Lumida Ledger on Economic Momentum: Decoding the Illusion
Lumida Wealth
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Here’s a sneak peek of what we covered last week:
Economic Momentum: Decoding the Illusion
By and large, the economy continues to surprise on the upside. New orders, a key leading indicator, continue to improve.
The US consumer is spending. Movie theaters are packed and airlines are full (and it shows in revenue).
I expect AMC earnings to beat estimates this week, and we’ll learn more from earnings out of Apple and Amazon.
One key idea to bear in mind… What’s happening is the?economy is beating expectations. The economy is in a low-growth mode - and you can see this in subdued housing starts and very little YOY earnings growth in the S&P or Nasdaq 100.
It’s the US consumer, not corporate earnings, that is strong. Consumers have shifted spending from goods to services (like restaurants, movies, cruising, airlines, etc.) as consumer confidence continues to improve.
Overall, market technicals continue to show compelling evidence of a bull market. We have a record winning streak in the Dow Jones and a record number of consecutive up months, and no real drawdowns.
Statistically these are all indicia of a bull market. Here’s one study.
We’re returning to a more normal markets rather than the ‘crowded defensive short in fetal position’ condition from Q4 ‘22.
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Over the next two months, however, we do want to highlight a ‘yellow light’.
We’re entering a period of weak seasonality. August and September are the worst. Our friend, the 10-year is now touching 4%. Higher yields mean higher discount rates for equity valuations. Economic surprises should mean revert soon.
Powell’s speech is coming up at Jackson Hole in late August, which will likely reiterate the campaign to squash inflation above all else.
Also, the average stock has dropped 85 basis points on their earnings release dates - on pace for the worst result in 20 years. That suggests expectations are a bit ahead of reality.
Sentiment is also just touching hot. (It can stay ‘hotter for longer’ though.)
Retail traders are also chasing the rally with extreme levels of call options activity.
All together, this suggests markets are due for a breather.
The takeaway from all of this is (1) trends continue to run longer - don’t fade or fight the rally; (2) now is not the best time to add index exposure or chase the hottest names; and (3) consider tilts to financials, energy or overlooked narratives.
For example, in AI, we have talked about Nvidia quite a bit. Now we like adding to adjacent names (the silicone layer, data center, AI infra) that have less attention, better valuations, but compelling growth stories.
With the S&P at a PE of 20+, now is an excellent time to focus on Alternative Investments.
Valuations do catch-up in the long-run. The S&P has a long-run average return of 9 to 12%. We believe Distressed CRE alternatives can outperform the market and generate tax efficient returns.
To dive deeper you can read the newsletter in full here .
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Disclaimer:?The information is for informational purposes only. It is not intended to be construed as investment advice or a recommendation to buy, sell, or hold any securities. Before making any investment decisions, it is recommended that readers consult with a licensed financial advisor and conduct their own research. Investing involves risk and past performance is not a guarantee of future results.