18 Dec Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords
Just when I thought the Fed were about as predictable as the sun rising in the morning…..Powell turns around and teaches me not to get too complacent.
I was drafting this note last week and preparing what I was going to day today. Something along the lines of “the market is expecting rate cuts next year but they won’t happen and Powell reaffirmed that on Wednesday”.
I’ve had to throw it all out and start again today because everything changed last week.
First of all, we had inflation on Tuesday. It came in at +3.1%, pretty much as expected and confirming the downtrend in price gains we have seen this year.
But the statement by Fed on Wednesday was completely unexpected. After saying there would be no rate cuts and rates would remain “higher for longer” the pivot happened.
The Fed kept rates on hold but announced they expect 3 cuts next year.
That sent growth stocks instantly higher.
The market has been projecting that for some time and now the Fed has confirmed it.
That’s the final piece for the Goldilocks scenario. The Bull Market should continue from here.
This is from the CME FedWatch Tool and is for the end of next year.
The market is saying there is an 84% chance of 5-7 cuts next year. That is significant.
Along with the rate cuts the GDPNow tool has increased the GDP prediction for Q4 from 1.2% to 2.6%.
On the micro level, Factset sees companies growing profits next year.
Everything says stocks should continue to add to their gains next year.
Where do you focus?
Tech is the safe answer. Large Tech should make up the bulk of your portfolio.
The chart above says to focus on the first 4 sectors as they are expected to outperform the market as a whole.
Even valuations look reasonable. The Case-Shiller ratio is a well respected way to consider valuations.
It is saying prices are about on the long-term average. That means they are not overly expensive even after the gains of this year.
It really does not come much better than this.
The only question in my mind is, do I go for large-cap Tech and play it safe or do I start to look at the small-cap sector?
The small-cap space will benefit more from falling interest rates and it has also underperformed large-cap all year so a reversion to the mean could well be on the cards. Our Top 30 Strategy throws up a lot of interesting small-cap names every month.
Projections for 2024
All the major brokerage houses will soon be announcing where they think the S&P500 will end 2024. They usually do this by taking the current price and then adding a number. The long run average is 10%, so more often than not they just predict a number close to this. Watch out for them and see if anyone is actually outside of +5% to +15%. I bet not.
But there is another, less-discussed, method to do this. You could take the price target for every one of the 503 stocks in the S&P500 and apply the index maths to it to get a price target for the index.
Our friends at FactSet did just this. This technique has proven amazingly accurate in the past.
Look how close the light blue (actual result) is to the dark blue (projection) every single year for this method. The two years when there was a significant difference were because of exogenous shocks. 2021 actuals exceeded projections due to free money and stimulus printing and 2022 underperformed due to a sudden shift in interest rates. All other years are close.
Turns out, when you take all the price targets for all the Wall Street analysts and add them together, you get something fairly accurate.
Which makes the 2024 projection of 9.8% interesting and highly achievable.
Dividends or Growth
In 2022, Dividend stocks vastly outperformed Growth stocks as is typical of a rising interest rate environment. Here is what happened in 2023:
As you can see, Growth crushed dividends in 2023.
Over the last two years, it is neck and neck
What about 2024? Who will win?
That is quite easy. It all comes down to interest rates. Dividends won in 2022 because interest rates began to rise. Although they continued to rise in 2023, as the year went on the market was increasingly looking for future cuts. In that falling rate environment, Growth is the winner.
Unless you think inflation will come roaring back in 2024 or that we will fall into a recession, then the story will be confirmation of rate cuts and Growth will once again outperform.
Now is a good time to start thinking about whether you want to be in Growth or Dividends as we go into 2024. I would recommend you go with Growth.
On Friday we have the Fed’s preferred inflation measure, Personal Consumption Expenditures (PCE), widely expected to be lower.
On the corporate side, Nike (NKE), FedEx (FDX), General Mills (GIS), Micron (MU) and Carnival (CCL) are set to report quarterly results. Results here will be an interesting read on the consumer. Good forecasts from Nike and FedEx will have the consumer discretionary sector roaring.
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.