22 May Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords||+0.5%|
Clearly, no one listened to me last week when I said be cautious as the US indices all had a good week.
The Nasdaq and S&P 500 had their best week since March and their highest weekly close since August 2022. Year to date, the Nasdaq is up more than 20%, while the S&P 500 has risen more than 9%; the Dow Jones Industrial Average is just barely clinging to gains for the year.
Things are looking very positive as you will see from these charts
The question is why? Interest rates are higher than 12 months ago and earnings are lower.
At the end of the day, the value of any asset should be determined by the future value of cash flows discounted by risk-adjusted interest.
There are two reasons why the US market looks positive, and much more so than the Aussie market, which looks like this
The first reason is the market is forward-looking. For day-to-day movements, I like to think about how things will look in 6 months’ time.
Six months from now the question of where interest rates will peak will be past. The market is quite convinced we are at the peak now and interest rates will be lower in six months. Less of a discounting rate on my asset valuation model leads to a higher asset price.
Analysts are also forecasting earnings to grow.
The grey bars are forecasted earnings and you can see sequential growth.
Higher future cash flows also mean higher asset prices in my model.
If these two assumptions are correct then stock prices should be higher in six months, so traders are buying them today to get ahead of the curve.
The second reason is A.I. It is seen as the new disruptive technology that will lead to huge growth for some companies and huge job loss for certain industries (lawyers being one of them believe it or not)
It is stocks set to gain from AI that are powering this market higher.
I’ve pinched this chart from Societe General. It shows that if you take out AI stocks from the S&P500, the index would actually be down this year.
If we believe this research by Societe General, then it shows why Australian stocks have underperformed. We have no exposure to the sector.
If you want to get on board the AI train here are a list of stocks set to benefit
Over the weekend Apple announced “Personal Voice”. The idea is your phone can learn your voice in just 15 minutes and then use that voice to read text to you.
Amazing stuff. Apple says they did it because one of their core values is inclusion and they want to include people who used to have functioning voices but lost them due to illness.
If you believe that, please come and see me because I have an extremely rare empty chip packet that is worth $1,000,000 but I am happy to sell to you for just $50,000.
Markets have been positive lately and I have been uncharacteristically bearish, telling you not to add last week, just as the market puts in the best week since March.
But I am sticking to my guns. This debt ceiling debate is a bigger problem than stocks are pricing in. In fact, the stock market is saying there is no reason for concern at all.
The debt ceiling is a limit on spending approved by Congress to hold the government in check.
Janet Yellen says if they do not raise it, the US could default on payments as soon as June 1st. That is next Thursday. They have not reached an agreement yet. It is such a problem that Biden canceled his trip to our glorious country last week.
The US has increased the debt ceiling 78 times since 1960. That is more than once per year. When I think about it, it means the US government is in constant risk of default and only by raising the debt limit more than once each year do they avoid it.
Mind you, they have created the world’s largest economy and military power in the same time. So is it such a bad thing?
The fear mongers are out there saying this is the end of the US and the debt will catch up with them…blah blah blah.
But the fact remains the US first went into debt with France to fund the war of independence from England. 200 years later and they are still running debt.
If it hasn’t blown up in 200 years, why would it possibly become an issue next week?
No, the stories of serious problems and the end of the US dollar are just stories designed by clever people who make fantastical headlines to get you to read articles. Nothing more.
But, that does not mean it cannot cause a short-term problem for markets.
Biden should have raised the ceiling last year when they controlled Congress. Now the Republicans have the majority I fear they will use the issue as a political standpoint to gain advantage.
They know Biden must raise it and they will hold him hostage on something to get their agreement. I don’t know how this will end. Will the Republicans let it default to make a point? Will Biden cave on whatever it is they want? How will credit ratings agencies react? How will stocks react?
That last one is easy. If something bad happens stocks will collapse 10%+ in fairly short order.
Of course, the opposite could happen and it could get raised this week in which case stocks will probably rally. But this is a non-symmetrical risk. A potential fall (if it happens) would be much bigger than any potential rally.
When the risk/reward is skewed against me, I take money off the table. The good thing is the answer will happen quickly.
Treasury markets are saying this is a problem even though stocks are saying it isn’t.
One-month Treasury yields remain above the Fed Funds rate, 5.53% versus 5.08%. This is a very unusual occurrence. Normally one-month yields are lower than the Fed Funds rate. The fact they are higher tells us Treasury Bill investors are still concerned. We should be listening to these guys as this is a professional market with 3 times the stock market at stake.
The market fell on Friday because the parties put talks on hold until Biden returns from his trip to Japan.
Biden called the GOP’s debt-ceiling stance “unacceptable,” adding it was “time for the other side to move from their extreme positions.”
GOP negotiators walked out of the room for six hours out of frustration.
“Let’s spend less, let’s pull back the Covid money that we haven’t spent … work requirements … let’s do some permitting reform … I think we could probably find a pretty good agreement to be able to move forward,” said McCarthy.
They seem pretty far apart to me, which is why I am re-iterating my cautious note. You could even say I am short-term bearish here.
Apart from politics messing things up, next week we will get earnings from NVidia on Wednesday. That stock is up 100% YTD and does have a tendency to fall on earnings announcements.
Plus we will get second estimate of GDP on Thursday which will include PCE inflation and that is the Feds preferred measure. No change to last month is expected.
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.