US Exceptionalism is Returning
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For the entire year of 2024, the focus has been on interest rates, the Fed, and the growth rate / possible recessionary bias in the economy. On top of this, the business editors in virtually every medium seem to be kicking and screaming about how the rally in the markets the last year and a half isn’t real because not all companies and indexes are participating. I really find this quite frustrating as applying fears?of recession or a lack of growth (at best) does little to address many of the?places where the US Economy is still quite stable and flourishing. At times leaders will lead and then, normally quite abruptly, leaders will get tired. As it stands, and this was clear in Barron’s this past weekend, the “Magnificent Seven” of 2023 has dwindled to almost the “Magnificent One.” Maybe this will be true, or quite possibly, due to the strength of this one, the others might just reignite in their performance. I think it is important to take a look at the consensus of economic?growth for 2023, so far in 2024, and what is expected in 2025 to get a sniff at what the markets might be telegraphing:
It is clear that 2023 was a good year, 2024 is starting out as a good year as well, and 2025 consensus has little confidence in as it will depend on what the new administration wants to do to address many different?hot points. Whatever the case, this brings me to what I feel is important to discuss this week at a mid-year point. But before I get to that, I wanted to give the bullet points of what I am currently focusing on as most important:
Often, I get questions about investing and how we arrive at our methodologies. The science of investing is backward looking. History is concrete and it should be easy to see what “should have been done.” Versus the art which is the study of all markets and the influence on decisions about what “could be done” moving forward. From a very general perspective, I believe that one of the most important things to pay attention to is momentum. If something has positive momentum, one would want to recognize this as quickly as possible, discern if it has a big enough runway that many investors could participate and then monitored for changes in momentum to decide if moving out of our partially exiting is prudent. The interest rate market (or bonds) is one of the most visually measurable momentum issues to see this in. Taking credit rating and individual company or country risk aside, interest rates went from over 20% in the early 1980’s to almost 0% during the shutdown of COVID. Once they hit 0%, could they go any lower? In the US no, but in other countries throughout the year they actually did! A strange phenomenon but it happened. This in and of itself is a complete subject to discuss on its own, but suffice it to say that when rates went from over 20% to 0%, it was time for a momentum change.? Ari Wald put up a very interesting chart this past weekend that made me ponder this whole thought process. He titled the analysis, “Uptrend Supported by Positive Momentum.” Ari is referring to the fact that the S&P 500 continues to move up in price and, on a “relative” basis, continues to outperform other markets. See chart below:
This brings me to a bigger point. When considering how and where to invest, there are basically six different places money can be placed: US Stocks, Foreign Stocks, Bonds, Commodities, a currency other than the US Dollar, or Cash. Right now, US Stocks, cash, and some commodities seem to be the places to be, as they are acting the best.?Boiling down the US Stock market, the next thought should be whether growth companies (like technology companies) or value companies (like utility companies) are acting the best. Then look to see if larger, medium or smaller companies are doing best. Last week, NDR (Ned Davis Research) wrote a report on this issue of Growth vs. Value. What they have found is based on longer-term trend models and expected growth in earnings from the two. These are their findings:
Besides favoring growth by the highest level in some time, the earnings?expectations support this as well:
Ari Wald put some work into this comparison as well this past weekend. He believes as well that growth should continue to outperform value and drive market gains over the coming months. He believes we are in the throes of a multi-year breakout in this High-Beta trade as long as the indexes hold above longer-term moving averages:
Last week I had discussed the importance of a continuation of the larger companies over the smaller companies but that the smaller companies really needed to join the party so there is enough fuel for the party to continue. As can be seen below, the small-cap index has tried to breakout from a consolidation period that has been in place for some time, and right now has been building up its energy to finally exhibit this breakout. We are watching closely for a confirmation of this.
A week or so ago there was a statistic presented that showed that index investing has overtaken portfolio investing for the first time since records were kept going back to the early 1990’s. Given the vast volume of money in circulation, it would seem to me that larger companies are needing to be more and more relevant as the amount of money chasing the current and future winners is such a large number. These companies really need to be large enough to accommodate the gross investment. This is a concept that is becoming accepted and understood by the day as the information available increases, the population that is investing is growing, and overall volume of investable capital continues to expand.?This continues to push more money into the US markets as they are the largest in the world and have shown the greatest momentum and earnings growth.?
In Saturday’s Barron’s, the market sage that was interviewed this past week was Savita Subramanian, head of US equity and quantitative strategies at Bank of America Securities. She is educated in mathematics and philosophy. I find this quite interesting as she pays attention to both the factual data of the markets but also the behavioral side. These two can often be oil and water, so I find them both important to pay attention to. She joined Merrill Lynch in 2001 and then became part of Bank of America after the merger of the two. She therefore has over 20 years of experience at the post. She was asked if inflation was still her biggest?concern for investors and the Fed or is it secondary to fears about the economy and the job market. Her response I found quite intriguing. "Over three- or four-month period, the data look worrisome because they're all softening. But when you look at them from a longer-term time horizon, they look?fantastic. When we were in more of an inflationary environment, we wrote about how the best environment for?equities was 2-4% inflation. That's where we are right now! The best environment for equities is when real wage growth is positive, and sales growth is at reasonable levels. We are looking at things through the wrong end of the telescope. Every week there is cause for recession or stagflation concerns. But in the grander scheme of things, we're seeing economic data normalized from very hot levels after the COVID pandemic and all the fiscal stimulus to levels that are good for equities."
Jeff Sommer in the Sunday New York Times Business section also had some interesting perspective. He said the Federal Reserve has disappointed investors this year. If the markets have another very strong start, how could this be the case? Or maybe, although real estate investors would love to have mortgage rates back down where they were, this really just isn’t in the cards right now with inflation stubbornly as high as it currently is for a variety of reasons. He goes on to say that without a certain few companies, the returns in the stock market would be far less attractive. This may be true, but hasn’t this always been the case? Hasn’t there always been a selective few companies that are leading the charge??Whatever the case going forward, larger US Growth companies seem to be leading the charge and have been since October of 2022.?
Ari Wald said, "We believe the market is behaving in a manner that supports higher highs over the coming months. Along with confirmation from our primary indicators, we remind clients that 16 out of 23 bull cycles (70%) lasted to their two-year anniversary. In addition, while the S&P 500 at 5,400 suggests the index is fairly-valued for a weak bull, fair value for an average bull would be closer to S&P 500 at 6,000 over the next 12 months.?
What a way to continue this summer and into the election, a continuation of the S&P 500 up to a "new target" of 6,000. That would make Santa mighty happy wouldn't it!?
领英推荐
Summer arrived this weekend and it appeared that everybody wanted to go to the beach. It is always terrific watching everyone laugh and have fun in the sunshine. The sun has been shining on the markets and although we are sure to see some periods where the clouds might roll in, continued sunshine appears to be in the clouds if history and current reading are to continue.?
-Ken South, Newport Beach Financial Advisor
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