14 Mar Capital 19 Catch-Up
“It is a way to take people’s wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.” – Thomas Sowell
Weekly Index Movement
Aussie All Ords -0.8%
Stock markets have been in a rut since the start of the year and the downtrend has been nasty with no signs yet of it breaking.
The S&P500 has been churning around support for the last 3 weeks and is causing some investors to worry. But is giving us a lot of confidence to buy.
For much of 2021 everything that could go right for the market seemed to be going right. 2022 has been the opposite. Investors have had to contend with soaring inflation, rising interest rates and the breakout of war. (Interestingly, the market is only down 1% since the start of the war.)
With commodity prices rocketing higher we got a good read on inflation last week from the US.
Headline CPI came in at +7.9% year-on-year. This was the highest print since January of 1982 at +8.3%. It has all come on in the last year. February 2021’s number was just +1.7%. Once inflation becomes entrenched, it is very hard to dislodge.
Taking a look at the internal structure of this headline, we see food inflation was also +7.9%. While not part of “core” inflation, food is a critical category for how consumers perceive inflation’s effects on their everyday lives.
The second internal of note is Owners’ Equivalent Rent Inflation, which at 24% of CPI is the largest component in the index. OER came in at +4.3% in February. A lack of supply, still-low interest rates and a strong labour market all point to house prices continuing to rise which should keep this sector adding to the headline for some time to come.
Add to that what petrol prices are doing at the pump and you can see why investors are so negative right now.
There are several investor sentiment surveys out there. This chart is an amalgamation of AAII, II and NAAIM surveys
There haven’t been many times in the last 15 years when investor sentiment has been so bearish.
Which is kind of strange because Wall Street is still very bullish on company profits.
The estimated earnings of S&P500 stocks for the next 12 months have continued to climb, despite weeks of falling stock prices.
That means stocks are becoming more and more of a bargain as time goes on.
The good thing about investor sentiment is – it is always wrong. Note investors were about as negative at the bottom of the covid-market in 2020 as they are now. They got very negative back in late 2015/early 2016 too and the S&P500 went on to add 40% in the next two years from there.
The idea of being a stock investor is to buy low and sell high. The difficulty when trying to buy low is every piece of news and forecast you hear is negative. That is the very reason why stocks are low.
This is true of every market bottom. Markets do not bottom on positive news. Typically, the actual bottom is marked by maximum negativity.
All I can see here is very negative sentiment but rising corporate profits and a growing economy.
It is time to buy, for when this market turns, the first few days are going to be explosive.
What could the catalyst be for that? The obvious would be a resolution to conflict in Ukraine.
Putin’s latest demands seem very achievable and hopefully the West will seriously consider them. He wants
- Crimea to be recognised as Russian
- The two separatist states to be independent
- Ukraine to not join NATO
Putin took Crimea in 2014 so this shouldn’t be too hard, the two states want to be part of Russia anyway and NATO haven’t been rushing to let Ukraine in previously.
If an agreement is reached, I can also see Russia needing to pay reparations to Ukraine to rebuild, but to do that they would need to be admitted back into world trade and sanctions lifted.
This is what makes buying commodity stocks so hard right now. They all have a Ukraine premium built into their price. But this could evaporate as quickly as it came on. No one knows just how long these sanctions will last. (McDonald’s stood staff down for just 90 days in Russia and will continue to pay them during this period.)
Looking to the week ahead, we have a very important day on Wednesday when the Fed announces their widely known first +25bps rate rise. The actual rise isn’t important as they have basically already told us what they are going to do. But rather, their comments will help us understand plans for the rest of the year.
Tech stocks get sold when interest rates rise. On Friday the Nasdaq fell -2.18% vs only -1.3% for the S&P500. This move came after the big inflation print on Thursday.
But, if the path for interest rate rises slows, then it will be those very same tech stocks that get bought the most.
With inflation hitting consumers on core goods like petrol and food, they will have less discretionary spending power on things like eating out and luxury goods. That in turn will slow the economy. Maybe not by much, since employment is so strong, but perhaps by enough to slow the Fed. A slow Fed is good for all those beaten-down tech stocks.
Talking of which, we had an interesting announcement this week from Amazon (AMZN). Amazon stock is going to complete a 20 for 1 split. So instead of trading for $2,900 per share, it will trade for just $145.
This won’t make any difference to the value of the company, but it will make it eligible for inclusion in the Dow Jones 30 Index.
The Dow 30 is a hand-picked group of 30 companies said to represent the US economy. It is weighted based on stock price.
As it stands, if they included Amazon in the index, it would instantly be weighted as by far the largest component and skew the index greatly. But at $145 per share, it would be in line with the others and hence not affect the balance of the index.
The advantage to Amazon is, if they get added to the index, then all the index funds and ETFs have to buy the stock.
Alphabet (GOOG), the parent of Google, made the same announcement 5 weeks ago.
Amazon is the largest retailer in the US. 70% of the US economy is driven by the consumer, so it is hard to argue Amazon does not represent a part of the US economy.
Adding the stock to the index would be beneficial to the stock price. A stock price that has been beaten down recently due to expectations of multiple interest rate rises. Although those rises are now in doubt because of the inflation that is cooling the economy.
Could be a great time to pick up some Amazon (AMZN) shares.
Employees of Capital 19 presently own shares of Amazon.
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.