Category S&P500

Will Earnings Deliver on the Hype?

Q4 2023 earnings are starting to hit the tape. From mine, if the market is to continue rallying - it's less about inflation and the Fed - it's whether corporate America will deliver on 12% earnings growth in 2024. Coming into earning's season - my view 12% felt ambitious - given the slowing economy and relative health of the consumer. This post talks more to the concentration in the market - the relative influence from NVDA - and why diversification will be key this year.

Weighing Risk(s) More Useful than Forecasting a Number

Around this time of year - a wrath of 'experts' forecast where they believe the S&P 500 will finish the year. For me it serves little purpose. For one, most of the time forecasts are typically wrong (and by a wide margin). Second, as time goes by, more information will come to hand which often changes our view. From there, forecasts should be updated. Third, there are almost always random events which reset the game. What happens to forecasts then? They are typically tossed out the window. With that, let's look at what the market "experts" believe we will see this year - and I will offer my approach.

Reverse Goldilocks Coming?

2024 has not started the way we ended 2023. From mine, late last year feels a lot like what we saw at the end of 2021 (and early 2022). At the time, investors chased momentum in fear of missing out ('FOMO') - pushing multiples into what I considered 'higher risk' territory (i.e., above 20x forward). It was a time to lower exposure. As we start the new year - stocks are taking a pause. And it's not unexpected given the sharp run higher. However it begs the question... could it be something more than a pause? Of course we don't know the answer (no-one does). Where there is uncertainty - all we have are probabilities.

2023 – The Year in Review

2023 has come to a close... and what a year it was. For many, it will go down as one of the more challenging. For others, they will have banked some very attractive gains. In short, the S&P 500 recovered from its worst year in over a decade - finishing the year 24.2% higher. As for myself, my portfolio returned 19.63%. I made some errors this year (which I will discuss) but also had a couple of wins. Net-net - it was a solid year given the unchartered waters we were navigating.

Did We Just Pull 2024’s Gains Forward?

Stocks were already partying into the Fed meeting (up ~12% over 6 weeks) - however when Powell provided his December update on monetary policy - he simply turned up the music. Risk was on. So here's my question - with stocks up an incredible 15% in just 7 weeks - how much of next year's potential gains have been pulled forward? Is it riskier now to buy stocks than it was a few weeks ago? To be clear, stocks are likely to add to their gains before the year is done - however we are now trading close to 20x next years earnings. That's not a bargain.

What Just Happened?

Only two weeks ago Fed Chair Powell said "the FOMC are not thinking about rate cuts". And it was premature to conclude with confidence they are at a sufficiently restrictive level. Well forget all that. Powell performed one of the more remarkable pivots ever seen from the Fed. He pivoted 180 degrees from his sentiment barely 14 days ago. Powell is now talking three rate cuts next year and the Fed have essentially "won the battle" over inflation. My take is the Fed is now more concerned about the business cycle; i.e., recession. There is a reason the Fed will cut - and that is the risk of dislocation in the economy (i.e., recession)

A Rational Response or Pavlov’s Dog?

Market consensus is for a soft-landing with at least three rate cuts next year. The market does not expect a recession.This may prove correct (I don't pretend to know) - but there are some chinks in the armor. Readers will know I don't subscribe to a soft-landing. Typically in the lead up to a recession - spectators will generally lean towards it being "soft". Few ever forecast 'hard landings'. For example, if you have unemployment below 4% and positive GDP growth - it's hard to see anything else. But very rarely do things land softly. We've seen one over the past five decades. That's not a high ratio. What's more, soft landings are exceptionally rare after 550 basis points of rate hikes (not to mention over $1 Trillion in quantitative tightening - of which we have no parallel).

People Choose What They Want to Hear

Markets continue their ascent after a blistering November. The Dow and S&P 500 each gained ~9% for the month - in what is typically a seasonally strong time of year. From a year-to-date perspective, the Dow is up 8.5%, the S&P 500 is up ~19% and the Nasdaq up over 35%. The anomaly? 493 of the 500 stocks on the S&P 500 are barely positive for the year (i.e., the equal weighted index). So what's driving the optimism? Simple: the expectation of lower yields and the Fed hitting its terminal rate. This post looks at potential blind spots for the market.

Cautious… But Invested

It's a brave person who is short the market. Probabilities suggest we are headed higher in the near-term. For example, previous episodes of Fed pausing suggests stocks typically gain. My sentiment today is best described as 'cautious... but invested'. To that end, one should always be invested to some extent. And whilst it's always unwise to be completely remiss of the risks -- it would be an even greater mistake not to have some exposure to higher quality risk assets and fixed income (at current yields)

Why I’m Not Betting on a Soft Landing

With the Fed seemingly on pause and bond yields sharply off their highs - markets are optimistic. Equities have surged the past few weeks - up around 17.6% year-to-date. The S&P 500 added 10% in just 3 weeks! The narrative (as far as I can tell) is we're headed for "soft landing". But can we be so sure? Past experience suggests a "hard landing" is the more likely outcome. And absent other evidence, when the Fed hikes this much (and especially this fast) - we should expect one.