15 Jan 16th January 2024
Weekly Index Movement
| S&P500 | +2.5% |
| Nasdaq | +3.4% |
| Aussie All Ords | +3.2% |
Welcome to 2024
We are back from our little holiday hiatus and usual programming will commence.
After snapping a nine-week winning streak to start 2024, stocks got back to their winning ways last week.
All three major indexes advanced during the first full trading week of the year, led by a 3% gain for the Nasdaq Composite while the S&P 500 finished the week’s trading less than 13 points, or about 0.3%, away from a record high. To cap the week, Microsoft (MSFT) also overtook Apple (AAPL) as the world’s most valuable company.
That last point is more important than just who is bigger. It shows how AI is now a more dominant theme than phones. The smartphone and apps led to a decade of growth in tech. But their time is over. The next decade will belong to AI. Position accordingly.
I hear the crying. But Apple is such a good company. It will come back. Yeah? Exxon Mobil was the fastest grower for a long time and was the most valuable company in the S&P in 2013. Where is it now? Times change. You need to change with them or get left behind.
Let’s take stock of what has been happening. The market recently completed 9 straight weeks of gains on the back of lower interest rates. That story is done and the impact is priced in. Unless we get further rate falls (unlikely in the short term) we need another catalyst to drive prices higher.
That could well come in the form of higher corporate earnings. Earnings season started on Friday with the major banks. Results were mixed. But they would have been decent if it wasn’t for one time charges, mainly for credit losses. The results show us two things. First, the US economy is strong. That’s a good thing these days. But second, is on the margins, people are struggling with higher interest rates.
The key here is on the margins. Not across the board. There is no need for concern. The Fed’s goal is to lower inflation. That means stop spending. It does not mean crash the whole economy. They just want to take the edge off it. Inevitably it means those already vulnerable will experience hardship. But that marginal difference is enough to slow inflation to where they want it, and last Friday’s numbers show things are under control.
The headline figure was an uptick last month from +3.2% to +3.4%. The media will love this and use it to create headline grabbing stories, they believe in “if it bleeds, it leads”. Most investors could improve their returns if they ignored the media.
Quite how the media can explain why stocks rallied when this inflation report hit would be interesting.
The reason is the internals. This graph is core CPI with Owner’s Equivalent Rent stripped out.
This measure of inflation has been at the Fed target of 2% since September 2023. OER is approximately 30% of core CPI so has a big impact on the overall number. What this graph shows is the rest of the components are at the Fed target.
OER is therefore the only problem and OER is forecast to reduce, and it almost certainly will considering the still high mortgage rates. As this happens, core inflation readings will trend lower as well.
That’s why stocks rose on Friday despite an uptick in headline inflation.
To finish off this week I want to take a look at a couple of stocks I recommended during last year.
First is Charles Schwab (SCHW)
I recommended SCHW when the mini-banking crisis hit in March 2023. At the time Schwab was around $50. It had sold down from around $80 as the whole sector fell. The theory was it was unfairly being grouped with banks and should recover in time to the $80 mark as the banking crisis passes.
It did recover somewhat and is $65 today. The problem for Schwab was they lost funds to high interest rate products as rates went higher and that reduced overall revenue.
Still, a 30% return in 9 months isn’t bad and I would recommend you take that here and sell your positions. There is an argument that says as rates reduce in 2024 then the funds lost will return and profits will grow again. That is likely, but I feel the fast gains have been made and what happens from here will be slower.
The second is Iris Energy (IREN).
I have mentioned this one a few times and before I went on holidays it was up over $8. That was a gain of about 100% since I first mentioned it.
That move to $8 was on the back of a higher bitcoin price on speculation the SEC would approve ETFs and also on a company announcement their mining capacity had increased to 10EW. What they said was that it had acquired “8,380 new-generation T21 miners from Bitmain Technologies Delaware Limited for a purchase price of $14/TH ($22.3 million, payable in progressive installments). Shipping is scheduled for Q2 2024.”
This 1.6 EH/s purchase along with previous purchases of 1.4 EH/s Bitmain S21 miners and 1.3 EH/s Bitmain T21 miners will bring the company to its stated goal of 10 EH/s of mining capacity by the end of Q2 from the current 5.6 EH/s. This added capacity should be fully functional by the halving in Q2.
In the same release, the company announced that “80MW data center expansion at Childress remains on track to be progressively delivered from January 2024 through to Q2 2024”. This increased power will support the increase needs of scaling from 5.6 EH/s.
Moreover, there remains another 500MW of expansion capacity at Childress for higher EH/s and HPC (high performance computing) requirements.
The market liked this and the stock jumped 30%.
But, since the end of December, the stock has fallen sharply back down to $5….and I can’t find a reason why. All I can think is Bitcoins reaction to the SEC approving 11 spot ETFs.
For now, I say hold IREN. There is a longer-term play here and if you don’t have it then you could look to add at these levels.
Lastly today I want to quickly mention Bitcoin and the SEC’s decision to approve 11 spot ETFs. This was a very poorly guarded secret as the consistent news around it had fueled a rally in Bitcoin. The idea is, by having ETFs it increases access to Bitcoin and improves demand.
Since the accouncement BTC has fallen 10%. Another classic example of buy the rumour, sell the fact.
Next Week
US markets are closed on Monday in observation of Martin Luther King Jr Day. We have retail sales on Wednesday and earnings season will continue.
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.