While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood.
Following the advice of another newsletter that I won’t mention, he bailed out of all his stocks after the November 8 election.
After all, wasn’t the Dow Average headed straight to 3,000?
Despite the Federal Reserve now on a rate-rising path, here we are with the major stock indexes just short of all-time highs.
Why the hell are stocks still going up?
I paused for a moment as a kid driving a souped-up Honda weaved into my lane of Interstate 80, cutting me off. Then I gave my friend my response, which I summarize below:
1) While the next move in interest rates will certainly be down, they may take a while to get started. They are not going to move the needle on corporate P&Ls because at least half of US companies are net creditors to the financial system, including all the big tech ones. We are reentering a deflationary world.
At least, that’s what my friend Janet tells me.
2) The biggest leaders in the market are cheap, with NVIDIA (NVDA) and Meta (META) sporting price earnings multiples under 20X with a 60% earnings growth.
3) There is nothing else to buy. Complain all you want, but US equities are still one of the world’s highest-yielding securities, with a 1.4% dividend.
4) Oil prices are low, and the windfall cost savings are only just being felt around the world. Conversion to electrics and hybrids is happening faster than expected and much of the grid is moving away from oil to alternatives.
5) While the weak euro (FXE) ate into large multinational earnings, we are at the end of the move. The cure for a weak euro is a weak euro. The worst may be behind for US importers.
6) What follows a collapse in European economic growth? A European recovery, powered by a weak currency.
7) What follows a Chinese economic collapse? A recovery there too, as hyper-accelerating stimulus feeds into the main economy. Chinese stocks are now among the world’s cheapest with most having single-digit multiples.
8) Technology and AI everywhere are accelerating at an immeasurable pace, causing profits to do likewise. You see this in the AI 5 stocks, where blockbuster earnings reports are becoming as reliable as free upgrades.
Biotech has been on a tear as well where AI and big data are creating a new Golden Age.
8) US companies are still massive buyers of their stock, with some $1 trillion worth in 2023. Ditto for this year. This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), which bought $83 billion worth of its own stock in 2023, followed by Google (GOOGL), Meta (META), Microsoft (MSFT), and Exxon (XOM), the top five repurchasers.
They are jacking up dividend payouts at a frenetic pace as well, and are expected to return more than $430 billion in payouts this year.
9) Ignore this at your peril, but there is a global synchronized economic recovery going on that has been in the works for some years. Nearly a decade of central bank monetary stimulus and government fiscal stimulus is still out there.
Q1 earnings reports start in earnest in a few weeks, and the phrase “better than expectations” is about to become well-worn. Expect (SPY) earnings per share to reach new all-time highs, hardly short seller bait.
10) Ditto for the banks, which were dragged down by falling interest rates for most of the last decade. Reverse that trade this year, and you have another major impetus to drive stock indexes higher.
My friend was somewhat setback, dazzled, and befuddled by my out-of-consensus comments. He asked me if I could think of anything that might trigger a new bear market or at least a major correction.
The traditional causes of recessions, oil prices, and interest rate spikes, are now in the rearview mirror. There are only two things that could pee on our parade: a return of inflation and another pandemic. Watch those prices!
With that, I told my friend I had to hang up, as another kid driving a souped-up Shelby Cobra GT 500, obviously stolen, was weaving back and forth in front of me requiring my attention.
Where is a cop when you need them?
Stolen?
