The Three Stages of a Bull Market

Charlie Munger once warned us when wishful thinking takes hold - investors tend to believe that good times will be followed by more good times. This mentality feeds on itself - driving momentum - pushing prices higher. It's what fuels the final stages of a bull market. Attributes such as independent thought, logic, rationale and objectivity give way to herd behavior. That's when your internal alarm bells start ringing... and you start thinking differently from the crowd. Very few people have the ability to do that... but it's what's required.

The Big Tech Unwind

Can the market let the air out of the bubble without consequence? The answer relates to my post on economic cycles. That is, panics and busts only occur after booms and bubbles. But what a minute - are you saying this is a bubble? My answer to that is look at where we are in relation to the long-term mean. That's your litmus test. For example, if we simply take the S&P 500 - it trades at ~22x forward earnings (on the assumption earnings growth this year is 12%). The 10-year average forward PE for the S&P 500 is ~18x (mostly as a function of long-term yields trading near zero). And the 100-year forward PE average is closer to 15.5x. And if we look at tech specifically - valuations are even more extreme.

Cycles: Your Advantage over the Average Investor

I made a decision to reduce my exposure to large-cap tech a few months ago. The decision wasn't an easy one... these are great stocks. For example, did I sell prematurely? The answer will be more obvious in 6-12 months when the cycle has had sufficient time to play out. For now (as was the case when I sold) - I think the downside risks meaningfully outweighed further upside gains. In this post, I explained how selling is a way of managing your risk. I was ensuring I banked the appreciable gains realized over the past few years. In light of the rotation out large-cap tech we've seen this week - I thought it was opportune to share some thoughts on (a) how I calibrate my portfolio in a changing environment; and (b) when to be aggressive and when to play defense. It all comes back to understand the economic cycle...

Real Retail Sales Continue to Warn

When I caught the headline "retail sales hold up in June - better than expected" - I was curious to read the detail. Yes, it's true that nominal sales were flat MoM. But that's not what it states. They don't mention "nominal". As analysts and investors - nominal values are of very little use. What helps us more when forecasting trends (and assessing risks) is real sales. Real retail sales are those adjusted for inflation. And with inflation stubbornly high ~3.0% year-over-year (approximately) - that makes a big difference. When viewed through this prism - real retail sales have been declining for months.

Is the Market About to Broaden Beyond Tech?

Has the market finally started to broaden beyond tech? Whilst it's still too early to answer - there were signs of life this week in sectors which have failed to work this year. By way of example, the Russell 2000 and the Equal Weighted Index caught a bid - as the market started to price in at least one rate cut before the end of the year. And that makes sense. Companies that depend on leverage to supplement cash flows will stand to benefit more from rates cuts (vs their larger cap peers - who profit from higher rates due to cash hoards)

Real PCE: Seeing Around Corners

As an investor, your job is to carefully assess the risks against the rewards. A large part of that equation is knowing exactly where we are in the business cycle. For example, consider the following questions: (a) do you think we're at the beginning or middle of an economic advance (with more to go)? or (b) do you think we're about to encounter a significant change in direction? and (c) if so, is that change for the better or for the worse? Your answer is very important. It's far better to invest (or take more risk) at the start of the business cycle vs the end. Therefore, how will make that decision? How are you able to determine where we are? I will offer a market signal which is arguably more consistent and reliable than most indicators.

Wall Street Cheer a “Strong Jobs” Report…  Should They?

Wall St. cheered a perceived 'strong' monthly June jobs report. The economy added 206K jobs last month - however the unemployment rate moved to 4.1% - its highest level in 2 years. Here's the thing: there was a lot of weakness in the labor market - with most of the jobs coming from government. In addition, April's job gains were revised lower by 111K. And May was revised lower by almost 60K. I think there is material underlying weakness (reflected in slower Real GDP and PCE) and perhaps enough for the Fed to start cutting rates in September or November.

Why ‘Soft Landings’ Deserve Scrutiny

What impact will a 'soft-landing' have on current stock valuations And does there need to be a recession to experience a meaningful (e.g. 12%+) decline? My short answer is no. The gist of this post is to remind investors that you don't need a definitive line-of-sight to a potential recession before protecting gains. I say that because recessions are lagging events - which come at the very end of the cycle. By the time they arrive - the economic damage is already done. Therefore, we need to be in front of the curve. Typically in the 9-months leading up to a recession - stocks continue to trade at or near highs - as analysts raise their outlooks. Unemployment and earnings are usually strong - as GDP keeps its head above zero. But those who are able to understand where we are in the business cycle will pay careful attention to what's happening shortly after peak economic growth.

What Does Kolanovic See That Others Don’t?

Most analyst year-end S&P 500 targets range from 4200 to 5600 for equities; and 3.00% to 4.75% for 10-year yields. My guess is we will land somewhere in between these zones. On the whole, it's fair to suggest Wall Street feels 'comfortable' with holding equities. Consensus year end targets average 5400 - which tells me most don't expect stocks to do much between now and year's end. More important - they don't expect stocks to lose any ground. This post expands what I think is the single most important variable (and risk) with these forecasts: the relative health of the US consumer and their ability to continue spending.

Swoooosh

Is the market overconfident? Does it only see upside? What weight does it assign to the risks? And are the 'sirens' of perpetually higher prices too hard to ignore? One popular measure of confidence is the weekly AAII Investor Sentiment Survey. As at June 26th - 44.5% of all investors lean bullish - up from 39.0% June 5th. Analysts have also been busy hiking their S&P 500 targets for year end - with the average now around 5400. But not all analysts are aligned. Separately, we look at the record 20% one-day decline in Nike... they are warning of sales declines next year. Is this a great long-term (3-year) opportunity; or a signal to stay clear?

Buying is Easy… Selling is Hard

Do you consider yourself a "good" or "bad" investor? For example, one might say a good investor is someone who beats the returns of the Index over a long period (10.5% annualized). Beating the Index over the long-run is difficult to do... very few fund managers are able to do it. But what if I framed the question this way: (i) bad investors think of ways to make money; vs (ii) good investors think of ways not to lose money. Which one best summarizes your approach to speculation? Of the several thousand posts I've written the past 13+ years - this is arguably the most important question you could ask. If you understand the gravity of this distinction... you have a good chance of succeeding.

Divergent Signals

The market is wildly enthusiastic about all things "AI". If you're a company - and you don't have an AI narrative - the market doesn't want to know you. However, I also think this is potentially a blind spot. AI will undoubtedly be important and will change the way we do things (as we effectively re-wire tech) - but it's a tool. For example, whilst Wall Street celebrates that an iPhone might be able to better answer our questions - Main Street sees things very differently. Do you think the majority of consumers understand the optimism on Wall Street? And similarly, do you think Wall Street understands why consumers are complaining?