I keep hearing comments and concerns about these markets in the media. Since my wife is tired of me yelling as the television (“No! That’s wrong!”) you are the lucky recipients of my ire.
Here are five things I have been thinking about regarding markets, investments, and media – from the most bullish to the least – that are too easily misunderstood:
Profits: If I can only look at one data point to gauge the overall direction of equity markets, the obvious answer is profits. We have seen corporate profits on a tear over the past few years.
For sure, the hyperscalers’ artificial intelligence buildout and massive CapEx are significant factors. But we have also seen good profits in sectors ranging from Communication Services, Health Care, Financials, Consumer Discretionary, and Materials — all are having strong quarters; not surprisingly, Consumer Discretionary is the least consistent.
And these are not just one-time blips; we have enjoyed the rare combination of record profits and record profit growth rates. If you want to understand what has been driving equity profits, look no further than this powerful one-two punch.
At the same time, high(ish) valuations have become a little cheaper, as multiples have compressed.
All Time Highs: The data is unequivocal. Investing at all-time highs yields better returns than all other dates. I have been saying this for years, so rather than repeat myself, I will let Sam Ro give you the details:
“Just because major market drawdowns are often preceded by record highs doesn’t mean all-time highs are often followed by major market drawdowns. Hopefully, this is obvious. The stock market would not have trended higher for decades if this were not true. Eyeball any long-term chart of the stock market, and you’ll see all-time highs followed by new all-time highs.”
There were over 500 new all-time highs from 1982 to 2000. Except for the very last one, every single one of them was bullish.
If you want to make a bet against 500 to 1 odds, well, that’s your call. I am on the other side of that trade.
Sentiment: Another intriguing issue that keeps coming up is record lows in U Mich Sentiment. Many find this deeply concerning.
But here is the thing: Your personal sentiment is based on what you see – in BeFi terms, the “Availability Heuristic” of what is in your personal economy. – but that is not what drives markets. We discussed this in terms of the pandemic and more recently, how can we have all-time highs in equities with all-time lows in consumer sentiment?
Most of the time, Sentiment measures do not provide a very clear signal. The contrarian in me looks at record low sentiment measures as a potentially bullish indicator…
K-Shaped Economy: Here is the disappointing, grim reality: Throughout most of human history, it has been a very “Winner takes all (or most)” kind of economic system.
There were some hopes that the industrial revolution, unionization, and general rise of entrepreneurship might push back against that reality. But it is looking more and more like the Roaring 1920s, the 1980s bull market, the post-GFC bailouts were the norm, not the exception.
I grew up in the post-war era, and I took it for granted that it was the norm. I am starting to suspect exactly how aberrational that period was. It is looking more and more like the entire post-war period – the rise of the middle class, the build-out in the USA of suburbia, interstate highways, the electronics industry, semiconductors, manufacturing, civilian aviation, etc. – was a historical aberration.
I hope this is incorrect, but fear it is not…
Iran War / Oil / Inflation: Venezuela was fast and easy; Cuba is likely a bit more difficult. But Iran has its own strategic, tactical, and military assets; it is its own player in the Middle East — they have been supplying drones to Russia (!) for its war against Ukraine.
I have no idea how the Dunning Kruger War will ultimately play out in terms of energy prices and or inflation, but it appears to have not been well thought out in advance.
The good news is regional war generally doesn’t usually impact stock prices; the bad news is this is the one that has potnetial for that soirt of mischief…
