Daily Stock Market Articles

The Ludicrous List
Thu, Mar 7, 2024

Essentially the "stock du jour" of any day of the past year has been anything related to AI. The poster child has been NVIDIA (NVDA) with downright gaudy gains lifting the stock to a market cap of over $2 trillion. Although earnings have been impressive and to a degree supportive of those gains in the stock price, the stock currently trades with a price to sales ratio of a lofty 35.94. As we first noted in last Thursday's Closer alongside the debut of our AI Basket, including NVDA there are currently around 50 stocks that have doubled year-over-year, possess a market cap of at least $500 million, and have a price to sales ratio of 10 or more. In the charts below, we show the number of stocks fitting these criteria each month over the past 30 years. As shown, while there are currently a decent number of these stocks trading with "ludicrous" multiples and gains, the count is far below what it was at the time of the Dot Com era or even as recently as 2021. With that being said, the collective market cap of the current list of names far surpasses those prior peaks. The major caveat to this, of course, is that nearly half of that is all NVDA. Removing the other three stocks making this list with the largest market caps—Broadcom (AVGO), Eli Lilly (LLY), and AMD (AMD)—the collective market cap of this screen of stocks hardly stands out.

In all, currently there are a decent but not unprecedented number of stocks trading at high valuations. While the large collective market cap of these names (and hence their impact on market-cap weighted indices like the S&P 500) can perhaps be viewed as more worrisome, that is more a story for a handful of names rather than a broad market frothiness.



In the table below we show the 49 stocks that are currently on the Ludicrous List. Again, these are stocks that have doubled over the past year, have market caps above $500 million, and a price to sales ratio above ten. Outside of the four largest of these stocks by market cap mentioned above, there is no stock with a market cap above $100 billion. Additionally, the bulk of these names are in the Health Care industry; more specifically the traditionally more speculative Pharmaceutical and Biotech industry.

 

Semis Drop the Mic
Fri, Mar 8, 2024

The rally in semiconductors is starting to run out of superlatives to describe it. Just when you think it has to take a breather, it turns around and rallies another few percent. Yesterday, the Philadelphia Semiconductor Index (SOX) closed more than 17% above its 50-day moving average and 36% above its 200-DMA. Regarding the 50-DMA, it hasn’t even traded down to within 3% of that level in the last 80 trading days. In fact, the only time it has even traded within 4% of its 50-DMA since mid-November was on 12/6 when it closed 3.99% above that level.



The chart below shows streaks where the SOX closed at least 3% above its 50-DMA, and the current streak ranks as the longest since the days coming out of Covid and just the fifth in the index’s history since 1994. The longest streak ended at 143 trading days in August 1995. In looking at the four prior streaks, once they reached the 80-day point, the forward one-year performance of the SOX was mixed with a median gain of just 3.1% and positive returns just twice.



Yesterday was a monumental day for the semiconductor sector because it was also the first time in its history that the index closed at a higher price than the S&P 500. It got close in 1999 but never quite got there. The rally in semis over the last few years has been nothing short of amazing, but the slope of the ascent in the ratio (i.e. relative strength of semis) back in 1999 and early 2000 was practically a straight line!



As mentioned above, the SOX is currently trading more than 36% above its 200-DMA, and within the index, there are some incredibly wide spreads. As shown in the chart below, Nvidia (NVDA) closed more than 90% above its 200-DMA yesterday, and another three stocks -- Advanced Micro (AMD), Coherent (COHR), and Taiwan Semiconductor (TSM) -- are all more than 50% above their 200-DMAs.



In the case of NVDA, 90% above the 200-DMA???? A lot of traders looking at a spread that wide would probably start thinking about shorting a stock. We’d be the first to agree that a spread that wide seems unsustainable in most cases. However, you only have to go back 10 months to find the last time NVDA was more than 100% above its 200-DMA, and back then the price was under $400, or 60% below current levels! One thing to keep in mind regarding NVDA is that its rally has been described as a once-in-a-generation type of gain, and while these types of moves don't come around all the time, as we noted earlier today, NVDA's performance over the last 350 trading days since its 2022 lows still trails the gain Tesla (TSLA) experienced coming out of the Covid-crash lows.

 

Small Businesses Cut Employment and Spending
Tue, Mar 12, 2024

Ahead of this morning's CPI release, the NFIB updated their Small Business Optimism Index. The headline reading dropped to 89.4 in February compared to 89.9 in January. That result is the reverse of what was expected as forecasts were penciling in the index to tick up to 90.5. With the lower reading, small business optimism returns to the low end of the past decade's range and is only 0.4 points above the post pandemic low set last April.



Diving into the individual categories of the report, breadth was weak. As shown below, of the inputs to the headline number, there were only two categories that increased month-over-month: Expected Real Sales and Expected Credit Conditions. As for the categories that are not inputs, every single one fell versus January. Given these declines, many areas are sitting in the bottom decile of their historical ranges.



One category in which declines are not exactly a bad thing in the current environment are the share of businesses reporting higher prices. While not an input to the headline index, the higher prices index fell another point down to 21. That is now the lowest reading in just over three years.



Outside of the drop in the inflation reading, some declines in other categories were less reassuring. As we discussed in today's Morning Lineup, employment metrics were particularly weak. Hiring plans have fallen for three months in a row and are now at the weakest level since May 2020. The drop in compensation plans was even more dramatic falling 7 points month-over-month. In the history of the data going back to early 1986, the only time this index has fallen by more in a single month was April 2020.

While businesses appear to be significantly curtailing plans for hiring and wages, the actual changes have been a bit more robust. The actual employment changes remains negative as it has throughout the post-pandemic period, and implying small businesses are on net firing rather than hiring. The compensation index is at the lowest level since May 2021, however, that level is basically consistent with the high end of the pre-pandemic range. The same would apply for those reporting job openings as hard to fill which came in at the lowest level since January 2021.



Employment is not the only area that small businesses are reportedly cutting back on. Expenditure readings were also weak in the most recent report. For starters, Capital Expenditure Plans have reverted downwards to multi-month lows alongside actual changes to cap ex. Meanwhile, a net 7% of businesses report plans to cut down on inventories. That is a historically low reading in the bottom 1.5% of all months on record. Finally, we would note that small businesses have some of the highest expectations for credit conditions since mid-2022.



The report also offers a look at the type of capital expenditures small businesses are making. That recent drop in capex appears to be driven in part by the largest category: equipment. Only 35% of respondents reported making such capital expenditures in the past six months, the lowest amount since April through December of 2020. Prior to that you'd need to go back to May 2014 to find as low of a reading.

 

Labor: Not The Problem It Used to Be
Tue, Mar 12, 2024

In an earlier post, we discussed the latest NFIB survey of small businesses. While optimism was weak, a particular area of concern was employment. What businesses reported to be their most important problems reiterated this. As shown below, of all problems highlighted, labor took a backseat in February with a five percentage point decline in the share of businesses reporting quality of labor as their biggest problem.



When combining with the share reporting cost of labor to be their biggest problem, 27% of businesses reported these labor concerns as their most pressing. As shown below, that combined reading ties June and December 2020 for the lowest since May 2020.



As for what picked up the difference, the percentage of respondents reporting inflation as their biggest problem jumped back up to 23% versus the fresh low of 20% last month. At that level, inflation is once again the single most important issue among small businesses. That increase is also a bit contrary to the report's index on higher prices which fell to fresh lows in February.



While the increase in February in the share reporting inflation as their biggest problem doesn't exactly disrupt what has been an overall trend lower in inflation readings, one more pressing increase has been for poor sales. As inflation jumped to the forefront in the past few years, the share of businesses reporting poor sales as their biggest problem fell to historically low levels. While it is still low, the past year has seen a steady climb back up to 7%.

 

Remembering the Worst Bear Market Since the Great Depression


“I am an optimist. It does not seem too much use being anything else.” -Winston Churchill

Did you know one of the worst bear markets in history ended 15 years ago this past Saturday? If you were there then you no doubt remember it. Bank stocks were outright collapsing, with many down 90%. The global economy was in shambles, and people were losing their jobs all around. Retirement funds had been demolished and there was very little hope.

What do I remember about the Great Financial Crisis (GFC)? I worked at a very small research shop at the time and every Friday they’d bring a couple people into a room to let them go. Eventually they mixed it up and let people go on other days, which was nice, since it got to the point you were sick to your stomach by the time Friday rolled around, as it could be your day.

But like all bad things, it eventually came to an end. The S&P 500 fell 57% from its October 2007 peak before bottoming on March 9, 2009, ending the GFC bear market. Between the tech bubble bear market earlier in the decade and the GFC, the 2000s went down as one of the worst decades for stock investors ever. Even worse than the 1930s!

Benjamin Franklin once said, “There are no gains without pains.” In part due to that lost decade of the 2000s, we’ve been in the midst of incredible gains ever since. In fact, the S&P 500 is up more than 900% on a total return basis the past 15 years.



But let’s never forget, it wasn’t a straight line higher. We had many scares along the way. Near bear markets in 2011 and 2018, a 100-year pandemic accompanied by a 34% bear market in 2020 and then another 25% bear market in 2022 made it anything but an easy 15 years. Yet, in the midst of all of it, longer-term investors were once again rewarded for sticking to their long-term investment plans. They say the stock market is the only place where when things go on sale, people run out of the store screaming. Well, we saw a lot of screaming the past 15 years.

Here’s a TIME magazine cover that best summed up that time. Notice the date is March 9, 2009, the exact day of the low!



You don’t ever want to blindly invest based on magazine covers, but we do use magazine covers as potential contrarian indicators to get a good feel for what is priced in. Once something makes it to a magazine cover, chances are good markets have already taken it into account. TIME isn’t a financial publication, so when they have a very bearish or bullish cover, take note.

Seven months after the GFC bear ended, stocks were up nicely off the bottom and TIME came out with this all-time contrarian cover. They suggested it was time to retire the 401k, as who could possibly ever want to invest in stocks for their retirement again? At the time I saw this cover and said it was wildly bullish, as the cover captured the sentiment of so many people. That sentiment persisted for many years, as the memory of the GFC continued to haunt many investors.



Which brings us to the latest cover in the financial publication Barron’s.



Quite the difference in sentiment, huh? Maybe a 900% total return rally will do that, but this cover caused a huge ruckus on social media with many claiming the bull is now over. First off, if you want to get specific, Barron’s didn’t put a bull on the cover, as it is only the horns. At the same time, Barron’s is a weekly financial magazine, so they have more opportunities to use bulls (and bears) on their covers. My take on Barron’s is they’ve made many good calls, so to me, this by itself isn’t some big contrarian warning.

In late October for instance, they said to buy bonds, which was right in front of one of the greatest two-month rallies bonds have ever seen. You didn’t want to fade that one.



I did a quick Google search and found numerous covers with a bull on it in Barron’s the past decade. Here’s one of my favorites. After going nowhere for 13 years, stocks were just starting to break out to new highs and Barron’s was leading the charge in May 2013.



Speaking of May 2013, here’s a much younger version of myself that very same month, explaining to Maria Bartiromo and the quite bearish other guest, why we were going higher. The pushback I got for being a bull back then was never ending.

You have to remember, after the GFC people didn’t trust the stock market and for many years, and it was widely expected that a new bear was always right around the corner. I made a name for myself in 2009, 2010, 2011, 2012, and especially in 2013, as I was bullish when very few were. I’d go on CNBC all the time and the producer would ask if I was still bullish. When I answered yes, they’d always reply with something like, “Good, because I have a bear, but can’t find another bull to come on TV.” That was a signal to me all by itself that the rally had plenty of room to run.

In March 2024 there’s no question being bullish isn’t so lonely anymore. I’m seeing many of the more vocal bears from last year turn into bulls now (and they are doing their best to change the narrative on just how wildly wrong they were last year). No question this is a bit of a near-term warning. Various sentiment polls are flashing extreme optimism and put/call ratios are in the complacency range as well. None of this is end-of-the-world stuff, but it does say the bar is set quite high and any disappointment could lead to a well-deserved pause or break.

Let’s remember, the S&P 500 is up 16 of the past 19 weeks and up close to 25% since late October. 25% is a great year, let alone only 19 weeks! I found 20 other times the index gained at least 20% in 19 weeks and 6 months later the S&P 500 was higher 19 times and a year later 18 times. Even if we see near-term weakness, the overall bull market is likely alive and well.



Let’s wrap it up with one of our favorite charts. As good as things have been lately, this won’t continue. Even the best years tend to see multiple scary moments. Stocks gained 25% last year, yet a year ago this month we saw a regional bank crisis that caused many legit worries. We also had a standard 10% correction in late October which caused incredible amounts of fear. Volatility is the toll we pay for stock’s upside, and we haven’t had to pay that toll for a while now. Just have this in mind when the inevitable pullback comes. Volatility is normal, and even sometimes desirable, in a healthy market.

 

March Quarterly Options Expiration Week: S&P 500 and NASDAQ Up 12 of Last 16

March Quarterly Option Expiration Weeks have been quite bullish. S&P 500 has been up 27 times in the last 41 years while NASDAQ has advanced 25 times. More recently, S&P 500 and NASDAQ have both advanced 12 times in the last 16 weeks. But the week after is the exact opposite, S&P down 27 of the last 41 years—and frequently down sharply. In 2018, S&P fell –5.95% and NASDAQ dropped 6.54%. Notable gains during the week after for S&P of 4.30% in 2000, 3.54% in 2007, 6.17% in 2009, and 10.26% in 2020 appear to be rare exceptions to this historically poorly performing week.

 

Ides, Schmides – March Drawdowns <2% Rather Bullish

While our 2024 outlook has remained decidedly bullish since our December “2024 Forecast: More New All-Time Highs Anticipated,” we’ve warned to “Beware the Ides of March.” That this overbought market is due for a pullback. That stuff happens in March, especially in election years (think 1980 Hunt Bros, 2000 Dotcom Bubble Pop and 2020 Covid Crash).

But what does it mean if this AI-driven bull powers ahead through March without a hitch? Well, it’s bullish, that’s what. Gains beget gains and when macro forces overpower weak seasonality, those forces often gather momentum when the seasonal period ends.

While there is still time left for March’s history of volatility to kick in, especially during notoriously treacherous week after Triple Witching, should the market escape the usual March retreat that would support continued robust bullish market action for the rest of 2024. When March’s drawdown is <2% the Best Six Months November-April are up 95.7% of the time, average gain 11.4%; Worst Six Months are not bad, up 69.6% of the time, 3.5% average; rest of the year is up 87% of the time, average 9.3%; and the full year is up 91.3% of the time with an average gain of 15.7%.

 

The Inflation Report Was Actually Better Than It Looked


The latest consumer price index (CPI) inflation data for February came in slightly ahead of expectations, which led the commentariat to worry about “sticky” inflation that doesn’t go away. However, I had a different sentiment after spending some time under the hood with the data. But first, the numbers. Headline CPI rose 0.4% in February, which was higher than the 0.3% increase in January, mostly thanks to a 3.6% increase in gas prices. CPI inflation is currently up 3.2% since February 2023.

Here’s the big picture: Inflation has eased a lot since June 2022, when it hit 9%. However, it appears to have stalled at just over 3%. But as you can see in the chart below, shelter (dark green bar) has been the largest driver of inflation. No other category is contributing as much as shelter, and despite the February increase, the contribution from energy prices is nothing compared to what we saw in 2022. The good news is that the contribution from food prices (bright red bar) has also shrunk a lot.



Shelter Inflation: There’s Good News and Bad News
Last month I wrote about how shelter is keeping CPI inflation elevated. That’s still the case. If you exclude shelter, headline inflation is running at a 1.8% annualized pace over the last 6 months, similar to its year-over-year increase.



As I’ve explained previously, a big part of shelter is “Owners Equivalent Rent” (OER). It is the implicit price at which homeowners are assumed to rent their homes to themselves. It’s derived from market rents of single-family homes and has nothing to do with home prices, or mortgage rates. It makes up 27% of the CPI basket, which is ironic because a large majority of American households own their homes (66%) and do not experience anything like OER. Meanwhile, regular rents of primary residences make up 7% of the CPI basket. So, you can see how shelter can have an outsized impact on CPI inflation.

OER inflation unexpectedly surged in January to an annualized pace of 6.9%, the largest monthly increase in 10 months. There was some worry that this could potentially be the start of an unwelcome uptrend in shelter inflation, driving overall inflation higher. As I pointed out last month, the January surge was likely a one-off, and the good news is that February data reverted to what we saw in the fourth quarter. OER inflation rose at an annualized pace of just 5.4% in February. Regular rental inflation came in at 5.0% (annualized) – that’s slightly higher than in January, but lower than what we saw in late 2023. The bad news is that these readings are still elevated relative to where they were pre-pandemic (around 3-3.5%).



Looking ahead, rents and OER still appear to be following the path of private market data, albeit with a really long lag. What’s positive is that private data is still showing rents falling on a year-over-year basis, which means we needn’t be too worried about a resurgence in rental inflation.



Really Good News: Food Price Inflation Is Easing
This was underreported amidst all the headlines about the CPI data. But food price inflation is easing and that’s a big deal for three reasons.

First, easing food inflation is a big boost to household wallets. Even more so than energy, food typically makes up a larger wallet share. And recent data is very encouraging. Grocery store prices (“food at home”) were flat in February, and it’s up just 1% over the last year. That’s down from a peak of 13.5%. Despite that, food services inflation, including fast food and full-service meals (“food away from home”), has been running strong recently. But we saw a big pullback in February, with prices rising just 0.1%. It’s still up 4.5% from last year, but that’s down from a peak of 8.8%.



Here’s a nice quote from Costco’s CFO during their earnings call, one that I thought nicely underlines what we’re seeing in the data:

“A couple of comments about inflation. In the last quarter, in the first quarter, we estimated that year-over-year inflation was approximately 0 to 1%.

We’ll now say that in Q2, it was essentially flat. And notwithstanding essentially flat, we’re taking price reductions where we can. Anecdotally, everything from simple items like reading glasses from $18.99 to $16.99, the 48 count of Kirkland signature batteries from $17.99 to $15.99, a 24-count of Pellegrino from $16.99 to $14.99 and even 4 pounds of frozen fruit plan for $14.99 down to $10.99 with new crop pricing. So we continue to do that.”

Second, easing food services inflation is positive for the Fed’s preferred inflation metric – personal consumption expenditures ex food and energy (“core PCE”). Interestingly, food services are not included in core CPI but it makes up 6% of core PCE and has been a driver of excess inflation on that side. So, the pullback is good news for core PCE inflation.

Third, easing food services inflation suggests that underlying inflation pressure is easing. Specifically, within foods services, “full service meals (and snacks)” has historically tracked core inflation verry closely. You can see this in the chart below. That’s despite only a 3% weight in the core CPI basket (Mathew Klein at the Overshoot has pointed this out before). In fact, it tracks core CPI better than OER (despite OER’s huge weight in the basket).



If you think about it, full-service restaurant meals combine several elements that go into inflation, including:

• Commodity prices – obviously food, but also energy prices to an extent (for things like crop fertilizers and diesel for transportation)
• Wages – for workers in restaurants
• Rents – of the restaurant premises

We’ve seen all of the above ease considerably over the last year, and that may be starting to show up in the inflation data. CPI inflation for full-service meals rose just 0.1% in February, the slowest monthly pace since August 2020. It’s up 3.8% from last year, but that’s down from a peak of 9% in 2022, and not far above its pre-pandemic pace of 3.5%. This more than anything else tells me that underlying inflation is running close to the Fed’s target of 2% (never mind shelter).

Here’s the Big Picture
As I noted at the top, inflation is easing, but with a few bumps along the way. CPI inflation was on the hotter side over the last two months, but there were positives under the hood of February data. The downtrend from late last year is intact, and importantly, core PCE inflation is likely to be softer than its CPI counterpart. Also, easing inflation for full-service restaurant meals suggests that we’re not looking at a resurgence of inflation. And that underlying inflation is already at, or close to, the Fed’s target.

This also means we’re still on track to see interest rate cuts in 2024, but less than what the market expected at the beginning of the year. We’ve always been in the camp that the Fed’s likely to cut rates by 0.75-1%-point in 2024, and we haven’t changed that view, assuming economic growth continues along trend (as seems to be the case now). That’s still positive for markets, as the Fed looks likely to cut rates into a strong economy, one that is seeing higher income growth thanks to easing inflation. In our latest Facts vs Feelings episode, Ryan and I chatted about how sentiment is beginning to shift as skeptics acknowledge the more positive outlook.

 

Rotation
Fri, Mar 15, 2024

Investors have been waiting for a broadening out of the rally for even longer than they’ve been pricing in (and then pricing out) rate cuts, but while breadth may still be relatively narrow, there has been a good deal of rotation recently.

Let’s start with where the market stood heading into today. We measure overbought and oversold levels as a closing price that is one or more standard deviations above (below) the 50-day moving average (DMA). By that measure, the S&P 500 closed at overbought levels for 40 straight days through the close on 3/14. While that sounds extreme, we would note that in the period ending on August 1st of last year, the S&P 500 closed at overbought levels for 45 straight days in what was the ‘summer of overbought’.



Now let’s get to the part about rotation. While the S&P 500 has been overbought for the last 40 trading days, not a single sector has closed at overbought levels for as many days. As shown in the chart below, the streak for the Financials sector has been close at 39, followed by Industrials at 30 days. After those two sectors, no other sector has closed at overbought levels for even half as long as the S&P 500. To put that in perspective, since daily sector price data starts in late 1989, there have been eleven other periods where the S&P 500 closed at overbought levels for at least 40 trading days, and of those periods, there was only one (in 2012) in which not a single sector had seen 40 or more overbought straight closes on the same day that the S&P 500 reached 40.

 

Homebuilder Sentiment Back to Expansion
Mon, Mar 18, 2024

Earlier today, the National Association of Home Builders published its March reading on homebuilder sentiment. The headline index rose back above 50 and into expansionary territory. Albeit back in expansion, the index is only at the highest level since last July, and that is well below much of the past decade's range.



The only sub-index of note was for future sales. This reading has risen month-over-month in four consecutive releases, which brings it up to match the June 2023 high.



On a regional basis, homebuilder sentiment is showing as much healthier in the Northeast and in the Midwest. While in the Northeast the index pulled back from a nearly two year high, the Midwest leaped 11 points month over month to the highest level since July 2022. That one month jump is tied for the fifth largest one month increase on record. The only larger recent increases were in June and July of 2020. As for the West and South, homebuilder sentiment rose and fell, respectively.



As homebuilder sentiment improves, the chart of the homebuilders, proxied by the iShares US Home Construction ETF (ITB), remains in its long term uptrend. Currently, the group remains overbought in spite of recently pulling back from its highs.



Finally, we would note that although homebuilders have been mostly headed higher, on a relative basis versus the S&P 500 (SPY), ITB has weakened a bit. Taking the ratio of ITB versus SPY, the homebuilders have been on an impressive string of outperformance over the past few years. However, that ratio has made a couple of lower highs since the end of 2023. While that is not to say the longer term trend is reversing, it has at least pumped the brakes so far this year.

 

Inflation Projection No Rate Cut Soon

Until PCE is sustained at or below 2% they are not likely to cut. Our PCE projection chart reveals the Fed is not likely to be in a rush. They are slow to cut rates & only move quickly when a real crisis is at hand, which currently is not.

The Street is overly optimistic the Fed will cut rates sooner, substantially, & start well before the election to not appear political. But last week’s higher than expected CPI (0.4% monthly 3.2% yearly) suggests otherwise as PCE tends to follow CPI’s trend.

Headline PCE index, including food and energy “is the Federal Reserve’s preferred measure of inflation.” https://fred.stlouisfed.org/series/PCEPI

PCE’s monthly change was 0.3%, which put the 12-month rate at 2.4%, above the Fed’s stated 2% target. Anything above a 0.1% monthly change will keep inflation above 2%. Any monthly change greater than 0.1% is likely to delay any Fed rate cut until after midyear if not longer.

The Fed may have engineered the goldilocks soft landing, but with inflation persistent while the economy remains resilient and unemployment stays down, there’s no need for the Fed to rush to cut rates.

 

Why Stocks Aren’t in a Bubble


“Please, God, just one more bubble.” Popular Silicon Valley bumper sticker after the tech bubble burst

With stocks back at all-time highs, many are of the opinion that stocks must be in a bubble. Take note, many of these bubble callers were the same bears that fought this bull market all the way up. Now they are taking a different angle on their incorrect calls and blaming things on being in a bubble, because it can’t possibly be their fault. It must be a bubble.

We disagree, as this is not a bubble. Could there be parts that feel a little over the top? Sure, the excitement toward the Mag 7 at the start of this year was maybe a bubble in how much everyone talked about these names and sure enough, we’ve seen both Apple and Tesla drastically underperform lately. But a bubble overall? We’d say no way.
Let’s start at the beginning. What is a bubble? I found this definition in a Forbes article and liked it:

A stock market bubble—also known as an asset bubble or a speculative bubble—is when prices for a stock or an asset rise exponentially over a period of time, well in excess of its intrinsic value. Eventually, prices hit a wall and then fall very far, very fast, as the bubble “pops.” Bubbles can occur to all kinds of assets in addition to stocks, from real estate and collectibles, to commodities and cryptocurrencies.

Famous bubbles include tulips in Holland in the 1600s, the South Sea bubble in London in 1720, railways bubbles of the 1840s, the roaring ‘20s and crash of 1929, the Japanese real estate and stock market bubble of the 1980s, the tech bubble in the US of the 1990s, and the housing bubble that burst in 2008. There were many others, like baseball cards, beanie babies, and even Wordle if you ask me. Bubbles can be anything that is popular, sees tons of excitement, then the hype is simply too much and the excitement falls, likely along with prices.

The other thing about bubbles is in some cases the prices drop in excess of 90% (or more) and rarely recover or can take decades to recover. It took Japan’s Nikkei 40 years to get back to new highs, while many tech bubble stocks will never recover their losses.

Is the Mag 7 a bubble? Many really smart people are saying this, but let’s not forget that these companies are making money, a lot of money. How many companies in the late 1990s soared simply because they added “dot com” to their names? Trust me, it was a lot. More recently the meme stock craze of 2021 stands out as a bubble. Many of those stocks had very little value, poor earnings potential, weak future growth along with headwinds to growth, yet traders pushed them up to astronomical levels. Sure enough, many of them have come all the way back to earth. Here’s AMC for a perfect example.



Back to the Mag 7 for a second. Amazon now sends you medicine and Apple is practically a bank with Apple Pay. In the past, a railroad stock was just a railroad stock, but that really isn’t the case anymore with these large companies. I will end it with a look at how much money these companies are making. They make a lot of money. A LOT OF MONEY.



Here are price/earnings (p/e) ratios on the Mag 7. I’m old enough to remember the late 1990s and how p/e ratios in the 100s were normal, at least until they weren’t. P/E ratios in the 30s, 40s, and 50s are indeed pricey, but, in my opinion, to say this is a bubble is a bit much.



Is the stock market over in a bubble? Some pockets are quite pricey, but overall we don’t see signs of a bubble. Small caps aren’t even at all-time highs (and are historically cheap relative to large caps) and the Nasdaq is practically flat since November of 2021. That doesn’t exactly scream stocks have gone too far, does it?

We’ve been overweight equities since December of 2021 and we comfortably remain there. One of the main reasons is earnings are really strong. In fact, forward 12 month S&P 500 earnings hit another record recently. Incredibly, earnings estimates have jumped 2% the past six weeks. Yes, stock have soared the past six weeks, but with earnings improving we think this helps to justify things.



Speaking of earnings, the trailing 12-month p/e ratio for the S&P 500 is about 26 versus the five year average of 23 and 10 year average of 21. Yes, stocks are a bit pricey, but by no means historically out of line. Then if you remove tech stocks from the equation, it is estimated those numbers drop another 3 points approximately, putting most stocks right in line with historical averages.



One of the big reasons many claim this is a bubble is because earnings last year were barely positive, while stocks soared, implying it was all multiple expansion. As American football analyst Lee Corso would say, “not so fast my friends.”

Going back to the end of 2019 though last week, the S&P 500 gained 71%. Not bad given two bear markets took place over this time. But where did those 71 points come from? Before I go there, returns can come from three places, earnings growth, multiple growth, and dividends.

Breaking things down like this we found the 71% gain was:

• 47% earnings growth
• 15% multiple expansion
• 9% dividends

In other words, that bubble came from mainly earnings and dividends. Not quite the story that loud guy on X told you, huh?



I will leave you with this. Here are two recent studies that suggest the continued path for stocks is indeed higher. The past 20 weeks the S&P 500 was up 24%, which is one of the best 20-week rallies in history. I found 22 other times stocks gained more than 20% in 20 weeks and a year later stocks were higher 21 times. in other words, this strength off of the late October lows is actually consistent with the beginning of longer-term market strength, not the end of bull markets.



Lastly, it has been a great start to 2024, with the S&P 500 up 8.3% as of the 50th trading day of the year (which was last Wednesday). We found 25 other times stocks were up at least 5% on day 50 and the rest of the year (so about 200 trading days) was up an incredible 24 times and up 12.6% on average the rest of the year versus the average return of 7.6%.

 

Yen Weakness Continues
Wed, Mar 20, 2024

Following Tuesday morning's widely anticipated decision from the BoJ to end the era of negative interest rates, BoJ Governor Ueda reiterated his view that it was "important to keep conditions accommodative" due to his view that there is "still some distance for price expectations to hit 2%". While the move out of negative rates was hawkish at the margin, it was also well-telegraphed in advance. Just as important, officials maintained their plans to keep policy easy. As a result of the actions and comments, the Japanese yen sold off on the news, and even though markets are closed for the Vernal Equinox today, it has continued to sell off in trading today. As shown in the chart below, the yen is once again testing the 152 level, an area where it has run into resistance multiple times in the last couple of years. The chart of the yen is starting to look a lot like a cup and handle formation which, from a technical perspective, is considered a positive pattern. This would imply that any breakout above the 152 resistance level would be followed by a weaker yen.



Taking a very long-term look at the yen, the roughly 152 resistance level has been in place for decades. The yen also weakened (rising price in the chart) towards those levels back in the late 1990s and late 1980s before rallying (falling in the chart). If the yen does manage to take out that 152 resistance level in the weeks/months ahead, there would be very little resistance between here and 200, and that would likely have some pretty major macro ramifications for capital flows in Japan and around the world.

 

A Dovish Fed Signals Rate Cuts Amid a Strong Economy – That’s Bullish


The Federal Reserve (Fed) left rates unchanged at their March meeting, but the headline was that the median official continues to project three interest rate cuts in 2024, each worth 0.25%-points. Going into this meeting, a big question was whether Fed members would lower that projection to just two cuts in their summary of economic projections (the “dot plot”). Keep in mind that even two cuts for an economy that’s running strong is a nice tailwind for growth. But there was concern that the Fed would signal a big shift in their thinking, spooked by two months of relatively hot inflation data. However, Fed Chair Powell pointed out that they’re not “overreacting” to recent data, just as they didn’t overreact to the soft inflation data over the prior six months. He stressed that the overall story remains the same: inflation is trending down along a bumpy path. I recently wrote about how the underlying inflation data points to more disinflation, and it’s positive that the Fed is viewing it the same way.

Bullish on the Economy, But Not Worried About Inflation
The details within the Fed’s dot plot were even more bullish. Fed officials upgraded their economic growth projections for 2024 from 1.4% to 2.1% (real GDP growth). That’s a big jump, and acknowledgement that the economy is strong. Their nominal GDP growth forecast for 2024 (real GDP growth + inflation) increased from 3.8% to 4.5%. Nominal GDP growth is where company profits come from, and by itself that’s positive as far as markets are concerned.



Even more interesting: they increased their core inflation (core PCE) forecast for 2024 from 2.4% to 2.6%.

All this to say, the Fed’s still projecting 3 cuts in 2024 – taking the federal funds rate down from 5.4% to 4.6% by the end of the year – even as they upgraded their view on the economy, and projected core inflation to remain above their target of 2%.



It’s one thing to project rate cuts in the face of a slowing economy and lower inflation. But they did the opposite, and that’s a big deal. In fact, the scenario of strong growth with easing inflation that allows the Fed to ease rates is exactly what we laid out in our 2024 outlook. We’d like to think the Fed read Carson Investment Research Team’s 2024 outlook.

Interest Rate Cuts Will Be a Tailwind for the Economy
Powell did say that the projected interest rate of 4.6% at the end of 2024 would be higher than their long-run estimate of the “neutral rate” of 2.6%, implying that monetary policy would remain restrictive. However, the economy managed to avoid a recession in 2022-2023 despite rates at 5.4%. Even better, the economy grew 3.1% in 2023 (inflation-adjusted), well above the 2010-2019 trend of 2.4%.

The labor market has been the backbone of the economy, with rising employment and strong wage growth coupled with easing inflation boosting consumption. Another positive from the Fed meeting is that Powell said they’re aware of the risks of doing too little, i.e. cutting rates too little and too late, and causing “unnecessary harm” to the labor market. They clearly want to hold on to the strong employment gains we’ve seen over the last two years. Up until last year, they were willing to risk higher unemployment if that’s what it took to quell inflation. That’s no longer the case. With inflation heading the right way (down), the Fed likely has the back of the labor market once again.

At the same time, interest rate sensitive areas of the economy, notably housing and equipment investing, have been a drag on growth since 2022. You can see this in the chart below, which shows the main components of our proprietary leading economic indicator (LEI) for the US. Consumption more than offset the drag from other areas of the economy and kept the economy humming. Well, there’s reason for optimism as former headwinds turn into tailwinds. Investors, consumers, and businesses sense that interest rates have likely peaked this cycle, and cuts are coming. Or LEI indicates that the economy continues to grow along trend, if not slightly above it (zero implies trend growth in the chart below).



Take housing as an example. Single-family housing activity makes up the bulk of residential investment within GDP, and that crashed in 2022 as the Fed raised rates. Housing dragged on GDP growth for nine straight quarters (through the second quarter of 2023). That shouldn’t be a surprise because housing is perhaps the most interest rate sensitive sector of the economy, and mortgage rates surged from around 4% to 8%. The good news is that single-family activity has been trending higher since late last year, as rates pull back in anticipation of rate cuts by the Fed. As of February, starts are up 35% from the prior year, and are now 27% above the 2019 average. Permits, which are a sign of future supply, are up 30% year over year and 19% higher than the 2019 average. In short, housing is likely to add to GDP growth this year.



Similarly, a pullback in rates will likely boost the manufacturing sector, as businesses start to invest more in equipment and machinery. Parts of the manufacturing sector, especially defense and hi-tech equipment, are already running strong, but it’ll be positive to see broader strength.

Ultimately, what matters for stocks is profits. And if the economy is strong, profits will continue to grow. The icing on the cake is that we could potentially see rate cuts boosting the most cyclical areas of the economy.