Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+1.6%

A very quiet week in stock markets saw the Australian market outperform the US in a rare event. mainly driven by iron ore prices. Chinese steel exports are up 33% this year in a good sign for Australian resources.

The Chinese renewable sector is growing. Both cars and renewable power generation is ramping up nicely in China. Which will lead to more buying of our resources. This is why we have recently seen rallies in the likes of BHP and RIO in the last few weeks.

But one of my favourite commodities is going the other way. Oil fell to under $70 a barrel last week. This is despite OPEC+ confirming they will cut production in the new year. It is strange to see oil drop on an OPEC cut but I suspect this recent weakness will prove to be temporary and oil will recover to $80. A good time to buy some oil companies then.

Over the pond in the US, employment numbers were fairly strong on Friday adding 199,000 jobs for the month. But the number isn’t real. This number included the Auto Workers ending their 6 week strike action of about 30,000 employees. You could take that out but then would need to add it back in to the 150,000 number the month before to see that jobs added has been steady at 170-180,000 each month.

Unemployment is 3.7% and crucially, wage growth is 4%.

This is more evidence of the soft-landing the Fed has been trying to engineer. The whole idea of a soft landing is to get the economy to slow down at a slow pace. A hard landing is the opposite, where things drop suddenly.

So we had a quiet week with more evidence of the perfect stock environment continues.

AI Is the Next New Wave to Ride

Google announced their new AI tool, Gemini, last week. If you are not sure what all the fuss about AI is, watch their trailer

AI really is going to change the world. It is going to be just as disruptive as the launch of the internet.

A friend of mine recently started a new garden business. He needed a logo so AI produced one for him in 30 seconds. In the past, some sort of graphic designer would have done this for a fee. Poor old graphic designers are going to be in trouble already.

But it isn’t just graphic designers, coders and even lawyers are going to see changes to their industry.

And change means opportunities for massive profits.

At the moment the chip manufacturers are gaining all the attention. The real money won’t be made by the people who make the AI. The real money will be made by those who figure out how to best use AI to profit in their business.

It is still too early to tell which companies this will be. But next year should deliver some great new names to invest in.

I believe that there will be more advancements made in the medical and tech industries in the next 5 years than we have seen in the last 25 years.

It is all very exciting and if the tech does not interest you, I’m sure the profits will for those who invest in the space.

Check-In on Institutional Investors

I showed you this data set from State Street a little while ago so I thought it was time we checked-in to see what the big boys are doing with their money right now.

This is the State Street Institutional Investor Risk Appetite Index.

You will notice that since the October lows, Insto’s have been adding risk assets and are only now getting back to their average position of risk.

This means there is still plenty of room for them to add more risky assets which would drive stocks higher before they tap out at levels similar to previous highs in this index.

I continue to see more gains in December before this rally taps out.

Don’t Let Down Days Get You Down

Here is something from Bespoke Investment Group.

An emotional investor usually buys after up days and sells after down days, and here is some research to prove that this is the wrong thing to do.

Using the S&P 500 tracking ETF (SPY) as a proxy for the US stock market dating back to the ETF’s inception in 1993, we wanted to see how an investor would have done if they only owned the market on the day after “up days” versus only owning the market on the day after “down days.”  The hypothetical strategy is pretty simple to calculate (and also not replicable without factoring in trading costs).  As shown below, over the last 40 years, had you only owned SPY on trading days that immediately followed down days for SPY (days where the ETF closed in the red), you’d be up 785%.  Conversely, had you done the opposite and only owned SPY on trading days that immediately followed up days for SPY (days where the ETF closed in the green), you’d be up a measly 16.7%.

Taking this a step further, what about the day after BIG down days?  Below is a look at SPY’s cumulative price change if you only owned the ETF on the day after it experienced one-day drops of 1% or more.  As shown, since SPY’s inception in 1993, this hypothetical strategy is up about 325%, which represents about a third of SPY’s total price gain over the same time frame.  Historically, 1%+ down days have accounted for about 13% of all trading days, so the day after 1%+ down days has historically accounted for a large portion of the market’s overall gain.

It gets even more interesting.  Had you done the opposite and only owned SPY on the day after 1%+ up days since the ETF’s inception, you’d currently be sitting on a huge loss of 50%!

The moral of this story is – it is hard to beat buy and hold. But if you want to try then you are much better buying after larger than normal down moves than buying after up moves.

The old Warren Buffett saying that investors should “be greedy when others are fearful and fearful when others are greedy” certainly applies.

Turns Out Passive Investing Isn’t So Passive

Passive investing generally refers to buying something and just sitting on it forever. Index investing is a favourite here. Vanguard built a huge business out of telling people active investing does not work and the best way is to just invest in the index. Then they created index funds and charge people to put their money in them.

The vanguard argument is approximately 90% of actively managed funds do not beat the index. So why bother taking the risk you are in the 10% and just buy the index through an ETF or managed fund instead.

There is a reason indexes perform so well.

Turns out they are not as passive as you might expect.

Take the S&P500. In S&P’s own words, it is “considered to be a proxy of the U.S. equity market”.

It consists of 500 companies that have issued a total of 503 stocks. (Some companies, like Alphabet have two stocks – GOOG and GOOGL). But since 1995, there have been a total of 700 changes to this index.

They make a change by kicking someone out and then adding someone else in.

That means this index has been completely turned over 1.4 times since 1995. It looks very different today to what it did in 1995.

This dropping some companies and adding others is the same idea as cutting your losers and letting your profits run. The index does it for you.

They made another change last week. Uber will join the index at the end of the month. Alongside Jabil (JBL) and Builders FirstSource (BLDR).

They replace Sealed Air, Alaska Air and SolarEdge Technologies.

You can see what S&P is doing. They are adding more tech and manufacturing automation to the index and removing older traditional industries. Sealed Air has been in the index since 1957. They are adding more technology to the index on the argument this is more representative of the US equity market.

US manufacturing is making a comeback and few services have redefined modern life quite like ridesharing services. Meanwhile, packaging demand has waned post-pandemic, the airline industry is consolidating, and green energy initiatives continue to get pinched.

It is unusual for me to be talking about and index and making an argument for why passive index investing works. That is because I think it is fairly easy to outperform the index.

S&P is slow. They took a long time to come around to the idea the best place to be is in Tech. You can act much faster than them.

If you treat your portfolio like a passive index fund and stick with it through thick and thin, but at the same time rebalance positions to more heavily weight growth industries (like Tech) you can fairly easily outperform the index.

The problem comes when you start to make predictions of pending doom and hesitate to act or worse still sell down positions because of a media headline. Such as

China has joined the US on outlook negative due to large levels of debt.

I’m fed up of being told “it’s going to crash next year because of all the debt”

All these talking heads on the internet spouting rubbish and putting fear into people’s heads really annoys me. Quite why anybody believes someone who says “everything is going to crash but if you pay me the small sum of $5,000 I can send you an e-book to teach you how to protect yourself” truly astounds me.

Why is it going to crash?

Because of all the debt.

Oh, I see. It is as simple as that. Better sell everything then and buy gold and bury it in the back garden because all the banks are going to collapse too and money is going to be worth nothing.

But, who will be able to buy my gold off me if everything is worth nothing? Who will have so much money left they will want to buy an underperforming asset that pays no income from me at a huge price?

Mind you, I suspect they have an answer to that too. So I will stop there.

Next Week

The last two major events of 2023 will happen in the week ahead.

US CPI inflation will come out on Tuesday ahead of the Fed’s interest rate announcement on Wednesday. Inflation will be around 3.0% and the Fed will keep rates steady. At his press conference, Powell will try and change the expectation for rate cuts next year. But the markets will ignore him just as they have all year.

I’m not expecting an awful lot to happen between now and the end of the year, but the bias will be to the upside.


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.