27 Aug Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +0.8% |
| Nasdaq | +1.7% |
| Aussie All Ords | -0.5% |
We are still seeing a good bit of volatility but at least we got some gains last week.
Fed Chair Powell spoke at Jackson Hole. (interesting fact, Jackson Hole has been the venue for this meet since 1981. Prior to that it was held in a number of different locations. But in the 80s, then Fed Chair Paul Volker insisted on Jackson Hole so he could go fly fishing.)
Powell didn’t say anything unexpected – There is still work to do to beat inflation and Rates will stay high for a long time.
As he didn’t give us any direction, we need to figure it out for ourselves.
When you look at the fundamental drivers of any asset class the often murky picture becomes a lot clearer.
It really is quite obvious to me which stocks we should be buying and which we should be avoiding.
There is a real problem for a lot of old school companies. And that real problem is real interest rates.
Real interest rates refer to the difference between the interest you receive on an investment and inflation.
Take the US 3-month Treasury bill, yielding 5.30%. That means you can get a 5.3% annualised return from a risk free asset.
US inflation is running at 3.2%, which means your real return on this risk free asset is 2.1%.
Consider an income investor. You could buy trash like CBA stock at the top of the cycle with a dividend yield of 6% even after franking and the prospects of rising bad debts and equity market risk. Or you could get a risk free 5.3%.
What would you choose?
Money goes to where it earns the most for the least risk.
High interest rates are causing income seeking investors to switch out of risky equities and into safe cash products that earn more with less risk. Which is a very sensible move.
That cuts out the income segment of equities, leaving us with Growth.
Do you choose small-cap growth or large-cap growth?
Small growth companies usually need funds to power their growth and the cost of obtaining those funds has risen significantly. But they can always just raise equity instead of debt right?
Well, the equity pool of capital is diminished. When interest rates were zero money went looking for a return and there were plenty of investors willing to fund growth companies. We lived in a period of TINA. There Is No Alternative. Growth stocks flourished.
We now have TIAN – There Is An Alternative.
Imagine your average large family office. They saw their wealth explode in 2021 funding growth start-ups. Then they watched it collapse in 2022. 2023 rolls around and they are gun shy, but can get a real 2.1% return with zero risk. That’s very attractive as they lick their wounds.
It’s been over a decade since we had real no-risk returns like this.
So small-cap growth isn’t the place to go now either.
Which just leaves large-cap growth.
There will always be investors out there seeking growth and they are all going after large-cap growth in this environment.
One look at the size of the companies at the top of this list tells you this theory is correct.
Until the environment changes, money will continue to seek out the same home. Just stick with them and buy any weakness.
When interest rates start to fall the small-cap growth will be the place you want to be. And maybe also some income equities. But we are a long way from that.
As some inspiration for you……….
What do most of these have in common?
Mostly tech stocks.
Microsoft was a massive company 10 years ago. Who would have thought you could 10-bagger an already massive company? But there you go.
While we are on the topic of tech, Nvidia announced profits last week.
Nvidia reported record sales in its latest quarter and projected that surging interest in artificial intelligence is continuing to propel its business faster than expected. Revenue for Nvidia’s fiscal second quarter was $13.51 billion, the company said, more than double the amount a year ago and far ahead of analyst forecasts in a FactSet survey. Net profit was $6.19 billion, also ahead of Wall Street expectations. Signaling that the boom in AI investments isn’t moderating, Nvidia said revenue in its current quarter was estimated at around $16 billion, also exceeding analysts’ expectations by about $3.5 billion. That figure would set another record for the company and would be more than double the same period a year earlier.
Amazing stuff.
There are only two types of investors. Those who bought NVidia on the AI hype this year and those who wish they had bought NVidia. I fall into the latter category as I refused to pay the multiples the market wanted. I underestimated the power of decreasing growth opportunities concentrating buying in an ever decreasing circle of names.
I’m still not buying it for the same reason so I expect I’ll be writing about the one that got away in 10 years when it is a $10Trillon company.
Mr. Market’s obsession with all things Nvidia and its AI stock ecosystem is throwing accelerant on a growing fear of missing out among investors.
I saw a quote by Buffet recently about his worst investment. What he said has me reconsidering my take on NVidia. He said he does not regret buying any company, after all, the most you can lose is 100%. His biggest mistakes are not pulling the trigger on some that would have gone on to deliver 1000% gains had be bought them.
Maybe I should be taking a position in NVidia. Even at these ridiculous prices.
As we draw to the end of August and start looking at September, it is worth remembering that the S&P 500’s average performance during the month of September has been a decline of 0.73% with gains just 44% of the time. February and August are the only other months that the index has averaged declines, but no other month has been down more than half of the time.
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.