PE multiples, those numbers were 29% and 53%. Even the much lower multiple period of the 2010s saw revenue rise faster at 19% alongside 25% per year EPS growth.

In other words, current multiples are elevated verses history for a business that is growing slower than it was in the past.

I know you all love Apple. But stocks are not for falling in love with. They are purely investments so you can spend more money on what you truly love.

If you can forget the above relates to Apple, and instead reread all the above, then ask yourself if you want to buy this company today, what would you say?

Whilst I am on the topic of stocks you love, how about Tesla (TSLA)? It is down 67% last year. But still trades on a PE of 36. Ford (F), in the same industry, trades on a PE of 6. General Motors (GM) also trades on a PE of 6.

Is Tesla cheap after its 67% fall or could it get a lot cheaper still?

From 2017-2019 Chevron (CVX) traded with an average PE of around 18. Today it trades on a PE of 10. Even though the stock price is close to all-time highs of $180, could it go higher? Yes, it certainly can and I’m betting it does.

At some point this year, the bear market will be over. That will either come when we have certainty over Fed actions or with a big sell-off that wipes the slate clean.

My bet is things get incrementally better each month, inflation slows and hits target by mid-year. The Fed has two more increases left (which they don’t need to do). Then they will hold rates steady for some time. Companies will reduce costs and maintain profits before the next growth cycle hits

There will not be a big sell-off. Conditions will improve. But some stocks are still overpriced, particularly in a 5% interest rate environment. Others are underpriced despite big increases last year.

Continue to stick with value and dividends for now. But get ready, because a new bull market will be born at some point this year.


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.