Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+1.6%

Inflation Cools and Small Stocks Rip

US inflation was announced on Tuesday and came in at 0% for the month and 3.2% for the year. That is the lowest reading since September 2021 and boy-o-boy did stocks react

Large cap indices added 2% but the small caps let fly and added 5%.

It was lower energy costs that held inflation back with energy prices dropping 2.5% month over month, driven by lower gas prices, which dropped 5% during the month of October.

Take note. It was lower energy prices that drove this low inflation number.

Let’s have a think about this. Energy costs are the main problem we have high inflation. Energy costs are high because we are trying to transition from carbon-based to green. What would happen if we didn’t do that? What would happen if we encouraged the coal and gas industries? Greater supply would mean lower prices, lower energy means low inflation and low inflation means low mortgage payments.

Unfortunately, the powers that be are idiots and this won’t happen. So we will continue to struggle with high energy prices. You know my approach to dealing with it. Own the energy and get massive dividends to increase your income. That’s why I keep buying Oil and Coal companies.

Only the rich can afford to drive a green agenda. When you don’t have to worry about money you can find something else to worry about, like climate change. Too bad if you can’t afford it. Australia makes up 1.1% of the world’s carbon production so clearly, we need to suffer as much as possible while China, at over 30% of the world’s carbon production continues to build more coal-powered energy generators.

But I digress.

What was important last week was the market’s reaction to that inflation print. Yes, it was lower but was it enough for a 5% buying spree in small caps? I feel that was overdone at this stage as it is too early, but you can see the tone of the market. Any small excuse is enough for big gains.

Does that seem like a bear market to you? Do traders think there is a big problem coming? Or maybe they think that conditions continue to improve and we are just at the start of a new bull leg higher?

Expect further gains before this year is done.

Morgan Stanley 2024 Outlook

Morgan Stanley have released their 2024 outlook.

They predict the Fed will make large cuts to interest rates over the next two years as inflation cools. MS think these cuts will start in June of 2024 and again in September and then at every meeting from Q4 onwards to end at 2-2.5% by the end of 2025.

Now, this is a prediction so I don’t know why I am wasting my time writing about it, but let’s use it as a thought exercise.

Why would inflation fall so far that the Fed can cut rates in 6 months’ time?

The only reason I can think is because the economy cools fast.

Seeing as GDP came in at 4.9% last quarter and is forecast at 2.5% this quarter, that means something horrible happens in the first half of next year. That would be a big and sudden change.

The thing that happens is so big that it causes the Fed to change their forecast from high stable rates to thinking they need to drop rates to get things back on track.

Sounds pretty much like a recession prediction to me.

Far from being a concern, this would be a good thing. Recessions cause companies to cut costs. That increases profit margins. The Fed cuts rates making money more freely available, that money gets spent and revenues rise for corporate America. With their now higher profit margins, companies produce record earnings and stock prices rise accordingly.

Take a look at this and consider how it would have gone buying every recession, marked by the grey bars.

The red crosses mark low points in the index. Notice how they coincide with recessions.

That MS forecast has the Fed cutting rates throughout 2024 and 2025 so they obviously think the downturn will last some time.

I actually hope they have this right as there will be big money to be made buying when everyone else is selling. But, unfortunately, their forecasts are about as accurate as a blind darts player so I doubt we will get such luck.

While I am on this topic, Goldman Sachs (GS) forecast is for the Fed to cut rates by 2.75% next year, beginning in March. Barclay’s doesn’t expect the Fed to cut until December.

Looks like all the economists agree, the Fed will cut rates next year.

Normally, I would tell you to do the opposite and position for higher rates. But this time I think they might be right.

Consider these data points from last week:

  • US Retail Sales fell for the first time in seven months.
  • Delinquent commercial real estate loans at US banks hit the highest level in a decade
  • Continuing US jobless claims hit a near 2-year high and marked 8 consecutive weeks of increases.
  • Home Depot warned of a bumpy road ahead with a first annual sales decline projection since 2009
  • Walmart CEO “we may be managing through a period of DEFLATION in the months to come”
  • Auto loan delinquencies amoung subprime borrowers reached a nearly 30-year high in September
  • Average credit card balance hits a 10-year high at over $6,000

It all points to a slowing economy.

I think the consumer came into the rising rates period cashed up from Covid. That cash saw them through the first period, then they turned to loans to continue their spending habits. But cracks are beginning at the fringes and those cracks could well lead to bigger problems throughout the economy next year.

Maybe this is what the economists at the banks see. But they are so rarely correct I feel it would be silly to agree with them just yet.

The stock market certainly doesn’t. Traders would not be adding risk if they thought a downturn was coming.

Unless they were falling behind targets……..

Bloomberg All Hedge Fund Index

The Bloomberg All Hedge Fund Index is down 7% this year while the S&P500 is up 17%

I don’t know how Bloomberg calculates this index or if it is truly representative, but it would explain what is happening.

Fundies get paid to beat the market. Being down in an up market is a job-losing position. That would make them desperate to par losses into year-end. Typically you do this by finally giving up and jumping on what is working.

This is why Microsoft (MSFT) and NVidia (NVDA) hit all-time highs last week.

This chasing of returns is likely to propel stocks higher into year-end. Enjoy it while it lasts.

But be ready to take profits early next year as I have a sneaky feeling those economists have it right for once.


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.