A Question of Leadership
October 28, 2022
In the aftermath of the Tech-Bubble collapse running from 2000 to roughly October 2002 through the end of 2021, there is little doubt about market leadership. In that time frame, the NASDAQ 100 was up over 1,500% versus the S&P 500 advance of roughly 430%.
The Housing Market Under Pressure
October 21, 2022
The Covid pandemic created significant market distortions. The economic shutdown and reopening process with the 42% increase in money supply is being unwound in the equity markets currently.
Technically Speaking, Close Your Eyes and Buy
October 14, 2022
Core CPI was up 6.6% in September versus 6.3% in August. Counter to market expectations, inflation is getting worse. The Fed is now expected to raise the Fed Funds rate another 0.75% in November and December. If a rate hike equals a 0.25% rate increase, we are facing another six hikes before year end. The 10-year U.S. treasury may migrate up to 5% and 30-year fixed rate mortgages could go to 8%.
2022: Year of the Interest Rate Bear
October 7, 2022
At the beginning of 2022, investors expected the Federal Reserve to raise the Fed Funds rate roughly 2-4 times with a single rate hike equating to 0.25%. Using 0.25% as our definition of a rate hike, the Fed has raised the Fed Funds rate 12 times this year. The Fed says there is more to come.
Interest Rate Blitz
September 30, 2022
The Federal Reserve is raising the Fed Funds rate at the fastest pace ever. 30-year mortgage rates climbed above 7% this week, up from 6.4% last week and up from the January 2021 low 2.65%.
Running Up Hill
September 23, 2022
The Federal Reserve is now projecting a terminal Fed Funds rate of about 4.6%. This is up from about 3.8% over the past month. On August 1, the 10-year US treasury was about 2.6%. Today, it is 3.7%.
What Do You Expect
September 16, 2022
Not much if you are a consumer. Consumer confidence is near the lowest level it has been since 1971. The good news is the average subsequent twelve-month return of the S&P 500 from confidence lows is roughly 25%.
Pushed to the Edge
September 9, 2022
The re-re-re-adjustment of interest rate expectations higher following Fed Chairman Powell’s Jackson Hole speech two weeks ago triggered a significant selloff in stocks. Then the news deteriorated further.
Jackson Hole
September 2, 2022
Since Fed Chairman Powell spoke on Friday from Jackson Hole Wyoming, the S&P 500 has pulled back by about 6%. The sudden market depreciation could be considered the “Jackson Hole.” The hole developed in reaction to Powell’s statements about higher rates for longer and a “sustained period of below tend growth.” The peak in the Fed Funds rate is now projected to be 3.75% and it appears that investors are expecting S&P 500 earnings to be roughly $220 in 2023, down from an expectation of roughly $240.
Negative Earnings Without Energy
August 26, 2022
We have had a couple of back-to-back quarters of negative real GDP growth. This is typically the layman’s definition of recession. Many market strategists and economists have said we are not in recession because corporate earnings are growing.
The Mother of All Moving Averages
August 19, 2022
Fundamental analysts have a wide dispersion on their outlooks. Several months ago, the consensus outlook for S&P 500 earnings was roughly $250. Today, it is $243.81. Some analysts believe the actual number will be closer to $235 and in the worst case, $200. If S&P 500 earnings are $235 in 2023, the S&P 500 is trading at a P/E of 18.3x which is high relative to the 25-year average of 16.9x.
Now or Later
August 12, 2022
We are roughly halfway through the third quarter of 2022. In the next six weeks, a substantial amount of economic data will be released, as it always is, that will shape our view of the health of the economy. This week, the big news was the Consumer Price Index (CPI) report was better than expectations and may indicate we are past peak inflation. The stock market’s interpretation of this data is 1) the Federal Reserve will be less aggressive in its future rate hikes and, 2) the economy is unlikely to suffer a deep recession.
Inflation Cost Too High
August 5, 2022
“There is risk of doing too much, but a greater risk in doing too little,” says Federal Reserve Chairman Jerome Powell. Thus, we got the hammer, not the chisel from his toolbox to combat the highest inflation in decades. The swift rate increases so far this year takes rates to the Fed’s neutral range of 2.25-2.50 (vs 0.00-0.25 at the start of the year). Borrowers were spoiled having historic low rates for so long. Something had to give. Someone had to blink. Coming from such a low level, the rate increases felt more like a sledgehammer was used to nail down the inflation spike, but again, we are just back to neutral.
When Recession Is Good News
July 29, 2022
The Advance Q2 GDP Report indicated that real GDP decreased at a seasonally adjusted annual rate of -0.9% which marked the second straight quarter of contraction. Real GDP in Q1 was down -1.6%. Two sequential quarters of negative GDP growth is the layman’s definition of recession. The official recession designation is determined by the National Bureau of Economic Research (NBER), usually months after the trough of the business cycle.
Technically Speaking
July 22, 2022
From the June lows, the S&P 500 Index is up almost 9% and the NASDAQ is up 13%. Both indexes are trading above their 50-day moving averages. Technically speaking, many momentum traders see this as a positive trend shift.
Timing Issues
July 15, 2022
The Consumer Price Index (CPI, inflation measure) was up 9.1% in June year-over-year. This was an acceleration of inflation from May. The Producer Price Index (PPI, inflation measure) was up 11.3% in June year-over-year. This was an acceleration of inflation from May.
Recession Today
July 8, 2022
Crazy as it might seem with unemployment in the mid 3% range and the service and manufacturing sectors expanding, the U.S. may already be in a recession. The real gross domestic product (GDP) decreased at an annual rate of 1.6% in the first quarter of this year. The Atlanta Fed’s model currently predicts the second quarter GDP will decline by 2.1%. If real GDP is negative in the second quarter, this will meet the common definition of recession.
Modern Finance
July 1, 2022
The financial industry in the United States is the world leader in innovation. In 1996, the first Exchange Traded Fund (ETF) began trading. It was the Bloomberg Barclays TIPS (TIP). It was followed by the S&P 500 (SPY) in 1998. Today, there are thousands of ETFs with $328 billion of assets. ETF popularity is driven in their advantages over mutual funds including lower expense ratios, intra-day liquidity and tax advantages. As the ETF industry has developed, it has migrated from offering only index portfolios at a low cost to a better way to own actively managed and complex investment strategies with the purchase of a single ticker.
LEI Trending Down
June 24, 2022
Last Friday, the Conference Board reported the Leading Economic Index (LEI) decreased by 0.4 percent in May and revised down April to -0.4% vs. -0.3% previously reported. The decline was “fueled by tumbling stock prices, a slowdown in housing construction, and gloomier consumer expectations.” The June LEI will likely decline again when reported in July given the stock sell-off in June and weak consumer sentiment. If so, the 6-month moving average will turn negative next month.
Disconnecting the Data
June 17, 2022
Efficient markets price in all available information. Sometimes, the information does not make sense and there are disconnects. One of the most surprising disconnects is between consumer sentiment and aggregate demand.
Last Friday. the preliminary University of Michigan Consumer Sentiment for June was 50.2 - the lowest recorded level, ever. Comparable to the trough reached in the middle of the 1980 recession. Forty-six percent of the consumers surveyed attributed their negative views to inflation. The final June data will be reported next Friday.
Hurricane
June 10, 2022
Jamie Dimon, CEO of JPMorgan Chase, told investors at an analyst meeting last week to “brace yourself” for an economic hurricane caused by Fed tightening and food and fuel inflation as a result of the war in Ukraine. The national average gasoline price reached $4.92/gallon this week. In California, we are already experiencing sticker shock when we fill our cars with gasoline at $6.50 per gallon and a fill-up costs $100. In Mendocino California, gas prices have reached $9.60 per gallon.
Bond Market Confirmation
June 3, 2022
In the last week of May, the S&P 500 Index rallied by more than 6% clawing back losses and finishing flat for the month of May. $1 trillion worth of annualized stock buybacks started up. Fixed-weight portfolios were rebalanced to restore the target stock/bond balance. Monthly rebalancing can create up to about $75 billion worth of stock buying pressure in the wake of a mid-single digit down month. As stocks bounced last week, short covering buys added boost to the rally.
Inflation Profit Pressure
May 20, 2022
Walmart and Target reported better than expected sales. But earnings disappointed primarily because inflation pressures are shrinking margins. Both companies said they expect price pressures to persist for several quarters.
The problem investors face is the rising possibility that inflation remains higher for longer. This will have a negative impact on profits and may cause consumers to pull back from currently high levels of consumption. Additionally, the Federal Reserve will have to remain hawkish on interest rates for longer which increases the probability of recession.
Big Bear or Little Bear?
May 13, 2022
January 4, 2022 was the most recent all-time high for the S&P 500. The stock market has been in drawdown for nearly five months. Whether its interest rates, war or inflation, the news has generally gotten worse as the year progressed. From both a duration and magnitude standpoint, this drawdown is morphing from an ordinary pullback into a bear market. Through Wednesday close, the S&P 500 is down 17.3%, the NASDAQ 100 is down 26.7%, and “innovation” stocks as measured by the ARK Innovation ETF (ARKK) are down 78%.
2022 May be the New 1990?
May 6, 2022
The investment landscape is challenged. The Fed summed it up as follows: “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.”
More Sellers than Buyers
April 29, 2022
Since the intraday high last Thursday through Thursday morning of this week, the S&P 500 declined by about 7%. The reasons cited for the sell-off are Russia/Ukraine war, inflation, interest rates, hawkish Fed, Covid in China, etc. In other words, nothing new explains the sudden decline in the S&P 500 other than there have been more sellers than buyers.
Unstoppable Spending Meets Historic Pessimism
April 22, 2022
First quarter 2022 earnings season has begun. In the first days of earnings season, most major banks report. We learned from JPMorgan Chase, Wells Fargo, Bank of America, Citigroup etc. that consumers are spending their accumulated excess $2 trillion held in savings and checking accounts. Businesses used Covid to refinance their debt and they generally have strong income statements and balance sheets.
Not Intuitive
April 15, 2022
The Consumer Price Index (CPI, inflation measure) was up 8.5% year-over-year, the largest 12 month increase since 1981. The Producer Price Index (PPI, inflation measure) was up 11.2% year-over-year, the highest reading on record.
Worst Year Ever for Bonds
April 8, 2022
If you thought investing in stocks during this turbulent time was difficult, try bonds. Making money in bond portfolios during a period of rising interest rates is a significant investment challenge.
Yield Curve Twister
April 1, 2022
The Federal Reserve is expected to raise the overnight lending rate between banks (Fed Funds interest rate) at least seven times this year from about 0% to about 1.75%. The duration of an overnight loan is measured in hours. Raising this ultra-short duration interest rate is causing other short-duration rates to rise materially higher. For example, the 2-year treasury rate began the year at 0.78%. This week, it reached 2.3%.
Easy Money Speculation
March 25, 2022
It is often easier to see financial speculation when assets are being sold rather than bought. The 80% 2000-2002 tech bubble collapse and 2008-2009 housing market demise are examples of speculation becoming painfully evident as assets were sold.
Perestroika Reversed
March 18, 2022
In the mid-1980s, Mikhail Gorbachev began speaking out against the Soviet Union’s inefficient economic system. By 1988, Russia announced it would hold its first truly democratic elections since 1917. Perestroika is the Russian word for political reformation based on “openness.” In 1990, Gorbachev became the first president of the Soviet Union. The Berlin Wall came down in 1989 and Russia was racing forward with capitalistic enterprise, much of it through joint-ventures with U.S. companies.
War is Inflationary and Higher Interest Rates May Not Fix This
March 11, 2022
Last year, Russia was the second largest producer of oil behind the United States. One 42-gallon barrel of oil creates 19.4 gallons of gasoline. The rest (over half) is used to make things like: solvents, fertilizer, tires, deodorant, shoes, insecticides, CDs/DVDs, dashboards, all plastics including all plastic packaging, roofing, tennis rackets, skies, surf boards, toothpaste, clothes, refrigerators, detergents, aspirin, luggage, furniture, etc.
Connected World, Connected War
March 4, 2022
The world of 2022 is highly connected via media/Internet and commerce. A ground war cannot be executed in isolation. Russia may be taking ground in Ukraine, but in many other important areas, it is suffering significant loss.
Thinking About the Unknown
February 25, 2022
Russia has invaded Ukraine. This creates uncertainty. Elevated uncertainty causes the equity risk premium to rise and stock valuations to decline. As stock investors, we need some basis for evaluating the current market decline.
It’s All About GDP Growth
February 18, 2022
Growing up, I had a brother who would point to the stars and yell, “Look, Kohoutek!” Kohoutek is a comet that passed by earth in 1973. Prior to 1973, Kohoutek had not been seen from earth for 150,000 years. The media played up Kohoutek as the “Comet of the Century.” When I looked up to view Kohoutek in response to my brother’s yell, he would take the opportunity to sucker punch me with some brotherly love.
Bailout, Borrow, Earn and Spend
February 11, 2022
There are many measures of corporate “cash.” Whatever measure of cash is used, the trend is the same. Cash positions on corporate balance sheets have risen sharply in the past two years as a result of strong earnings, federal Covid relief money and extreme low interest rate borrowing. Today, cash on corporate balance sheets conservatively measured by time and savings deposits (not including banks) is roughly $344 billion, up from about $190 billion two years ago.
Lesson From Earnings
February 4, 2022
Through the first 32% of the S&P 500 earnings reports, 75% are beating both earnings and revenue estimates. 4Q revenue growth has averaged 16% and net income growth is 25%.
- #1 Demand is robust
- #2 Plenty of pricing power
- #3 Covid impact subsiding
2022 Rough Start
January 28, 2022
At the end of 2021, the market had attained the 70 new all-time highs, the second most on record. Coming into 2022, the market had strong bullish momentum.
Although the number of new jobs created in the December labor report reported during the first week of January disappointed, the unemployment rate at 3.9% was a pleasant surprise. In our January 14, 2022 Delta Insights Where Is Everyone Going, we suggested the discrepancy between the two labor market readings is because people are starting new businesses. Subsequently, it has been reported that 5.4 million new business applications were filed in 2021, an all-time record (previous high was 4.4 million in 2020 – pre-Covid high was 2019 at 3.5 million). New business formation is bullish for GDP growth.
Stock Market Looking for a COVID Booster
January 21, 2022
Many of the major banks have reported earnings. Banks are on the front lines of consumer credit card activity and business and consumer loan demand, two very important elements of economic activity.
Where Is Everyone Going?
January 14, 2022
Four and a half million workers quit their jobs in November, another all-time high. The “Great Resignation” has reached a point where even the television news show 60 Minutes ran a segment on the subject last Sunday.
Coming Out of the Gate in 2022
January 7, 2022
The S&P 500 attained 70 closing highs during 2021 with the last one on December 29. On January 3, 2022, it reached a new closing high. Like a hurler in a track and field event, the market’s sprint-pace record of attaining new market highs will be tested with the Omicron Covid surge, shifting Fed policy and upcoming earnings reports. Sell-offs on Covid and Fed news are likely buying opportunities. Strong earnings reports are an essential factor in potential further market gains and we will have to wait and see through the next several weeks if the market’s anticipation of a positive earnings season comes to pass.
Santa Claus Rally
December 23, 2021
The Omicron Grinch is working hard to suppress a Santa Claus Rally. But virus news is becoming less market moving with every wave. It appears the virus is also having less of a health impact with every wave. Bloomberg is reporting that South Africans contracting Omicron are 80% less likely to be hospitalized than if they caught prior versions of Covid-19.
Higher Rates, Higher Stock Market
December 17, 2021
This week, the Federal Reserve announced that it will double the pace of tapering to $30 billion per month in January and the expectation is for three Fed Fund rate hikes in 2022 and 2023. The normal reflex stock market reaction to tightening of the money supply and rising interest rates is to trade lower. In this case, the stock market jumped higher on the announcement on Wednesday afternoon. Why?
What To Expect
December 10, 2021
- September 26, 2021: S&P 500 Earnings Growth May Have Stalled, Forbes
- September 8, 2021: Bank of America Sees Stocks Flatlining Through 2022, Fortune
- April 13, 2021: The S&P 500 is Overvalued, Expect Low 10-year Forward Returns, Seeking Alpha
- May 28, 2009: Gross Predicts a New Normal; We Will Have to Get Used to a Permanently Downgraded Economy and Much Lower Returns, Morningstar
Delta 2022 Outlook
December 3, 2021
When considering possible returns of the U.S. stock market next year, we start with the question is the risk of recession elevated? In recessionary periods, stock market drawdowns can be much more severe (e.g., down by 50% and in drawdown for years) than they are during non-recessionary periods. In non-recessionary periods, market drawdowns typically last for a few months and calendar year returns are almost always positive.
Ride the Ups, Avoid the Downs
November 19, 2021
Yale economist, Robert Shiller, won a Nobel Prize in 2013 for essentially saying the returns from stocks are better if you buy them when they are inexpensive versus expensive. Buy low, sell high proved to be a thesis worthy of a Nobel Prize when presented with sufficient academic support.
The Inflation Game
November 12, 2021
The Federal Reserve, treasury bond traders and equity investors are some of the key players in the inflation game. On one side, there is the inflation-is-transitory team which includes the Federal Reserve. On the other side, is the team that expects inflation to be higher-for-longer than what is priced into current market expectations.
The New Credit Cycle
November 5, 2021
What is a credit cycle? The encyclopedic definition of a credit cycle is the expansion and contraction of access to credit over time. When times are good, credit flows freely to corporations and default rates are low. Eventually, a point of excess (home loans in 2008) or stress (Covid shutdown in 2020) is reached, default rates spike, credit availability shrinks and the boom cycle busts.
Friday the 29th
October 29, 2021
Friday the 29th may not be as bad as Friday the 13th. Fear and skepticism can be friends of the market. These emotions keep complacency in check. They raise the discount rate on future earnings which can increase expected returns.
Earnings Boost
October 22, 2021
We are about two weeks into earnings season. On October 4, just before the start of third quarter earnings season, the S&P 500 hit its recent low. Since the low, the S&P 500 and NASDAQ 100 have appreciated by roughly 6% and 7%, respectively as good earnings reports have been consistently delivered.
What Should the S&P 500 P/E Be?
October 15, 2021
Consensus analysts’ estimates for the S&P 500 earnings in 2022 is $220.47. The S&P 500 index is trading at about 4430 currently. If we divided Price (P, 4430) by earnings (E, $220.47), the S&P 500 P/E on 2022 estimated earnings is roughly 20x. Based on these inputs, that is the number. Is it “fair?”
Global Market Warming
October 8, 2021
The capital markets have never been this hot. The stock market is near all-time highs and interest rates are low. Companies are issuing equity and borrowing money at a record rate this year. Year-to-date, more than $1 trillion worth of equity and nearly $4 trillion of bonds have been sold. When you add loan deals, a total of roughly $8.7 trillion has been raised.
Intermediate vs. Long Term Outlook
October 1, 2021
September was a negative month for the U.S. stock market. For the third quarter, the S&P 500 traded nearly flat. Since last November, the S&P 500 appreciated on a steady trajectory to a peak closing valuation reached on September 2. With the mild (less than 5%) depreciation in the S&P 500 during September, the positive momentum in the market has dissipated. This can be measured by the current price of the index breaking down through various moving averages.
Rules
September 24, 2021
In difficult times, rules can help guide you through safely. In the Transporter movie series, actor Jason Stratham’s three rules are: 1) never change the deal, 2) no names and 3) never open the package. His discipline in following these rules allows his character is survive dangerous, action-packed segments of movie scripts. The key is Jason knows his rules prior to encountering difficulties and sticks to his rules during the difficult times.
Brain vs. Body
September 17, 2021
The brain says stay but the body says run. Greed is a mental sentiment while fear is emotional. Behavioral economists say the sensation of fear is twice as strong as the thought of greed. This explains why investors sometimes allow their emotional decisions to override higher level investment considerations.
If We Can Agree on Growth, What Then?
September 10, 2021
The media highlights the polarization of opinions in America. From an investment standpoint, it can be instructive to consider what metrics the investment community agrees on rather than disagrees on. Knowing what the “market” believes to be the case allows an investor to position investments accordingly.
Hot Potato Cash
September 3, 2021
$100,000 invested in a traditional bank savings account earns an investor about $80 per year. The core CPI over the past twelve months increased by 4.45% through June. To keep pace with inflation, the savings account would have to earn $4,450 per year, not $80. The $100,000 investor in a bank savings account is effectively $4,370 poorer in real dollars (purchasing power) over the past year.
Bad News Gets Old
August 27, 2021
Investors have endured a steady stream of bad news from the Covid pandemic for well over a year. As time passes, the Covid bad news gets old and investors are left with fresher good news. Although Covid has been a persistent negative economic force, it is not stopping the steady progression towards a recovered economy. For example, the second estimate of Q2 GDP growth released this week was 6.6%. A 6.6% GDP growth report is a reminder that a recession is nowhere in sight and the bounce still has spring in it.
The Grass Is Greener
August 20, 2021
In June, the Bureau of Labor Statistics (BLS) reported that 5.6 million people lost their jobs. Of the 5.6 million, 3.9 million quit. The 70% quit rate is an all-time high.
To have 70% of all job separations be a result of quits means lots of people seem to have high confidence that the economy is expanding and finding a better job in a reasonable time frame is likely.
By the Numbers
August 13, 2021
Let the numbers speak.
- Share buyback announcements have totaled $683 billion year-to-date, the second largest total on record at this point in the calendar year.
- US money market funds have AUM of $5.4 trillion, more than $1 trillion above balances at the start of 2020.
- Despite the collapse in economic growth in 2020, S&P 500 sales declined by just 3%.
Go for the Gold
Augsut 6, 2021
Many of the athletes in Tokyo started their journeys 10 years ago. It started with a step, a throw, a swing. They have put in their 10,000+ hours. Some of the athletes have been honing their skill for more than 20 years. Going for the gold takes years of practice and planning. Planning for our golden years takes long term vision, commitment and hard work.
Low Interest Rates, Easy Money & Strong Earnings Feed the Bull
July 30, 2021
For the Bull to keep climbing, it needs to be fed. This week, the Bull was fed healthy doses of continued low interest rates, easy money and better-than-expected earnings. So far this earnings season, 90% of companies have exceeded consensus earnings expectations and over 80% are ahead of revenue estimates. Operating earnings will reach an all-time high this quarter.
Narrative Shift
July 23, 2021
Although the S&P 500 Index is enjoying a fairly smooth ride higher this year, there have been significant trend shifts below the surface. There has been a narrative shift from Covid-under-control, government stimulus, rapid-reopening, inflation to Covid-not-so-much-under-control, peak growth, global slowdown.
Delta Variant Pushes Covid Stocks Higher
July 16, 2021
P.T. Barnum said, “There’s no such thing as bad publicity.” So far, the Delta Variant has had no impact on our web views and phone calls. Unfortunately, the Delta Variant has not been good news for most of the stock market with the exception of “Covid stocks.”
Productivity Growth
July 9, 2021
Economic output in the United States is at new all-time high.
The record level of output was achieved with 6.76 million fewer people working since pre-pandemic.
Dividend Outlook
July 2, 2021
The Federal Reserve released preliminary results of its Comprehensive Capital Analysis review of banks this week. The banks included in the review have $175 billion of excess capital. With the excess capital, many banks are increasing dividends and some have upped their stock buyback programs.
Big Debt, Low Rates
June 25, 2021
Some analysts believe the Covid experience from a financial perspective was more like a war than a recession. The shutting down and reopening of the economy and all of the government debt-financed support to make this happen seems more like a war effort than a market-driven recession. In fact, government debt levels as a percent of GDP have not been this high since the end of World War 2.
"Summertime"
June 18, 2021
As DJ Jazzy Jeff and The Fresh Prince recommended in their song Summertime, its “time to sit back and unwind.” Covid restrictions are being lifted across the country. The Federal Reserve says they will not raise rates until 2023. The CBOE Volatility Index (VIX) below 20 indicates investors are relatively calm. If low volume traded is the measure, stock investors are unwinding.
Raise the Roof
June 11, 2021
Stocks rise as far as earnings growth, interest rates and investor risk appetite will allow. If these metrics are moving in the wrong direction, it can place on ceiling on stock valuation. Through March of this year, interest rates were rising and investor risk tolerance was flat to up. Earnings growth has been good but is not expected to accelerate. The S&P 500 traded sideways.
Inflation Hedge
June 4, 2021
To hedge is to protect oneself from an anticipated negative outcome. Keeping your money in cash has an expected negative outcome over time. The longer the duration, the worse the outcome. The value of cash erodes with inflation.
Still Waters Run Deep
May 28, 2021
Amazon (AMZN) has traded sideways for almost a year. Under the smooth surface of flat price performance, the 2021 earnings estimate increased by 26.5% and the 2022 estimate is up 36.3%.
Covid Long-Haul Effects: Higher Taxes
May 21, 2021
Some people who have had Covid-19 suffer from “long-haul” symptoms for months after they were first infected. The CDC lists some of those symptoms as fatigue, headache, chest pain, shortness of breath, depression, etc. Somewhat like negative physical symptoms, the economy is likely to suffer from negative “long-haul” economic symptoms as a result of Covid. One of the more concerning potential long-haul symptoms are higher taxes for years to come.
Faster and Faster
May 14, 2021
During the Covid recession of 2020, the S&P 500 declined by about 34% in three weeks. Five months later in August 2020, it had returned to its February 2020 high. Over the next eleven months, the S&P 500 climbed another 25% higher.
Peak Growth?
May 7, 2021
Apple, Microsoft, Amazon and Google represent 19% of the S&P 500 and 37% of the NASDAQ 100. From April 27 through April 29, these four companies all reported significant upside to both revenues and earnings. Google’s (Alphabet) revenues were up 34% y/y and the company authorized $50 billion in stock buybacks. Microsoft’s revenues were up 19% y/y. Apple’s revenues were up 54% year/year and the company authorized $90 billion in share buybacks. Amazon’s revenues were up 44% y/y.
Bull-Market Checklist
April 30, 2021
GDP Growth: Check; The Federal Reserve is predicting US GDP growth this year of 6.5% and 3.3% in 2022.
Corporate Earnings: Check; With more than a quarter of the S&P 500 companies reporting, 84% have exceeded EPS estimates with an average upside of 24%. If this upside amount does not deteriorate as the rest of the S&P 500 reports, it will be the largest earnings surprise percentage reported by the S&P 500 since FactSet began tracking this metric in 2008...
Millennial Demand Wave
April 23, 2021
Modern stock market history is often referred to as beginning at the end of World War 2. The Baby Boom generation (roughly 69.6 million people) is comprised of people born between 1946 and 1964. Baby Boomers dominated economic activity during the second half of the 20th Century. Baby Boomers were some of the most voracious consumers buying cars, TVs, homes, etc. like never before. The great bull market of the 1980s and 1990s reflects much of the consumption appetite of Boomers.
Flood Tide
April 16, 2021
A rising tide lifts almost all boats. In this case, we are experiencing a financial flood. During the financial crisis of 2008, roughly $800 billion was spent on various bailouts. Today, the U.S. government has spent roughly $10 trillion on Covid related stimulus/support. Globally, there has been $31 trillion of government stimulus.
Bullish Spirits
April 9, 2021
The S&P 500 reached new all-time highs this week. This achievement required valuation metrics to stretch even further. The S&P 500 12-month forward P/E ratio is 22.5x today versus the 25-year average of 16.7x.
Feeling Better Post Covid
April 1, 2021
The Conference Board’s Consumer Confidence Index jumped to 109.7 in March, up from a downwardly revised 90.4 in February. Consumer confidence is at a 52-week high. In aggregate, consumers’ spirits appear to be recovering from Covid.
An Open Question
March 26, 2021
Texas and Mississippi are 100% open and masks are not mandated. Northern California, the most Covid closed region of the U.S., is reopening with restricted access to indoor dining, gyms and movie theaters. Vaccines should be available to all Americans by the end of May. The question of Open appeared to be shut.
Who’s in Charge?
March 19, 2021
Not former Supreme Allied Commander Europe, White House Chief of Staff Alexander Haig. In 1981, following the assassination attempt on Ronald Reagan, Al declared “I am in control here.” Just as it was in 1981, he is still not in charge today. Anxiety is not controlling the stock market currently either.
Are Interest Rates Going Up?
March 12, 2021
We don’t know. What we mean when we say “we don’t know” is that it is too early to know if the trend has changed. The downtrend in the 10-year US treasury rate remains in place currently. This will be the case until the rate breaks two standard deviations above the trend line on a sustained basis.
Inflation
March 5, 2021
Interest in inflation is inflating. Google Trends shows “inflation” is at peak popularity, up 100% year-to-date. The last two times “inflation” searches on Google were this popular was 2004 and 2008.
When Do We Become Fixed Income Investors?
February 26, 2021
We buy financial assets to make a return on our money. The more return we seek, usually the more risk we accept. When risk-free assets offer almost no return (for example the one-month U.S. treasury rate is 0.06%), most investors are willing to accept some risk for some return.
We Are Not Japan, Yet
February 19, 2021
In the 1970s and 1980s, Japan had a world leading economy. They were an export powerhouse with industry-leading manufacturing sophistication and quality. The Japan Nikkei 225 Stock Market Index reached an all-time high in late 1989.
Springboard for Higher Equity Valuations
February 12, 2021
Goldman Sachs says they are seeing the “most accommodative financial conditions on record.” What this means is we have a springboard for higher equity valuations. The “springs” in the springboard are:
Steady Hand of the Bond Market
February 5, 2021
The equity waters have been choppy the past couple of weeks. We have seen high stock volatility, particularly in heavily shorted stocks. The poster child of stock volatility lately is Gamestop (GME) which was roughly $20 per share three weeks ago, reached a high of $483 and is now roughly $66. Even Apple (AAPL) traded from about $127 last Monday to a high of $145 and back down to $130 earlier this week.
Caught Off Base
January 29, 2021
Much of the trading in the modern stock market is done by hedge funds and computers. It is trading activity that sets prices in the short-term. There are times when the largest and most active traders are caught off base.
This Recession Was Different
January 22, 2021
There is a high probability the 2020 COVID-19 economic shock will be officially sanctioned as a recession by the National Bureau of Economic Research (NBER). But being awarded this title does not mean it was similar to previous recessions.
Trend Boost
January 15, 2021
The stock market is in a strong, upward trend. Micro-cap stocks are in a really strong, upward trend. Through the first seven trading days of 2021, the Russell Micro Cap Index is up 9.4% which is the best start for the index since its inception in 2007. By contrast, the S&P 500 index was up 1.2% during this first trading week of 2021.
Rising Above the Chaos
January 8, 2021
Despite the chaos on Capitol Hill, the stock market moves higher. Often, chaos raises investor uncertainty which places downward pressure on stock prices. But not this time.
Blackjack! 21 Beats 20 – Happy New Year 2021!
December 31, 2020
The number question we hear from investors is how can the stock market can be at all-time highs when the world is under siege from the COVID pandemic. Some things are hard to explain. “The market is forward looking. Not all businesses are suffering. The market is telling us things will be better.” Like Annie sang, “The sun’ll come out tomorrow, bet your bottom dollar.”
Passive Expansion
December 24, 2020
n 1992, Vanguard launched its Total Stock Market Index (VITSX) fund. At the end of its first year, it had $512 million of assets. Today, assets exceed $1 trillion. Passive mutual funds and Exchange Traded Funds (ETFs) now represent about half of the stock market. At the end of last year, there were roughly 6,970 ETFs and 7,945 mutual funds (not all of these funds are passive) versus roughly 3,670 public companies (U.S. stocks).
Lots and Lots of Money and Low, Low Rates
December 18, 2020
Congress is about to pass another COVID relief bill which is expected to put an additional $900 billion in to the U.S. economy. The Federal Reserve is buying $80 billion worth of U.S. treasury securities every month and at least $40 billion worth of mortgage-backed securities. Since March, the Fed has expanded its balance sheet by over $3 trillion.
The Good Old Days
December 11, 2020
From August 1999 to March 2000, the NASDAQ index appreciated from about 2,500 to 5,000. At the time, “NASDAQ 5000” seemed mind-boggling high. Day trading was popular. Buying almost any stock made investors feel intelligent as the overall market was making a historic bull move. “NASDAQ 5000” became an adjective to describe conspicuous consumption.
End of Year Considerations
December 4, 2020
2020 is almost over. Trading volumes fall off significantly around mid-December. Generally, you should attempt to complete your 2020 stock market/account management activities by December 18.
The Case for International Stocks
November 25, 2020
The U.S. stock market has been the best performing large economy stock market over the past decade.
Delta 2021 Outlook
November 20, 2020
The stock market almost always has positive calendar year returns during years the economy does not experience a recession. We do not foresee a recession in 2021 making the probability of enjoying a positive investment year in U.S. equities high.
Crash Course: Interest Rates and Stock Values
November 13, 2020
Stocks are categorized by size (small vs. large) and type (growth vs. value). During 2020, large capitalization growth stocks significantly outperformed the rest of the stock market. Year-to-date through November 9, the five largest stocks (all growth stocks) of the S&P 500 are up collectively 48% versus the remaining 495 stocks which are up 4%.
Election Results
November 6, 2020
From an investment perspective, the election results are in.
Uncertainty and volatility collapsed. In advance of the election, many investors were anxious and bought insurance (via put options on the S&P 500) to protect their stock portfolios. Apparently, fear may have been overblown and the insurance protection is being unwound. Technically, unwinding put option insurance creates buying pressure. Fundamentally, less anxious investors are more willing to own risk assets.
Certain Uncertainty
October 30, 2020
Since 1788 and thanks to George Washington, the most popular president of all-time, we have held presidential elections once every four years. The four-year presidential cycle in the U.S. is certain. What is uncertain is who will win the election. On, or shortly after, election day (Tuesday, November 3, 2020), we gain certainty on who won.
Bank on It
October 23, 2020
The ping-pong like back-and-forth action of the bailout debate and the presidential election have narrowed the scope of headline news and captivated investor attention. Hey, we are in earnings season! The major banks reported last week and said important things that appear to have gone mostly unnoticed.
18 More Days
October 16, 2020
In 18 more days, the presidential election will take place. We have had one raucous debate. Trump has questioned the validity of an election dominated by mail-in ballots and has suggested he may not accept the election result if it is not favorable to him. The drama so far has caused the upcoming election to be one of the leading sources of anxiety for investors.
Conversation with Hundred Billion Dollar Manager
October 9, 2020
We are in the fourth quarter of one of the most unusual stock market years in history. The economy experienced peak output and then one of the most severe recessions in history. We are 25 days from a presidential election. The economy is beset by COVID-19 while stocks have reached all-time highs.
The Fourth Quarter
October 2, 2020
On September 30, the last day of the third quarter, the S&P 500 (SPY) closed at 3,363 and is +5.5% YTD. Given that 837,000 people filed initial unemployment claims this week and 11.7 million people are receiving continuing unemployment claims, the S&P 500 is performing surprisingly well. The market cap-weighted index is benefiting from mega cap technology companies. The equal weighted S&P 500 (RSP) is -4.8% YTD.
COVID-19, Market Wave 3
September 25, 2020
The COVID crisis is impacting the stock market in waves. Wave 1 struck in March with a mandated global economic shutdown and 35% market collapse. Wave 2 arrived mid-summer with a significant rise in confirmed cases and renewed business closures. Between the June 8 high and June 15 low, the S&P 500 lost about 8% of its value. Despite a brief pullback in June, the S&P 500 quickly looked through the case spike partly because the number of deaths remained low, expectations of additional federal stimulus, record low interest rates and further economic reopening later in the year.
XLE.EEK!
September 18, 2020
The S&P 500 energy sector ETF (XLE) is down over 40% year-to-date. EEK! It is the worst performing sector of the S&P year-to-date, down by more than twice as much as the next worst performing sector, financials (XLF -17%). These are the only S&P 500 industry sectors with double digit declines YTD.
Big Spender
September 11, 2020
The U.S. economy is measured by its Gross Domestic Product (GDP). GDP is a summation of economic activity by individuals, businesses and government. Over the past 45 years, government expenditures have contributed about one third of GDP. In a COVID-19 world with many business activities restricted and record amounts of federal stimulus, government expenditures now represent over half of all U.S. economic activity.
Let Inflation (and the Stock Market) Run
September 4, 2020
Chairman Powell of the Federal Reserve says the Fed would like to see inflation average at about 2% rather than be capped at 2%. To the ears of investors, this statement translates into low rates for even longer. Inflation is running well below the Fed’s 2% average target.
Crossing the Karman Line
August 28, 2020
Occasionally, markets rocket higher. In 1998, between July 21 and October 8, the NASDAQ lost about 33% of its value. The NASDAQ then appreciated by 278% from about 1,357 to 5,132 on March 10, 2000. The fuel was investor enthusiasm for the endless growth possibilities of the Internet.
Getting Ahead of COVID-19
August 21, 2020
China and much of Western Europe seems to be well ahead of the United States in managing the prevalence of COVID-19 and in re-opening economically. In China, mall traffic is back to about 85% of pre-COVID levels and China domestic air travel is fully recovered.
Interest versus Dividend
August 14, 2020
When is the best time to plant a tree? Many years ago. When is the second-best time to plant a tree? Now. The same goes for investing. The best time to invest was a long time ago. Given the best option may no longer be available, the second-best time is now. Like a tree, investments generally grow over time.
Adding Up the Numbers
August 7, 2020
The total civilian labor force of the U.S. is roughly 160 million persons. The labor force includes all people “16 years of age and older residing in the 50 states and the District of Columbia who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.”
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Google This: “Next July”
July 31, 2020
Google (Alphabet) is a California headquartered company. California is mostly shut-down. San Mateo is the only coastal county still open from Mendocino all the way to the Mexican border.
Small-Cap Catch-Up
July 24, 2020
The COVID-19 pandemic has created significant uncertainty. For the most part, the stock market has held up surprisingly well with the S&P 500 now having a small positive gain for the year. The key bullish drivers have been tremendous monetary/fiscal stimulus and an acceleration to on-line commerce which is benefiting the very large capitalization companies in the market..
Commodity Prices Signal Global Recovery
July 17, 2020
Copper prices are largely influenced by the health of the global economy. Copper is used in power generation and transmission, construction, factory equipment and electronics. Copper prices are used as a leading indicator by some economists. Lumber, oil and silver are similar to copper as their prices measure global supply and demand. Many commodity prices are trading at 52-week highs.
The COVID-19 Defensive Trade Lifts Markets
July 10, 2020
COVID-19 is a major driver of trading activity since February. At the start of the crisis, the obvious projection was to say an economic shut-down would severely curtail economic activity and the equity market would suffer. For the first month, this is what happened. The S&P 500 declined by about 35% from late February into March.
Hyper Speed Creates Uncertainty
July 3, 2020
J.P. Morgan Asset Management calculates the recession that began in March ended in May. The pace of change in the markets and the economy is moving at record speed. The pace of change is creating apparent dichotomies that make the investment landscape confusing. The Covid-19 headline news is persistently negative. Corporate earnings are forecast to fall by about 44% in the second quarter. Yet, the NASDAQ is at record highs and the S&P 500 is close to breakeven after enjoying its best quarterly performance in the past 22 years.
An Expected Rise
June 26, 2020
Two months ago, the U.S. reached a single-day record of 34,203 new Covid-19 infections. This week on Wednesday, we set a new daily high of 38,115. A rise in Covid cases should not come as a surprise given social distancing requirements are being relaxed, testing has increased and there were mass protests over the past several weeks. Several states are contemplating plans to slow down the reopening process.
Surprising Strength
June 19, 2020
You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time” - Abraham Lincoln.
Low Inflation, Cheap Oil – Multi-Year Investment Implications
June 12, 2020
Predicting the future price of oil may be one of the most difficult assignments for a financial analyst. In the past twelve years, crude oil prices moved in a range of $150/barrel to $20/barrel. At one point this year, crude oil futures prices were negative $40/barrel. In the past month and a half, the price of crude oil has doubled.
Pandemic, Riots, Presidential Election, War: A Good Year for Investing
June 5, 2020
Pandemic, riots, presidential election and war sounds a lot like 2020. What these words best describe, however, is 1968.
• The H3N2 pandemic (avian influenza A virus originating in China) killed an estimated one to four million people worldwide and about 100,000 in the U.S.
Technically Even Stronger
May 29, 2020
Last week, the Delta Insights newsletter highlighted the building technical strength of the stock market. The S&P 500 gained strength this week and is now above its 200-day moving average. Momentum usually has persistence and a crossover above the 200-day moving average is a widely used positive momentum indicator.
Technically Strong, Fundamentally Rich
May 22, 2020
When is the best time to plant a tree? Many years ago. When is the second-best time to plant a tree? Now. The same goes for investing. The best time to invest was a long time ago. Given the best option may no longer be available, the second-best time is now. Like a tree, investments generally grow over time.
COVID-19 Phase Shift Change
May 15, 2020
COVID-19 is accelerating change in a way that Influenza, Ebola, Rabies, Polio, SARS, Smallpox, HIV and Dengue did not. COVID-19 shut down most of the major economies of the world. Some of the immediate consequences of the shut-down are extraordinary unemployment and all-time high Federal debt levels. Hopefully, these changes will not be permanent. .
Time of Exposure
May 8, 2020
You can pass your hand quickly through flame and feel virtually no pain. If your hand is held to the flame, it will burn. How long the COVID-19 crisis lasts will greatly determine how much economic pain will be felt.
Green Shoots in a Hot Market
May 1, 2020
Expansion, recession, collapse and recovery…all at once. In February, the first quarter GDP growth was expected to be about 3% (expansion). First quarter GDP (advance estimate) was reported this week at -4.8%. It is almost certain that 2Q GDP growth will be substantially more negative. Two sequential quarters of negative GDP growth is the definition of recession.
Groundhog Day
April 24, 2020
COVID-19 has much of America caught in a loop when every day seems the same. Businesses are closed and we wait to see what happens next. Repeat.
COVID-19 Winners and Losers
April 17, 2020
By March 23, the S&P 500 had declined roughly 35% from its all-time high on February 19. It was the fastest transition from bull to bear market in the past 120 years.
Peak in Sight
April 9, 2020
According to the Institute of Health Metrics and Evaluation (IHME), the peak usage in the United States for total hospital beds, intensive care beds and ventilators is April 11, 2020. The peak in deaths per day is projected to be April 12. Total U.S. deaths are projected to reach 60,415 by August 4. 60,415 deaths are a greatly reduced estimate from the roughly 100,000-240,000 projected a couple of weeks ago..
Taking the Temperature of the Market
April 3, 2020
COVID-19 causes some people, including healthy young people, to require intensive care and ventilation. In advance, we do not know who will suddenly require intensive care. Most people who get COVID-19 suffer minor symptoms and will recover at home.
Bear Market Signposts
March 27, 2020
The mandated economic shutdown and corresponding collapse in asset values (stocks and bonds) as a result of COVID-19 seems unprecedented. In about a month, the economy transitioned from economic expansion to severe contraction and bear market. From the February 19 high in the S&P 500 to the low on March 23, the market was down 35.4%.
Pause
March 20, 2020
We have collectively pressed “Pause” on the economy. Having the economy come to a stand‑still is unlike anything we have experienced in our lifetimes. Typically, recessions are part of a cycle…
Bear Shock
March 13, 2020
The stock market sell-off from the high on February 19th (down 20%) is the fastest on record, 15 trading days…
A Whole New (Fixed Income) World
March 6, 2020
A week ago, the Fed Funds futures were pricing in a 100% chance that the Fed would cut the Fed Funds rate by the March 18th meeting…
What If?
February 28, 2020
What if the current outbreak of coronavirus spreads significantly more than expected? This is the question the market is attempting to discount into stock prices…
Whoomp! There It Is
February 21, 2020
The Leading Economic Index (LEI) is an important indicator of recession risk. When the six-month moving average of the percent change month/month turns negative, recession risk is elevated. For the past three months, this has been the case.
LovE Is Prevalent
February 14, 2020
When we say LovE, we are referring to Leverage and Equity. Goldman Sachs prime brokerage (custodian for a significant number of hedge funds) reports they saw the largest net buying of Equities by hedge funds in nearly five months. Net Leverage increased as well.
Signs of Life
February 7, 2020
1. Manufacturing
In the fourth quarter of 2019, GM reopened 30 factories after a month-and-a-half strike. On January 15, the U.S. and China signed a Phase One trade deal. This week, China announced it will reduce tariffs by 50% next Friday on $75 billion worth of imported goods from the U.S.
Getting Behind the Numbers, Time to Panic?
January 31, 2020
Delta uses the Leading Economic Index (LEI) as a predictive indicator of recession. Four of the past five months have shown negative month-over-month readings. On a stand-alone basis, this is not bullish.
New Home Sales vs. Leading Economic Index?
January 24, 2020
Niners vs. Chiefs? Ali vs. Frazier? Monitor vs. Merrimack? Some questions are just really tough to answer in advance. Two well matched forces with only one possible winner.
Finally Time to Go Abroad?
January 17, 2020
The U.S. stock market (S&P 500) has dramatically outperformed both international developed and emerging markets since the start of 2009.
Stock Market Lessons of War
January 10, 2020
For the past thirty years, the United States military has been highly active in the Middle East. Some of the activity has been initiated by the United States including the events listed below. In three out of four cases, the stock market was up over the next twelve months.
Looking into the New Year
January 3, 2020
A New Year and new decade is underway. On the first trading day of last year, the S&P 500 opened at 2,476.96 which was 15x the forward twelve-month earnings. 2020 began with the S&P 500 at 3,244.67 and 18.2x the expected forward twelve-month earnings. From a valuation perspective, one might conclude the S&P 500 is less attractive today than it was twelve months ago. In the next several weeks, we will see important data points that should provide more clarity on the attractiveness of stocks.
