12 Jun Capital 19 Catch-Up

Weekly Index Movement

S&P500	+0.3%
Nasdaq	-0.5%
Aussie All Ords	-0.3%

Much has been written about the current US market rally is due to just the big 7 names but this changed last week.

Since last Friday’s jobs report, the Russell 2000 (a small-cap index) has surged 7%. In a short span of time small caps have gone from underperformers to massive outperformers.

At the end of May, the only decile of market-caps with positive performance year-to-date was the largest 10%

But look at the difference in June. Those same large 10 percent are up 3.09%, but the smallest 10 percent are up 9.18%

Something has clearly changed.

In fact, a few things have changed.

First are interest rate expectations. As recently as last month, the market was still expecting the Fed to cut rates before the end of the year. I could never understand why. That expectation has now changed. The market now expects rates by the end of the year, to be exactly where they are today. With one cut or one raise being the next two most likely outcomes.

That has removed one of my fears. I doubted the rally in 2023 would continue much further as it was driven by tech (typically interest rate sensitive) and the market had the interest rate story wrong. I was waiting on the market coming to the realisation that rates would remain high and tech to fall.

But the market has come around to that thinking and it did not cause tech to fall.

I was also worried that earnings expectations were too high. But they have also come down to more realistic levels, and still the market has not fallen.

I’ve got nothing left to worry about now so I am joining the 100% bullish camp.

What would I buy?

I’d probably play it safe and buy big tech. I’ve been thinking a lot about big tech recently and have come the conclusion it has more room to run.

As an Australian, I love the US market because of the tech sector. We don’t have one and it is one industry that can throw 10-baggers at you faster than Lance Morris in a baggy green.

I’ve realised this fact is true for basically every country in the world. Take Europe. It doesn’t have a serious tech sector either. So if I was a European fund manager, where my local economy was in recession, where do you think I would be parking capital?

The whole world wants big US tech. Which is why the price keeps rising.

If you don’t have exposure, you really should.

Bears back to hibernation

The bear market is now officially over. If you subscribe to the idea a bear market is a 20% fall, then you must also believe a bull market is a 20% rise.

The Nasdaq hit that mark a couple of months back but on Friday the S&P500 also closed over 20% up from a low. The S&P does contain a fair amount of tech, but it has good representation from a number of sectors.

Take a look at this chart of stocks hitting 52-week highs since May 1st broken down by sector

Tech has the most names. But Consumer Discretionary, Health Care and Industrials are also well represented. So much for this rally is just driven by AI.

And this is interesting too.

This is the list of names within 5% of a new 52-week high

Looks like the industrials are starting to make a run for it, so that might be a good place to go looking for a buy.

Oh but what about the recession that is coming Matthew, isn’t everything is going to crash?

Rubbish. There is no recession coming. I’m really fed up with this prediction. You can’t have a recession while everyone has a job. If people have jobs, they earn money, and if they earn they spend. If they have a job they can also access credit, which they do, and spend more.

Only a rise in unemployment can trigger a recession.

Technically we could have a recession at the same time as record employment, but it would be so mild as to be non-existent.

I believe the reason we have record employment is due to work-from-home. All those employees who work from home are only producing half as much as an employee in the office with a manager watching them. So you need twice as many employees to get the same work done.

Until office attendance picks up, there will be no recession. But Google announced plans last week to begin more strictly enforcing its policy that requires workers in-office at least three days a week. The updated policy includes tracking office badge attendance and possibly factoring it into performance reviews.

I’m keeping an eye on this trend but any real changes are a long way off and nothing to be concerned with now.

Next week we will get inflation from the US on Tuesday and the Fed will announce interest rates on Wednesday.

Inflation is expected to be +0.4% month-on-month. But the long-term trend is definitely down.

The market only places a 30% chance the Fed hikes rates this week. The other 70% is a pause. But it also thinks there is a 100% chance of one hike by August (next meeting). So it doesn’t really matter if the Fed surprises this week with a hike. The market will just say that is the last one and pause next time.

The story in Australia is quite different.

The RBA raised rates by 25bps last week, surprising everyone except readers of this missive. The Canadian bank also surprised with a 25bps rise.

The RBA minutes mentioned inflation no less than 15 times. This is Australian inflation

I suppose I have to admit that it isn’t still going up, but the picture is far worse than the US. Because we have been so slow to raise rates. The Fed has done 10. That includes four lots of 75Bps and two of 50bps. The result is down-trending inflation.

The RBA has been weak and dancing around like a ballerina. Inflation has been laughing at them. They still have a lot of work to do to cause a significant shift.

So I bet they were really happy to see the Labor government raise the minimum wage by 5.75%. That will pressure all employees to ask for a rise and with such tight labour markets, companies will agree.

Then we have the new rule that overseas students can only work 48 hours in a fortnight. Most of these students are working in hospitality. That means pubs and restaurants will have to find more employees to cover the same number of shifts. How do you find even more employees when unemployment is at record lows? All you can do is offer more money to pinch them from a competitor. Then to cover that rise in wages you add $2 to every paying customer.

Reminds me of my favourite Simon & Garfunkel song

Hello inflation, my old friend
I’ve come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains
Within the sound of rate hikes.

or something like that.

Australia is going to splinter. All those with debt who were withdrawing equity from rising investment properties in 2021 to fund the new car purchase are going to have to really tighten their belts. Expect to see a lot of low mileage Landcruisers on the secondhand market. No more eating out. This means restaurants don’t need the staff they just paid more to get.

Whether it balances itself out or ends in a crash is yet to be seen. But I can’t find anything appealing about Australia.

Except for our coal mining companies of course. All those who took my advice and bought New Hope last week at $4.80 are already sitting on 12% gains with the stock now at $5.40. It never stays down for long so if you see a dip again take advantage fast.

You will probably get a franked-up income of $1.14 from dividends in the next twelve months. On the $4.80 entry price that equates to a yield of 24%.

Or, of course, you could have bought Gold because there is a recession coming. You will be getting no income at all and you would be down 0.3% now

It always pays to be bullish

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.