Monster rally | Stocks soaring ??????

Hi folks -

Nothing gives autumn vibes in our house like Van Morrison playlists on repeat, parsnip chips, whole grain mustard and the majority of the 4 of us coughing and sneezing. Who knew leaf collecting could be such a joy for little people though!

Ok, admit it, we've all had our first mince pies, haven't we? I was a little taken aback to pay ￡3.12 (eat in at Pure, in the City) but I guess that's inflation for you. Look it was nice, I will say that. Good generous filling.

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Quote for the week -

It's ok to have opinions but not ok to act like they are correct - Howard Marks

Right let's get into it, I had to skip a week last week as had one of those weeks (in a good way though, November boards season has been pretty real) so there's plenty to talk about. Grab a coffee, let's dive in.

Stocks are up quicker than a toddler on Christmas morning. Low inflation, lower rates and decent earnings all paint a pretty good picture. What's not to like?

Another fortnight another plot twist for interest rates as markets grapple with peak rates, economic data, future Fed policy PLUS the future demand, both in the UK and the US. The big fall in rates seemed to be triggered initially by comments out of the US treasury that they would react to lower demand by issuing less long term debt (and more T-bills), but momentum grew as the Fed kept rates steady and gave off strong "we probably aren't raising rates more" vibes and finally October's inflation readings in the US and UK came in below expectations. Is inflation finished?

So higher for longer is already over, stagflation is out the window, scratch those off the bingo card, say hello to "positive stock bond correlation" and pour one out for all those macro strategists who had already baked that into 2024 forecasts... speaking of which .. tis that season.

The most forecasted recession ever failed to materialise this year so what are folks putting into their outlooks for the coming year?

Goldman Sachs says the hard part is over. More disinflation is on the way, the rate hikes are done with, and the odds of an imminent recession are low.

I am personally here for the "stocks could go up down or sideways but bonds yield good" flavour of market outlooks so we'll see if anyone goes there. The "be more active" is a little predictable so please folks, be better.

Earnings season was a pretty big positive surprise according to Factset [link]: expectations for slightly negative earnings growth were met with actuals of +4%, with companies on average delivering a pretty solid surprise to EPS. Although it looks like analysts have just assumed this is pull-forward of what was expected to come through in 2024 anyway. Per Factset, stocks that missed expectations got hit more than usual.

Markets mumble

The markets - global stocks are up 5-8% in last couple weeks, and back to near those July highs up about 15% for the year in $. Sterling has also rallied a fair bit so if you're an unhedged sterling investor it's more like +11% for the year, with non-US stocks up more like 5-10% for the year. In GBP terms global stocks are pretty much back at all time highs, which is remarkable where rates are.

The US market and big-tech are still the lead story, no change on that front but small caps and some unloved sectors like real estate did get a very strong bounce on that CPI news.

Rates have u-turned with US 10 years back around 4.5% and UK at 4.2%.

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Things I'm reading

1. JP Morgan 2024 outlook & long term capital market assumptions -?

?Thanks to the folks at JPM for an excellent breakfast session a couple of weeks ago on the market outlook and capital market assumptions. Enjoyed that!

Bonds are back (again, still . And yes it’s been painful being early on that call).?

?Global GDP growth is rising and healthy - not expected a year ago.

Valuation not a big part of their equity expected returns story - don't see valuations at extremes. Bad news now priced in real estate, so future returns are higher. And with the rates moves, things are tipping back in favour of US fixed income vs UK and Europe.

2. Have alternatives hurt or helped ??Richard Ennis (link)

Narrator: they did not help. Not since 2008 anyway and in US pension plans which Richard Ennis has carefully analysed using some neat looking techniques. He reckons real estate, hedge funds and PE are responsible for negative alpha of 1.2% per annum since 2008.

Admittedly that was a boom period for stock markets and of course, things could be different now. But a 15 year period of data is not nothing and some of the reasons analysed are worth reflecting on.

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Things I'm listening to -

Been doing a bit of driving & travelling these last couple weeks so clocked up a good number of podcasts, here's the best for you:

1. Charlie Munger?on Acquired (web | apple)

Bcos ... well, c'mon, it's Charlie Munger. And he hardly does interviews never mind podcasts.

What it takes to build a great partnership , what’s gone wrong in securities markets, and could Munger & Buffett achieve the same success today (spoiler: no). Also, they could have used a little more leverage and got better results without much risk.?Why he hates EBITDA.

?This seemed a lot more thoughtful than a lot of the usual Charlie Munger “old man wisdom” sound bites you tend to get which always struck me as wise but obvious and borderline patronising. Possibly his only podcast interview of his entire 99 years has to be worth a listen.?Yes, the interviewers are a bit guilty of "fangirling" here but again, it's Charlie Munger. It's a rough listen at times as his voice can be a little hard to pick up (maybe American friends will find it easier!), but stick with it.

2. Aswath Damodaran with Patrick O'Shaughnessy (web | apple)

?I like professor Damodaran's thoughtful academic style and industry outsider viewpoint. Some of his critiques of ESG border on the nasty though, but here he makes a much more thoughtful point that all responsible investors would do well to reflect on:

"ESG got no pushback , that’s a problem, because it overreached , oversold itself. Missed a chance to develop a movement that was healthier. Because there is demand out there from investors."

On why investors talk about the Fed too much:

?The fed is a great reason for copping out “the fed did it” is very unhealthy . But it’s conventional wisdom too often. We should stop talking about the Fed. Give up on “somebody up there giving us answers “?

?When experts and markets diverge . It’s the experts usually wrong . Have respect for markets ability despite mistakes and foibles in coming to a judgement on the big issues of the day .?

?Why we should always remember that companies are flexible and this matters:

Companies are flexible. People forget that. Yes pure discounting should mean stocks fall lots when rates rise,? but all else isn’t equal. Companies can react, raise prices and boost earnings.?

?3. Odd lots - Dimensional?CEO Gerard O'Reilly speaks to Joe and Tracy (web | apple)

4. Money maze - John Authers?(web | apple)

Legendary markets journalist John Authers reflects on 40 years writing for the FT and Bloomberg and what he's learnt. Why every article on markets should contain the footnote "you should probably be invested in markets almost all of the time".

?5. Private equity on all else equal?(web | apple)

Why has private equity grown so much? thoughtful answers to a real question.

Grab bag -

Someone pass me the popcorn while I dive right into the new book about Ray Dalio and Bridgewater ("The Fund"). If you want a quick intro Michael and Josh has the author on their podcast (here).

?Apple services vs selected companies combined revenue:

?This is cool (sound on) -

Struggle is real for allocators!

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Stay warm folks, and see you in a couple of weeks...

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