Core PCE Softens – Giving the Fed Scope to Cut

If there's one inflation indicator the Fed tracks more than any other - it's Core PCE (personal consumption expenditures). The PCE price index looks at U.S. inflation by measuring changes in the cost of living for households. It tracks the prices of a basket of goods and services, each with different weightings, to reflect how much a typical household spends every month. Today we learned that Core PCE continues to soften - which is good news. Question is does this give the Fed further scope to cut rates sooner rather than later?

Lessons from 1999/2000

Momentum is a powerful force. Bet against it at your peril. John Maynard Keynes was believed to have said "...the market can remain irrational longer than you can remain solvent". Sound advice. Those expecting (or worse betting) the market would reverse to start 2024 are probably questioning their decision. It's been one record close after another. Higher highs beget higher highs.

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.

Equal Weight ETF to see Mean Reversion

The euphoria in markets continued last week - with the S&P 500 notching a new record high - taking out the 4817 high from Jan 2022. Thanks largely to the Fed signaling peak rates in combination with inflation trending lower - markets now believe a 'soft landing' is possible. That is, inflation ultimately trends back to the Fed's objective (2.0%) without any negative impact to the broader economy (e.g. widespread job losses). We will see how that turns out - as the Fed is attempting to thread a narrow needle. From mine, a soft landing remains a lower probability outcome. However, I believe there is still opportunity... and it's not with large cap tech stock.

EPS Growth of 12% with 6 Rate Cuts? Really?

Over the past couple of months - I've been trying to reconcile the following: (i) can the market achieve 12% EPS growth; and in parallel; (ii) see the Fed cut rates 5 or 6 times this year? I ask this question as that's what the market is pricing in. It feels like a contradiction. Can we achieve both? For example, if the Fed is forced to cut rates aggressively - what does that tell us about the health of the economy? I would assume it signals an economy in need of emergency assistance.

Market Confident on Imminent Rate Cuts Despite Inflation Print

Today we received the final monthly inflation report for 2023 - ahead of the Fed's next policy meeting Jan 30-31. Markets were expecting very good news... but did they get it? On the surface, both prints were slightly higher than expected. However, we saw a mostly muted reaction in both bond and equity markets. Bond yields fell - with the market maintaining its 68% expectation of a rate cut as early as March.

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.

Jobs Data: Choose Your Narrative

Today we learned that December added 216K jobs. CNN reported it as a "red hot" print. Was it? From mine, the headline number offers us very little. For example, what I want to know is the following (a) where are the jobs are being added (e.g. public vs private sector and what sectors); (b) what are people being paid per hour (is it rising or falling?); (c) are people working longer hours (as part time work doesn't pay a mortgage); and finally (d) what's the prevailing trend (as one month's data doesn't account for much). The headline number doesn't provide this detail - therefore we need to dig a little. My quick take - this report is weaker than what the headline suggests.

Santa’s Rotten Apple

What happened to the Santa Clause Rally? Bahhh humbug! For those less familiar, a Santa Claus Rally involves a rise in stock prices during the last 5 trading days in December and the first 2 trading days in the following January. Over these 7 trading days in question, stock prices have historically risen 76% of the time (to the tune of ~1.3%) - far more than the average performance over a 7-day period. But this year the market received a fat lump of coal. Or more accurately - perhaps a "bad apple". Some feel that's potentially a bad omen for the year ahead... giving rise to the popular Wall St. maxim "... if Santa Claus should fail to call, bears may come to Broad and Wall"....

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.

The Investor’s Library: 89 Books to Master Market Psychology

"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time—none" - Charlie Munger. This post includes a collection of 89 books I've read which will make you smarter (and a better investor). Old Charlie also told us ".. if it’s wisdom you're after, you are going to spend a lot of time sitting on your ass and reading". Amen to that.

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.