Monthly Archives: May 2020

Super Micro Is Not So Super Anymore

Super Micro Computer Inc. (SMCI) was the market’s darling only six months ago. Amazingly, Its stock, had risen 3x in just the first three months of 2024. Consequently, S&P Global announced its addition to the S&P 500 Index. The announcement is annotated below with a box in early March. Furthermore, the circle, which coincides with the peak in Super Micro shares, was the date it started trading in the index. From the day it joined the index to today, it has been a one-way downhill ride for shareholders.

The bad news continued last Friday, with shares already down about 80% from the March peak. Super Micro’s stockholders learned the company could face a liquidity problem. If the company does get delisted from the Nasdaq stock exchange, it could be forced to make holders of its $1.725 billion 2029 convertible bonds whole. Currently, the bonds trade at around 80 cents on the dollar.

Per Yahoo Finance:

A delisting — seen as a real possibility after Super Micro missed an August deadline to file its annual financial report and its auditor resigned — would constitute a spectacular fall from grace for a company which is a major beneficiary of demand for high-powered servers and other hardware to power artificial intelligence.

smci super micro computers

What To Watch Today

Earnings

  • No notable earnings releases

Economy

Economic Calendar

Market Trading Update

Last week, we discussed the expected derisking heading into an uncertain election.

“There is an important lesson in this week’s action. Over the last several weeks, we have warned about the weakening of momentum and relative strength and the triggering of the MACD ‘sell signal.’ However, many followers commented that the market kept rising despite my warnings and “this time was different.” The lesson is that while technical analysis is NOT perfect, the signals derived from the analysis are often a good process to follow. As always, “timing” is the most difficult challenge. The indicators told us that the market would likely “derisk” before the election, which is now evident.

With the election over and the Federal Reserve cutting the overnight lending rate by another 25bps, many of the headwinds the market was hedging for are now behind us. As a result, the market surged higher, hitting our year-end target of 6000 on Friday. Furthermore, since election day, the “RE-risking” rally reversed the short-term sell signal, supporting higher prices. As we stated over the last few weeks, despite the many media-driven narratives, the underpinnings of the market remained bullish, suggesting the recent pullback to the 50-DMA was a buying opportunity.

Market Trading Update

Of course, much speculation exists about what will occur under a Trump presidency. Here is our short take.

The potential economic and market impacts are based on continuing pro-business policies and tax reform, likely involving further corporate tax cuts to boost growth and incentivize domestic investment. The regulatory environment would remain business-friendly, with potential rollbacks in areas like environmental restrictions and financial oversight to foster economic expansion.

Trump would likely maintain an aggressive stance on trade, particularly toward China. This could mean higher or expanded tariffs, which may negatively impact global trade flows and supply chains but benefit select U.S. industries like steel and manufacturing. Those tariffs could lead to heightened market volatility, at least initially. The resulting trade tensions and a “tit-for-tat” policy response could pose problems. However, certain sectors, such as energy, defense, and traditional manufacturing, could benefit from Trump’s policies, while technology and companies heavily reliant on international markets might face challenges.

Immigration policies would likely tighten further under Trump, potentially affecting labor markets and sectors dependent on foreign workers, such as agriculture and technology. The risks of restricting the labor pool are unknown. Still, they could have mixed economic effects, potentially raising wages for some domestic workers but increasing costs for industries reliant on lower-wage labor.

Given those concerns, it is undoubtedly worthwhile continuing to manage risk. While the backdrop is near-term bullish for stocks, it doesn’t mean there will not be corrections along the way.

The Week Ahead

Inflation data will headline economics this week, with CPI on Wednesday and PPI on Thursday. Accordingly, the current consensus is for CPI to increase by 0.2%, bringing the year-over-year rate to 2.6% from 2.4%. Thus, the expected shift higher in the yearly rate is a function of a low CPI rolling out of the 12 month calculation.

Import and export prices on Friday will further inform us of recent inflation trends. Retail Sales on Friday will provide some insight into personal consumption habits heading into the holiday season. However, bear in mind the two hurricanes likely affected the data.

We are looking forward to hearing from Fed members this week. Accordingly, we would like to hear about their views on the recent increase in interest rates, the Trump presidency, and their outlook for Fed policy in 2025. Hints that QT could be near an end would not be surprising.

Quick Thoughts On The Trump Presidency

The prospect of a Trump presidency has led to much debate and speculation about how markets might react. Depending on what policies he can pass, there are potential risks and opportunities in both the stock and bond markets. While the market surged immediately following the election, many potential future headwinds may impact returns from economic growth, monetary and fiscal policy, and geopolitical events.

Therefore, here are some quick thoughts about what we at RIA Advisors think about the stock and bond markets in 2025.

READ MORE…

trump corporate margins

Tweet of the Day

fed balance sheet

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Trump Presidency – Quick Thoughts On Market Impact

The prospect of a Trump presidency has led to much debate and speculation about how markets might react. Depending on what policies are eventually passed, there are potential risks and opportunities in both the stock and bond markets. While the market surged immediately following the election, many potential future headwinds may impact returns from economic growth, monetary and fiscal policy, and geopolitical events.

Here are some quick thoughts about what we at RIA Advisors think about the stock and bond markets in 2025.

Stock Markets

Upside Potential: During the Trump presidency, he will focus on ensuring the Tax Cut and Jobs Act, passed in 2017, does not sunset in 2025, which will keep corporate tax rates at 21%. However, it is not unlikely that he will also push for a new corporate tax cut bill at a lower rate, nearer 15%, which was his original goal during his first term. While maintaining the corporate tax rate at 21% will help corporations maintain current profitability, a lower rate would benefit certain sectors like consumer discretionary and technology, where earnings are especially sensitive to tax changes. Financial stocks could also benefit from Trump’s history of deregulation, potentially leading to more mergers and investment opportunities. In fact, during his first term, the S&P 500 rose nearly 70%, partly due to those pro-business policies​.

Real profit margins as a percentage of GDP

Technically, the market remains on solid bullish underpinnings with very high levels of expected earnings growth heading into 2025. The bullish trend remains intact, and as discussed, the seasonally strong period of the year has started. Notably, corporate share buybacks and year-end performance chasing will support the last two months of the year.

“According to Morningstar, during the first half of 2024, only 18.2% of actively managed mutual and exchange-traded funds outperformed the cap-weighted S&P 500 index. There are several reasons for this, including the lack of allocation to the ‘Magnificent 7,’ dispersion in returns of holdings, and lack of allocation to non-traditional assets.

Performance of select assets

However, there are risks.

It’s Not All Roses

Downside Risks: It’s not all rosy. A Trump presidency also brings risk from protectionist trade policies, including higher tariffs on Chinese goods. Those tariffs can potentially disrupt supply chains and increase costs for consumers and companies. Furthermore, if there are deep cuts to Government employment or spending, such would also slow economic growth more than expected and could offset the benefit of the extension of tax cuts. However, while those risks are present, the most significant risk is a reversion of economic growth, negatively impacting corporate profitability. The risk of investor disappointment is elevated with corporate profits already significantly deviated from long-term means.

Deviation of real profit margins from GDP.

Bottom Line: Stocks might see an initial jump on business-friendly promises but could face challenges if tariffs or unpredictable governance introduce economic shocks that suppress corporate profitability.

Bond Markets

Reasons for Caution: The bond market sold off sharply following the announcement of a Trump presidency. Such was not unsurprising, as bonds typically react negatively to narratives that might lead to higher inflation and rising interest rates. The initial knee-jerk reaction in the bond market was the assumption that the administration would emphasize deficit-financed spending on infrastructure or defense. Such spending would certainly lead to stronger economic growth and higher wages, which would sustain a higher level of inflation than witnessed from 2008 to 2020. The Federal Reserve will maintain higher interest rates to align with stronger economic growth if stronger growth occurs. In such an environment, bond prices would fall to accommodate higher economic activity. Such an outcome would stabilize bond prices at a higher “terminal rate,” reducing the potential upside in owning bonds.

As discussed in “Rates Are Going Much Higher?” there is an important correlation between wages, economic growth, inflation, and interest rates. To wit:

“If we create a composite index of wages (which provides consumer purchasing power, aka demand), economic growth (the result of production and consumption), and inflation (the byproduct of increased demand from rising economic activity). We then compare that composite index to interest rates. Unsurprisingly, there is a high correlation between economic activity, inflation, and interest rates as rates respond to the drivers of inflation.”

Interest rates vs the economic composite

Therefore, the bond market has a right to be concerned if a Trump presidency can foster a sustained level of higher economic growth and increased wages, creating a comparative inflation level. Such inflation would raise yields to align with those variables.

However, such will likely be harder to do than many think.

It’s The Economy

Potential Silver Linings: On the flip side, a Trump presidency must deal with high debt levels and a large fiscal deficit. Increases in the national debt were squandered on non-productive investments, and rising debt service results in a negative return on investment. Therefore, the larger the debt balance, the more economically destructive it is by diverting increasing amounts of dollars from productive assets to debt service. As interest rates increase, more federal tax revenue is diverted into servicing the national debt.

Interest payments as share of Federal Revenue

While many expect that Trump’s policies will lead to inflationary pressures, what should be evident is that increases in debt and deficits continue to divert more tax dollars away from productive investments into the service of debt and social welfare. The result is lower, not higher, economic growth, inflation, and, ultimately, interest rates.

Graph showing "Debt To GDP And Impact to Economic Growth" with data from 1966 to 2022.

When put into perspective, one can understand the more significant problem plaguing economic growth. A long look at history clearly shows the negative impact of debt on economic growth.

Graph showing Economic growth by cycle with data from 1790 to 2020.

Furthermore, changes in structural employment, demographics, and deflationary pressures derived from changes in productivity will magnify these problems. Trump or any other president cannot effectively resolve those particular issues.

Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

Overall Takeaway

Under a Trump presidency, the outlook for the stock and bond markets presents a blend of opportunities and challenges. The outcomes for both are heavily dependent on which policies become realities.

The one big concern for us at RIA Advisors continues to be a market that has enjoyed outsized returns over the past two years and deviates from long-term means. With the markets being overbought monthly and trading at the top of its long-term trend channel, expectations of further market upside seem overly confident without some correction first. Since 2009, the market has retested the 4-year moving average numerous times. Such is a normal and healthy process for an ongoing bull market, and a mean reversion should be expected at some point in the future. However, such an event isn’t likely between now and year-end.

Monthly technical stock market analysis

Furthermore, market predictions hinge on the balance between growth and inflation. While Trump has many policies on his wish list, those policies must be passed by a heavily bipartisan Congress. With only slim majorities to work with, there is a risk of defection on some bills, particularly by the “Freedom Caucus,” which would oppose large deficit spending bills.

Lastly, stocks could rally on tax cuts but might stumble if tariffs weigh heavily on global trade. Bonds could indeed face headwinds, but the “3-Ds” of debts, deficits, and demographics will continue to plague economic growth. While there was an initial surge in stocks and a sell-off in bonds on the announcement of a Trump presidency, there is still a very long road ahead that investors must navigate. Fed policy, economics, earnings and corporate profitability all pose risk to longer-term outlooks.

Investors should stay informed and consider a diversified approach, as the next presidency promises to bring both opportunities and risks across asset classes.

As Expected The Fed Cut Rates

As expected yesterday, the Fed cut the Fed Funds rate. With the expected 25bps rate cut, the new range for Fed Funds is 4.50-4.75%. The redlined second paragraph below, regarding inflation, is the only meaningful change to the FOMC statement. We think the Fed made the change to present a more hawkish stance. Furthermore, it may help combat the skittish bond market and stress its vigilance in fighting inflation. Also of note, this decision was unanimous, unlike the 50bps cut in September, which had one dissenting voter.

The following points are from Jerome Powell’s press conference:

  • He believes the recent rate increase has less to do with inflation and more with increased expected economic growth under Donald Trump.
  • We remain on a path to a more neutral stance.” Powell believes the Fed will continue to reduce rates, but the pace and terminal rate will be data-dependent. He reiterated that thought multiple times. We believe he is leaving the door open for anything from no rate cut to 50bps at the December meeting.
  • Powell said the statement about inflation highlighted in the first paragraph is meant to show that the Fed remains flexible in bringing inflation to target. Again, it appears Powell doesn’t want the market to think the Fed is on a predictable set course to get rates back to neutral.
  • We don’t comment on fiscal policy.” But, Powell said the Fed thinks a lot about how fiscal policy and deficits affect the economy and inflation.
  • The Fed is not overly concerned by the recent increase in rates. They focus more on “persistent changes to financial conditions.”

As an aside, Donald Trump has said he will allow Jerome Powell to finish his term, which expires in May 2026.

fed fomc statement

What To Watch Today

Earnings

Earnings Calendar

Economy

Calendar

Market Trading Update

Yesterday, we discussed the massive surge in the markets following the election of President Trump. Notably, the massive surge in small/mid-cap stocks was the most compelling. As shown in the chart below, there is a very high correlation between small/mid-cap stocks’ annual rate of change and the NFIB small business confidence index. Given that business owners typically lean conservative, favoring policies that promote economic growth, reduced regulations, and tax cuts, the election yesterday is supportive of business owners.

We suspect that the next iteration of the NFIB index will be a catchup move, fueled by an explosion of business owners’ confidence. This should lead to increases in CapEx spending, employment, and wage growth.

NFIB Index vs the Russell 2000 small caps

Given that pro-business policies should benefit small and mid-cap stocks, we began building a position in those stocks using the Russell 2000 Index ETF (IWM). The chart below shows that yesterday’s breakout above the previous consolidation. However, the index is very overbought and extended, which has previously preceded short-term corrections. Accordingly, we started with a small position in portfolios and are looking for pullbacks and consolidations to add to the position over the next several months.

IWM small caps

Of course, there is always risk that we need to be mindful of. But if Trump is able to pass “business friendly” policies, we should see that continue to benefit the small and mid-cap space.

Small Cap Stocks Hit Record Highs- Can It Continue Higher?

The Russell 2000 small-cap stock index hit a record high yesterday after rising 5%. Accordingly, the index is now up 18% year to date and making up ground against the S&P 500, which is up approximately 25%. In post-election trading on Wednesday, the small-cap index outshone all of the other key market indexes. With the large gap higher, can we expect a continuation?

To help answer that, we lean on a graphic provided by Sentimentrader, shown below. It shows the six times, including yesterday, when the Russell 2000 (IWM) opened 5% higher on the day. The first time was in September 2008. At that time, IWM opened up nearly 10% and gave up those gains and more over the coming days, weeks, and months. The other experiences, which occurred in 2020, were much better, especially over longer periods.

Our takeaway from the table is that Wednesday’s gap open will likely produce gains if the market remains firm. The first two instances in the table were in bear markets. As a result, the gap higher faded as prices continued lower. The remaining instances were in bull markets. Thus, the 5% opening gap initially gave up some of the gains but was on its way higher within a week or two.

small cap performance


Tweet of the Day

post election day market performance

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

A Second Trump Term Stokes The Inflation Narrative

After Tuesday night’s initial election results started to point to increasing odds of a Trump victory, bond yields began to rise sharply, as shown below. The surge in rates was not a sudden move. Over the past month, betting odds favoring a second Trump term and bond yields rose in unison. The narrative emerging from Trump’s victory and the market-election betting relationship of the prior few weeks is that a second term for Trump is inflationary. However, what makes such a narrative suspicious is that Trump ran on the platform that he would fix the inflation problem. Furthermore, many exit polls showed that inflation was one of the top voter concerns, likely pushing voters from Harris to Trump.

Interestingly, some other market reactions are at odds with the inflationary narrative. For example, the dollar is soaring on news of Trump’s second term. A strong dollar is deflationary as it reduces import prices. Gold, a supposed barometer of inflation and deficit spending, is down over 2%. Furthermore, crude oil is trading about 3% lower. Energy and inflation are highly correlated. Lastly, the interest rate-sensitive, small-cap sector is up much more than the broader S&P 500.

The election and market reactions will make managing monetary policy more challenging for the Fed. Higher interest rates will slow economic activity, thus allowing the Fed to cut further. However, if the Fed believes that a second Trump term is inflationary, it may be lax in cutting rates. We will find out more later today, as the Fed meeting was pushed back a day to accommodate the election.

us bond yields

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

A decisive Trump win reverberated throughout the market Wednesday, sending the S&P 500 and the Nasdaq up 2.5 and 3.0%, respectively, with the Dow seeing a 3.6% gain. The small-cap Russell saw an even more significant 5.8% surge.

‌ The S&P 500 now stands at 5,929 — a stone’s throw from its next significant milestone of 6000, our current year-end target. The bounce of support at the 50-DMA is a very bullish setup for the market, with the next resistance level being the running trend line support from the August lows. With the MACD “buy signal” close to triggering, the seasonally strong period of the year is now in place. As noted yesterday, there is little reason to be bearish. Continue to manage risk as always, but portfolio allocations should be near target weightings through year-end.

Market Trading Update

Treasury Bond Auctions

On Wednesday morning, a reader asked us if the afternoon’s 30-year bond auction was partially responsible for pushing yields higher.

The Treasury Department runs its auctions through the largest Wall Street banks they call primary dealers. These primary dealers are required to make markets for all Treasury bonds, facilitate auction orders, and, importantly, bid for auctions. Dealers always “take down” auction bonds at the auction and redistribute them to end investors over the coming days. The dealers’ number one goal is profitability.

Accordingly, the banks want to buy bonds cheaply and sell them at higher prices. To help manage the process, they often try to establish a short position on the auction bonds going into the auction. The natural effect of the short selling is lower prices. The process works well over time as many bonds hit the market at once but get distributed to customers over time. However, in the process, volatility is often higher.

The answer to our reader’s question is yes. Given the political risks, dealers were probably short more bonds than is typical. However, the auction is not, by any stretch, the primary driver of higher yields.

Why Is Gold Surging?

Record deficit spending, soaring money supply, and inflation are among the likely responses we would hear from investors to the question of why gold is surging. Instead of presuming those or other market narratives about gold prices are correct, let’s analyze historical correlations between gold and economic and market data.

In addition to helping you better appreciate why gold is surging, our analysis will help you recognize that market narratives explaining asset price movements can be wrong, no matter how reasonable they may seem at first blush.

READ MORE…

correlation of gold and stocks

Tweet of the Day

stocks and bonds

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

De-dollarization Or Re-dollarization?

Some gold and Bitcoin bugs claim the U.S. dollar is being inflated away and that our politicians and the Fed are abusing its status as the world’s reserve currency. While the narrative may sound logical, the fact of the matter is that the opposite is occurring. Despite growing de-dollarization narratives in traditional and social media, the dollar’s use in global transactions is increasing.

The Gavekal Research graph below shows that the dollar’s share of global payments using the SWIFT system is at its highest level in twelve years. Moreover, the Euro, the one currency some experts thought could be a replacement reserve currency, has seen its share of global payment transactions nearly cut in half over the last five years. A few people believe China’s Yuan might be a viable replacement at some point. While its share has risen, it only represents 5% of global payments. Since 2021, the dollar’s share has risen 9% to the yuan’s 4%.

De-dollarization is a myth. What those pushing de-dollarization fail to appreciate is that the rule of law, the world’s most liquid capital markets, military might, and economic status make the dollar the only option as a reserve currency. The reality, as the graph shows, is that re-dollarization is the current trend. For more on the topic, read our two-part article, Four Reasons The Dollar Is Here To Stay.

swift data on the dollar and dedollarization

What To Watch Today

Earnings

Earnings calendar

Economy

Economic Calendar

Market Trading Update

As discussed yesterday, the market held support at the 50-DMA and bounced nicely off that level. This morning, stocks are surging, with the Dow, S&P, and Nasdaq up 2% and the Russell 2000 index up 5%. President Trump’s strong win and control of the Senate set the markets up nicely for a year-end rally in anticipation of pro-economic policies next year.

With the election behind us, we now focus on the Federal Reserve and its next rate-cut decision today. Overall, the market continues to trade mostly as expected. Once past the FOMC announcement, the market should begin to pick up into year-end as buybacks, performance chasing, and window dressing all commence.

The good news is that regardless of your opinion of the election, the market doesn’t care much. Historically, market returns are fairly standard across elections and tend to rise into year-end. The market tends to fade through the inauguration, mainly because it reverses the previous overbought and extended conditions, setting up a rally for the rest of the year.

Median market returns

As shown, the market continues to perform bullishly for now. If it holds, today’s rally will take the market back above the 20-DMA, confirming the bullish trend and spotlighting our target of 6000 by year-end. Continue to manage risk as always, but there is little need to be overly defensive.

Market Trading Update

What To Expect From The Fed

Having met yesterday and today, the Fed will release its monetary policy statement, and Jerome Powell will follow with a press conference this afternoon. As we share below, the market firmly believes the Fed will cut by 25 basis points today. While not shown, the odds they cut again in December are currently 80%. Since the cut is highly likely, what will be more telling is the Fed’s recent take on employment and possibly the election. As we have noted, employment is challenging to assess due to the Boeing strike and recent hurricanes. However, prices continue to trend lower, allowing the Fed latitude to cut further even if the labor market doesn’t weaken further.

The other significant consideration for the Fed is bond yields. Since they last cut, bond yields have risen by about 50bps. In some respects, they may like that as it will provide a further headwind to growth and, thus, inflation. However, in some respects, it’s a warning to the Fed that cutting further will incite inflation.

fed rate expectations odds

Plan For Volatility

Therefore, delaying certainty in the election outcome could increase short-term market volatility. However, history suggests market performance has been fairly reliable despite short-term uncertainty. Markets tend to dip the day after the election, with historical data showing that the S&P 500 drops by an average of 0.66% following Election Day​. This reflects both disappointment when expected outcomes don’t materialize and uncertainty about the policy direction under a new administration. However, markets typically recover by December, with the S&P 500 posting gains in about 61% of election years. However, these gains are often muted compared to non-election years, with average year-end increases below 1%​

As we have stated, the risk is a contested election. Contested elections, such as in 2000 and 2020, have historically prolonged market volatility. Following the Bush-Gore election in 2000, the S&P 500 fell 5% over the next month as the legal battle dragged on. In 2020, delayed vote counts and legal challenges heightened volatility, keeping investors on edge for weeks.​

READ MORE…

election outcomes

Tweet of the Day

deflation in china

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Why Is Gold Surging?

Record deficit spending, soaring money supply, and inflation are among the likely responses we would hear from investors to the question of why gold is surging. Instead of presuming those or other market narratives about gold prices are correct, let’s analyze historical correlations between gold and economic and market data.

In addition to helping you better appreciate why gold is surging, our analysis will help you recognize that market narratives explaining asset price movements can be wrong, no matter how reasonable they may seem at first blush.

What Is Gold?

Gold is neither a claim on the promise of future earnings like a stock nor a liability owed by a public institution or a private party like a bond. Unlike currency, it lacks the full faith and credit of most governments. 

Gold serves few industrial purposes, unlike all other commodities, and is most revered as a shiny metal used for display or jewelry. It is precisely these facts that make gold a unique asset. Moreover, some investors consider gold a store of value and an invaluable diversifying component of a portfolio.

To some, gold is a time-honored currency. In the words of John Pierpont Morgan (J.P. Morgan):

Gold is money, everything else is credit

Fed Chairman Alan Greenspan defines it as follows:

Gold, unlike all other commodities is a currency… and the major thrust in the demand for gold is not for jewelry. It is not for anything other than an escape from what is perceived to be a fiat money system, paper money that seems to be deteriorating.” -Alan Greenspan 2011

Ad for financial planning services. Need a plan to protect your hard earned savings from the next bear market? Click to schedule your consultation today.

Shorter Term- M2, CPI, Real Rates, and the Dollar vs. Gold Prices

We start our analysis with a recent view to assess which factor(s) have had the most robust relationship with gold over the last few years.

The graph below shows the running one-year correlation of gold to M2 (money supply), CPI, 10-year Real Rates, and the U.S. dollar index since 2020. As shown, the correlation for each factor varies over the four years. Here are a few takeaways:

  • Except for 2023, gold had a positive correlation with M2. Interestingly, as M2 shrank in 2023, the relationship became negative. Against conventional wisdom, gold rose as M2 fell.
  • Gold and the dollar index have had a negative correlation for most of the entire period. The dollar index recently hit support at $1.00. If support holds such, it may portend weaker gold prices and vice versa if it breaks support.
  • Other than 2021, the relationship between gold and inflation has been negative. Despite sharply rising inflation, gold was unchanged in 2021. The relationship has become strongly negatively correlated recently as gold prices are rising while inflation is falling. Similar to our comments regarding M2, recent correlations between CPI and gold do not correspond with the narratives supporting surging gold prices.   
  • The relationship between Ten-year real rates and gold has oscillated over the period, albeit it has primarily been negative. Lower real rates have coincided with higher gold prices. This relationship is often negative but much more potent when real rates are closer to zero.
short term correlations with gold

Longer Term- M2, CPI, Real Rates, and the Dollar vs. Gold Prices

The analysis below is based on the running one-year correlation between gold and each economic factor. The graphs and tables show the most dominant factor for each month since 1971.

We set a correlation of +/- 0.40 as our minimum to appear in the graph. If the correlation of gold to any of the factors was above +0.40 or below -0.40, we show the factor with the highest or lowest correlation to gold. If all of the correlations are between -0.40 and +0.40, we deem that the period is not well correlated to any of the factors. Furthermore, we separate the positive and negative correlation scores to help better view the results. Lastly, we summarize the results in a table below each graph.

positive correlation graph
positive correlation table
negatively correlated fundamental drivers with gold
negative correlation with gold

As the graphs show, the factor with the most robust relationship varies over time. The dollar and gold seem to have the most predominant negative relationship, while the dollar and M2 have the most frequent positive relationship.

The critical takeaway is that different factors have a strong relationship with gold at various times. Furthermore, there are many periods when none of the factors strongly correlate with gold. If you are trading gold based on one of the relationships, it’s best to assess the recent strength of the relationship.  

Ad for The Bull/Bear Report by SimpleVisor. The most important things you need to know about the markets. Click to subscribe.

Gold And Stocks

Gold and the stock market, using the S&P 500, have no meaningful long-term relationship. However, as we show below, they go through periods of significant positive and negative relationships.

Over the shorter 3-month periods, the correlation can exceed +/-0.75, considered statistically significant. The correlation over the last three months is +0.49.

gold and stocks correlation

Gold and Bitcoin

Many people buy Bitcoin for similar reasons to gold. Simply, it is considered by many to be an alternative currency that, in theory, should protect the buyer against the debasing of the U.S. dollar. Because Bitcoin has only been around for about ten years, we calculate the correlation between it and gold on a shorter three-month rolling time frame. As shown, the correlation is volatile with no dominant relationship.

gold and bitcoin correlation

Multiple Regression Analysis- The Case For Real Rates

Based on the data, gold tends to have more reliable relationships with economic data than market data. Therefore, we take the analysis of the four economic factors a step further and run a multiple regression analysis. Doing so calculates the correlation of the four factors combined instead of individually. Furthermore, the analysis informs us of the relevance of each factor regarding its impact on the price of gold.

We broke the multiple regression into two periods, 1971-2007 and 2008-current. This method separates the eras when the Fed used QE and didn’t. Despite the time division, both analyses were similar.

The correlation coefficient was .23 for the QE era and .19 for the pre-QE era. Both are considered statistically weak. However, the t-statistics, measuring the relevance of each factor, highlight real rates as the most crucial factor driving gold prices. A t-stat of 2.0 or greater is considered statistically significant. The t-statistics for real rates were 3.25 and 3.75 for the post and pre-QE eras, respectively.

The multiple regression aligns with our prior analysis of gold. For more on the relationship and its meaning, please read our article – Gold Investors Are Betting On The Fed.

Ad for SimpleVisor. Get the latest trades, analysis, and insights from the RIA SimpleVisor team. Click to sign up now.

Current Situation

The recent bubble-like speculative activity occurring in many asset markets and the strong correlation between stocks and gold lead us to believe gold appears to be part of the everything bubble. Inflation is falling, M2 growth is flat, and real rates are high. Based on historical relationships, such an environment should not be conducive to higher gold prices. Moreover, tight monetary policy by the Fed is prudent, which should not bode well for gold.

So, Why Is Gold Surging?

Given that gold is running counter to its normal relationships with key fundamental factors, we are left with its positive correlation with the stock market to explain its recent price trend. As seen in many other assets, speculative fever in gold appears to answer our question. 

The speculative atmosphere can continue, but beware because gold is getting overbought and deviating from its long-term fundamental drivers. When speculative momentum fails, gold may eventually catch down to its fundamental relationships.

The following is from our article The Everything Market Could Last A While Longer:

On the other side of the bull/bear argument are “gold bugs” enjoying soaring gold prices because “debts and deficits” are finally eroding the U.S. economy. As Michael Hartnet of BofA recently stated:

Long-run returns in commodities are rising after the worst decade since the 1930s, led by gold, which is a hedge against the 3Ds: debt, deficit, debasement.”

The evidence doesn’t support that view. Historically, when deficits as a percentage of GDP increase, gold does very well as concerns about U.S. economic health increase (as per Michael Hartnett of BofA.)However, gold performs poorly as economic growth resumes and the deficit declines. Such is logical, except that since 2020, gold has soared in price even as economic health remains robust and the deficit as a percentage of GDP continues to decline.

Summary

The key to effectively trading gold is knowing which factor(s) currently has the most robust relationship with gold prices. As we share, the importance of each factor varies over time. Moreover, short-term speculative environments driving this gold surge, as we believe we are currently in, can sever fundamental relationships that are more dependable over extended periods.

Like any speculative asset, awareness of price trends, momentum, and the underlying fundamentals is critical to better evaluating how gold may trade.

Residential Construction Jobs At Risk

The number of residential construction workers has almost doubled since the aftermath of the financial crisis and housing bust. The graph below on the left shows that after a brief hiccup during the early days of the pandemic, the number of jobs in residential construction continued to rise despite higher interest rates. Moreover, the job count is approaching the levels of 2006, the peak of the early 2000s housing boom.

It has taken a while, but high interest rates are finally starting to impact new home builders negatively. This is a good example of the drawn-out lag effect of higher interest rates. Residential construction flourished despite higher rates as builders offered lower-than-market mortgage rates to draw in buyers. As a result, homebuilding jobs continued to rise. That may be ending based on the graph on the right courtesy of 3Fourteen Research. It shows that housing completions have outpaced new housing starts by the most since 2008. As we elaborate on below, with fewer new homes under construction and weaker homebuilder profits, homebuilders will likely have to start laying off workers in the coming months.

In our Commentary last week, we noted DR Horton’s (DHI) poor earnings results, further confirming that new homebuilding is slowing rapidly and the number of residential construction jobs is likely to decline. To wit:

DHI’s earnings and revenue fell short of expectations. More importantly, its number of completed but unsold homes rose 17% over the quarter to 10,300. This is especially concerning as it is going into a seasonally slow selling period, and mortgage rates are up by over 0.50% over the last month. Further, making matters worse for shareholders, DHI reduced its revenue guidance from $39.4 billion to $36-37.5 billion.

housing starts residential construction jobs

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As noted yesterday, the market continues to derisk, unsurprisingly, heading into today’s Presidential Election. As polls tightened over the last few days and the certainty of a Trump victory waned somewhat, investors took bets off the table. The MACD “sell signal” remains intact for now, but the market is holding support at the 50-DMA as the previous overbought conditions are reversed. The selloff was needed to “set the table” for a year-end rally post-election, regardless of who wins the White House.

Market Trading Update

The only question is what sectors rally more: Technology, Financials, and Energy based on a Trump victory or Healthcare, Biotechnology, Green Energy, and Infrastructure with a Harris win. Regardless, Technology, due primarily to buybacks and market weightings, should do well under both candidates, with the best historical market outcomes coming from a split Congress. Such was noted in this past weekend’s Bull Bear Report:

“Furthermore, there is a decent probability that the House and Senate will be divided regardless of who wins the presidency. Such an outcome limits the aggressive political policy changes that could impact corporate earnings. Unsurprisingly, Wall Street likes such outcomes.”

Gridlock is the best market medicine

This is a particularly charged election, emotionally speaking. There will be a lot of angst with whoever wins and a plethora of media headlines predicting the worst of possible outcomes. As investors, it is our job to look past the noise and realize that what drives the market is earnings and expectations, not extraneous headlines. The worst outcomes never materialize, and regardless of the President-elect, the markets tend to perform better than not over time.

Keep focused on the bigger picture in the long-term, and manage risk in the short term.

Small Business Are Feeling The Heat of High Rates

Our lead article indirectly discussed the lag effect of higher interest rates, which is finally weighing on new homebuilders and will likely result in layoffs for those with residential construction jobs. The graph and commentary below, courtesy of The Kobeissi Letter, further the argument that the lag effect is still in play and jobs in smaller companies may be at risk.

The average interest paid on US small business short-term loans spiked to 10.1%, the most in at least 13 years. Interest rates have now doubled in just 3 years. To put this into perspective, prior to the pandemic, interest rates on these loans averaged around 6.0%. Largely due to higher rates, small business earnings are now at their second-lowest level since the 2008 Financial Crisis, according to NFIB data. Small businesses need help.

small business interest rates

Small And Mid-Cap Stocks Lead The Way

This week’s SimpleVisor sector and factor analysis help show the benefits of the multiple tools in the DIY section. The first graphic below shows the S&P 500 conservative sectors tend to be the most oversold versus the market. Conversely, the cyclical sectors are overbought. The divergence is no doubt jockeying in front of the election. Ergo, take it with a grain of salt. Lacking from the sector analysis below is the fact that smaller companies led the way last week. We show this in the second graphic. The third screenshot is also interesting. It highlights that the top three most overbought sectors are growth, with small growth companies the most overbought.

Sector analysis is somewhat blind to factor analysis because it is comprised solely of S&P 500 companies. Furthermore, some sectors, like technology and communications, are primarily driven by a few of the largest growth stocks. Factor analysis uses stocks from multiple indexes. The combination of sector and factor analyses provides a broader view of the market, particularly on the type of stocks that are overbought or oversold.

sector overbought oversold
factor weekly performance
absolute and relative factor analysis

Tweet of the Day

mississippi gdp per capita

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Election Day! Plan For Volatility

With Election Day finally here, markets are bracing for potential volatility. History shows that the stock market can react unpredictably to election outcomes, especially when the results are unclear or contested. In past elections, sudden policy shifts, political uncertainty, or contentious outcomes caused heightened volatility—making it essential to prepare your portfolio now to weather whatever the day brings.

The S&P 500 has averaged a 7% gain during U.S. presidential election years since 1952. While a 7% gain is far from disastrous, it is also well short of the 22% gain this year. Of course, investors need to remember that past performance does not guarantee future returns, and there have only been 18 presidential elections since 1952.

Notably, this is the best election-year stock market of the 21st century, which is interesting given the potential for post-election chaos given the deep political divisions. Therefore, as investors, we likely need to focus on previous years where the outcome of the election was disputed,

Best election year market return of the 21st century.

2000 Election: Bush vs. Gore

  • Dispute: The 2000 election is the most infamous modern example of a contested outcome. The result hinged on Florida’s vote count, triggering a legal battle until the U.S. Supreme Court resolved it on December 12, 2000.
  • Market Reaction:
    • Initial Decline: The S&P 500 fell roughly 5% in the month following Election Day (November 7) as uncertainty grew over the legal proceedings and recounts​.
    • Volatility Surge: The VIX (Volatility Index) spiked during this period, reflecting heightened fear among investors.
    • End-of-Year Performance: By year-end, the market remained subdued, reflecting concerns about a slowing economy that eventually entered a recession in 2001.

2016 Election: Trump vs. Clinton

  • Election Night Volatility: Although the 2016 election did not result in a legal dispute, Trump’s unexpected victory caused panic in overnight futures trading.
    • Market Reaction: Futures for the Dow Jones Industrial Average dropped more than 800 points overnight, reflecting investor uncertainty about the unexpected outcome. However, markets quickly reversed course, rallying on tax cuts and deregulation​expectations. The market rose sharply by the end of the following trading day.

2020 Election: Biden vs. Trump

  • Dispute: The 2020 election saw widespread concerns about mail-in ballots, delayed results, and legal challenges, especially in swing states. The uncertainty weighed on the market outlook.
  • Market Reaction:
    • Initial Volatility: The S&P 500 rose slightly the week after Election Day, anticipating stimulus packages regardless of the outcome​.
    • Volatility Spike: The VIX remained elevated through November, reflecting ongoing uncertainty over lawsuits and recounts in battleground states.
    • December Rally: Once results solidified, markets rallied through the end of the year, buoyed by optimism about vaccine rollouts and fiscal stimulus.

Investors face an outsized risk that volatility could increase sharply post-election if chaos erupts between political opponents. This is particularly true if the election is close but Donald Trump wins the electoral college. In that event, Vice-President Kamala Harris will need to certify the election, which increases the possibility of a delay. Investors currently have very long equities, which opens the door to a downside reversal if “something happens.”

Long equity exposure

Interestingly, traders are also heavily positioned in the volatility index. The previous times that happened, the stock market was in a downtrend or a correction. It is uncommon, if not unprecedented, to see it happening when equities are near all-time highs.

Traders are long volatility.

So, with today being election day, what should we expect and do?

Schedule an appointment

Election Day And Potential Volatility: What to Expect

With the rush of voters to the polls today, there are already warnings that several key states may not report results for several days. As Yahoo News reported:

“For this election, some swing states, including Nevada and Michigan, have new laws and policies designed to expedite ballot counts. But others, including the battlegrounds of Pennsylvania and Wisconsin, still don’t allow the counting of absentee and mail-in ballots until Election Day — which could prolong the process of declaring a winner, especially in such a tightly contested presidential election.”

Therefore, delaying certainty in the election outcome could increase short-term market volatility. However, history suggests market performance has been fairly reliable despite short-term uncertainty. Markets tend to dip the day after the election, with historical data showing that the S&P 500 drops by an average of 0.66% following Election Day​. This reflects both disappointment when expected outcomes don’t materialize and uncertainty about the policy direction under a new administration. However, markets typically recover by December, with the S&P 500 posting gains in about 61% of election years. However, these gains are often muted compared to non-election years, with average year-end increases below 1%​

As we have stated, the risk is a contested election. Contested elections, such as in 2000 and 2020, have historically prolonged market volatility. Following the Bush-Gore election in 2000, the S&P 500 fell 5% over the next month as the legal battle dragged on. In 2020, delayed vote counts and legal challenges heightened volatility, keeping investors on edge for weeks.​

While the Presidential election is important, market participants will watch the House and Senate races the closest. The financial markets love “gridlock” in Washington. Therefore, regardless of the presidential election’s outcome, a split of control between the House and Senate will ease concerns about policies that could negatively impact economic growth.

Control in Washington DC

Treasury Bonds as a Key Hedge Today

One thing investors should consider is potentially hedging portfolios with Treasury bonds. In a highly contested election, Treasury bonds could act as a “safe haven” if an unexpected election outcome sparks a market sell-off. Historically, bonds perform well when the Federal Reserve is in a rate-cutting cycle but also perform well during periods of heightened uncertainty.

For example, during previous election cycles with rate cuts—such as in 2008 and 2020—Treasuries benefited as investors sought safe assets amid heightened market uncertainty​. Lower rates reduce bond yields but increase bond prices, making them attractive in volatile environments.

Furthermore, the options skew on Treasury futures is exceptionally lopsided, while, as shown above, traders are incredibly long equities. If today’s election outcome is disputed or delayed, Treasury bonds could rise as investors retreat from equities. In 2000, 10-year Treasury yields dropped steadily throughout the contested election period, reflecting growing demand for safe assets. While I am not suggesting such an event will occur, the setup for an unexpected election outcome favors hedging portfolios with Treasury bonds.

Treasury put/call skew
Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

Portfolio Moves to Make

In our opinion, Investors should brace for potential volatility as we head into the close of the polls tonight. Such is especially the case this year, given the potential for a contested outcome. Historical precedent shows that markets struggle when elections are disputed, such as in 2000 and 2020, triggering sell-offs and heightened volatility as legal challenges unfold.

If the election result remains unclear or legal disputes arise, sectors tied to policy shifts could experience sharp fluctuations. Additionally, the Federal Reserve’s next rate cut decision, which is tomorrow, may further compound uncertainty, making defensive assets like Treasury bonds appealing as safe havens.​

As such, given the potential for volatility, here are actionable strategies to protect your portfolio today and in the days ahead:

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against significant market declines.
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.

While we have discussed these simplistic rules over the last several weeks, we continue to reiterate the need to rebalance risk if you have an allocation to equities.

Keep moves small for now. As the markets confirm their next direction, we can continue adjusting accordingly.

Final Thoughts

Will we have a new President on Wednesday? Maybe, maybe not. Crucially, who will control the Senate and the House will either support or crush a new president’s ability to enact policy decisions. How will the market respond? What will the Federal Reserve do next?

Unfortunately, neither we nor anyone else knows how these events will unfold. These questions will be answered soon enough, and we must deal with the market response accordingly. We know that the market often does the very thing we least expect. We suggest remaining nimble, holding extra cash, and hedging existing positions.

Remember, we should carry an umbrella in case it rains. Do not try to find one after the shower has started.

Market Polls To Help Handicap The Election

With election eve upon us, we thought it would be helpful to share market based presidential election polls along with Greg Valliere’s final thoughts.

The graph on the top left shows the price of Trump Media & Technology Group (DJT), which runs Truth Social Media. Truth will be a clear beneficiary if Trump wins and will likely struggle if he loses. The graph shows that the stock was relatively dull until earlier this year when it started to price in the benefits of a potential Trump victory.

Below the DJT graph is the Goldman Sachs basket of stocks likely to benefit from who wins the election. This market poll currently has a clear bet on a Trump victory and a Republican sweep of Congress.

Lastly, on the right are the Polymarket betting odds. As shown, Trump has 62.9% odds of winning, having gained some ground over the last month.

While the market polls seem to have Trump as the winner, Greg Valliere thinks Kamala Harris “will win the presidency by a fraction.” We have been sharing a few of this long-time Washington insider’s views over the last few months. Accordingly, here are his final election thoughts.

THIS ELECTION IS SO CLOSE that it could be Christmas before there’s a final result. It’s virtually certain that we won’t know the winner on the morning of Nov. 6, the day after the election.  A winner has to be declared by noon on Jan. 20.

IT’S POSSIBLE THAT HARRIS WINS COMFORTABLY — she even may make a last-minute push in Florida — and it’s possible that Trump may win Pennsylvania, and thus the election.

BUT THE MOST LIKELY OUTCOME IS A PHOTO FINISH — Harris by a fraction in a race that may not be settled until there’s a resolution of at least 8 or 9 recounts.  The big winners will be the lawyers.  

market polls

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

Last week, we discussed the break of the rising wedge pattern.

“Unsurprisingly, the market stumbled a bit this past week, breaking the “rising wedge” pattern to the downside. However, the market continues to find buyers at the 20-DMA as portfolio managers are unwilling to be “out of the market” currently.”

Such remained the case this week until it didn’t. On Thursday, the market cracked the 20-DMA and swiftly fell to retest the 50-DMA. There is an important lesson in this week’s action. Over the last several weeks, we have warned about the weakening of momentum and relative strength and the triggering of the MACD “sell signal.” However, many followers commented that the market kept rising despite my warnings and “this time was different.” The lesson is that while technical analysis is NOT perfect, the signals derived from the analysis are often a good process to follow. As always, “timing” is the most difficult challenge. The indicators told us that the market would likely “derisk” before the election, which is now evident.

Market Trading Update

As we have repeated, while the market was set up for a short-term correction, the backdrop remains bullish. Thus, we expect momentum to carry into year-end. However, here is an interesting data point from Goldman Sachs trader Brian Garrett, which was pointed out this past week.

“Between the lows of October 2023 and the highs of October 2024, the SPX rallied over 40%.What is almost unprecedented about this rally is that it was achieved on a realized volatility of ~12, yielding a “Dirty Sharpe” ratio above 3. Such has only happened previously in ’95, ’97, and pre “vol-mageddon” in 2018.

Risk Adjusted 12-month returns

To put that into layman’s terms, the last 12 months have been one of the greatest risk-adjusted yearly returns in market history.

What should be noted is that such low-volatility, exuberance-driven rallies eventually end. They lack the appropriate catalyst. As we concluded last week:

“There is currently little risk of a bigger near-term correction. However, some things could cause one, like a highly contested presidential election. In the current political environment, such is not a low-probability event. As such, while we remain allocated to the markets, we are closely monitoring the amount of risk we take.”

In other words, don’t forget to manage risk.

The Week Ahead & The BLS Employment Report

The closely followed BLS employment report was well below economists’ expectations, but the market reaction was remarkably muted. The twin hurricanes likely played a significant role in the shortfall of new jobs. The graphic below shares the disclaimer issued by the BLS. The BLS reported that the economy added 12k jobs versus expectations of 115k and last month’s revised 223k. Moreover, August’s gain of 159k was revised lower to 78k. The unemployment rate was flat at 4.1%.

The election will be the most critical market driver of the week. However, if it is contested and a winner isn’t declared immediately, it could have a lasting impact for weeks. If Trump wins, as the market polls believe, we will likely see some of the Trump beneficiaries continue to do well. However, a Trump trade reversal could occur if Harris wins, as Greg thinks is possible. As we said a few days ago, buckle up!

As if the election weren’t enough news to digest, the Fed will meet on Wednesday and likely reduce rates by 25bps. They will also signal whether another 25bps in December is possible. The bond market will have to absorb a 10-year auction on Tuesday before the election and the Fed, followed by a 30-year auction on Wednesday. Both auctions will likely create some bond market unease as Wall Street will be asked to buy bonds with the Fed and election results unknown.

bls employment disclaimer

Corporate Buybacks: A Wolf In Sheep’s Clothing

Corporate buybacks have become a hot topic, drawing criticism from regulators and policymakers. In recent years, Washington, D.C., has considered proposals to tax or limit them. Historically, buybacks were banned as a form of market manipulation, but in 1982, the SEC legalized open-market repurchases through Rule 10b-18. Although intended to offer companies flexibility in managing capital, buybacks have evolved into tools often serving executive interests over broader shareholder value.

This article explores the mechanics of buybacks, how they impact markets, and whether they truly return capital to shareholders—or merely enrich insiders.

READ MORE…

stock buybacks

Tweet of the Day

euphoriameter

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Corporate Buybacks: A Wolf In Sheep’s Clothing

Corporate buybacks have become a hot topic, drawing criticism from regulators and policymakers. In recent years, Washington, D.C., has considered proposals to tax or limit them. Historically, buybacks were banned as a form of market manipulation, but in 1982, the SEC legalized open-market repurchases through Rule 10b-18. Although intended to offer companies flexibility in managing capital, buybacks have evolved into tools often serving executive interests over broader shareholder value.

This article explores the mechanics of buybacks, how they impact markets, and whether they truly return capital to shareholders—or merely enrich insiders.

The Rise of Corporate Buybacks: By the Numbers

Since 2003, U.S. corporations have spent over $11 trillion on share repurchases. Corporate buyback activity has surged in recent years, even in volatile markets:

  • 2021: $881 billion
  • 2023: $795 billion
  • 2024 (Projected): Expected to exceed $988 billion

Introducing a 1% excise tax on corporate buybacks in 2023 has barely slowed the trend. Companies prioritize repurchases over reinvesting in business growth, raising wages, or developing new technologies. Apple and Meta, among others, regularly allocate billions toward buybacks, supporting their stock prices and meeting shareholder expectations.

Schedule an appointment

How Buybacks Affect Markets

The impact of buybacks extends beyond individual companies. Since 2000, net corporate buybacks have accounted for 100% of the equity market’s net asset purchases—a reflection of the diminished participation from pensions, mutual funds, and individual investors:

  • Pensions & Mutual Funds: –$2.7 trillion
  • Households & Foreign Investors: +$2.4 trillion
  • Corporations (Buybacks): +$5.5 trillion
  • Net Flow: +$5.2 trillion
Equity flows since 2000

There are often statements made that corporate buybacks have only a limited impact on stock prices. However, the evidence is pretty overwhelming to the contrary since 2012, when corporations became very aggressive about buybacks.

Cumulative Corporate Buybacks vs the market

This trend raises important concerns. While buybacks temporarily support share prices, they can crowd out investments in innovation, capital expenditures, and employee compensation, contributing to long-term economic stagnation and inequality.

Who Benefits Most from Stock Buybacks?

Many analysts argue that buybacks return excess capital to shareholders. However, the reality is more complicated. Buybacks primarily benefit insiders through carefully timed stock sales, inflated earnings metrics, and compensation triggers:

  1. Timing Insider Sales with Buybacks
    • Insiders, aware of buyback schedules, can sell shares during repurchase periods when prices are temporarily elevated.
    • This practice boosts insider profits without triggering price declines or regulatory scrutiny.
  2. Boosting Earnings Per Share (EPS) to Unlock Bonuses
    • Buybacks reduce the number of outstanding shares, artificially inflating EPS.
    • Since many executive compensation packages tie bonuses to EPS growth, buybacks help executives meet targets and secure stock awards.
  3. Offsetting Dilution from Stock Options and RSUs
    • Buybacks reabsorb shares issued through stock options and restricted stock units (RSUs), preventing dilution and keeping share prices elevated for insiders.

Despite these benefits to executives, the average shareholder sees little return unless they sell their shares during buyback periods. This creates an uneven distribution of profits, favoring insiders and short-term traders over long-term investors.

Companies often market corporate buybacks as a “return of capital to shareholders,” but this framing is somewhat misleading. Unlike dividends, which distribute cash to all shareholders equally, buybacks benefit those who sell their shares. As a result, buybacks:

  • Prioritize short-term stock price gains over long-term investments.
  • Signal a lack of business reinvestment opportunities—or a deliberate choice not to pursue them.
  • Concentrate benefits among insiders and executives, whose compensation is tied to stock performance.

A study from the Securities and Exchange Commission (SEC) found that executives often sell significant amounts of stock shortly after buybacks are announced, reinforcing the idea that buybacks serve insiders more than ordinary shareholders.

Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

Alternatives to Buybacks: Real Ways to Return Capital

To promote sustainable growth and equitable returns, companies could shift their focus from buybacks to more transparent and shareholder-friendly strategies.

  1. Tender Offers
    • Tender offers involve buying back shares at a pre-determined premium, ensuring all shareholders have a fair opportunity to participate.
    • This process reduces the risk of manipulation and aligns better with shareholder interests.
  2. Dividends
    • Dividends provide predictable income to all shareholders, promoting financial stability, especially for retirees and long-term investors.
    • Regular dividend payments encourage companies to focus on profitability rather than temporary stock price boosts.
  3. Long-Term Investment in Growth
    • Companies can create sustainable value over time by reinvesting profits into research, innovation, and employee compensation.
    • This approach aligns corporate management with broader economic growth rather than short-term financial engineering.

While corporate buybacks can support stock prices in the short term, they do little to enhance long-term business performance. Studies, including the Bank for International Settlements research, have shown that buybacks prioritize EPS manipulation over actual value creation. This emphasis on stock price gains discourages investment in productive assets and innovation, weakening companies’ ability to grow sustainably.

William Lazonick, in his seminal article Profits Without Prosperity,” highlighted how stock buybacks divert corporate resources away from economic growth and into executive compensation. Between 2003 and 2012, S&P 500 companies allocated 54% of their earnings to buybacks and another 37% to dividends (91% of total earnings), leaving little for business expansion, wages, or job creation investments.

Conclusion: A Shift Away from Buybacks Is Necessary

While corporate buybacks are marketed as a “return of capital,” they primarily benefit insiders and short-term traders. Their rise reflects a broader shift in corporate priorities—from investing in growth and innovation to maximizing executive compensation through financial engineering.

To promote long-term shareholder value and economic prosperity, companies should adopt more transparent capital return strategies, such as tender offers and dividends. These methods distribute profits more equitably and encourage sustainable growth. A shift in focus could rebuild trust between corporations and shareholders, aligning business strategies with broader economic health.


Call to Action:
Want to learn more about sustainable investment strategies and how they impact your portfolio? Visit RealInvestmentAdvice.com for the latest insights and actionable advice.

PCE Price Index Is Back Into The Pre-Pandemic Range

It’s too early for the Fed to claim the infamous “mission accomplished” for inflation. However, yesterday’s PCE price index is now within the Fed’s mission accomplished range. The PCE price gauge rose 0.2% monthly and 2.1% year over year. That yearly rate is down 0.2% from last month and 0.6% over the previous six months. It is the lowest since February 2021 and within spitting distance of the Fed’s 2% target. The graph outlines the average (dotted line) for the 2010-2019 period and the one standard deviation range for more historical context. It’s fair to say the PCE price index is now on the high side of the range and within a normal band of the pre-pandemic period.

While the inflation data continue to decline, we are unlikely to hear the Fed taking a victory lap. Simply, it is too early. If they were to claim inflation is now at target, the market would likely assume the Fed has a clear path to significant rate cuts. While the Fed may be breathing a sigh of relief, the last thing they want to do is create anxiety in the inflation expectations markets. Inflation expectations can have an inflationary effect. We suspect another six months of a flat to declining PCE price index and CPI will be needed for the Fed to be publically comfortable with inflation.

pce price index

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As noted yesterday, the market had been holding the 20-DMA as support. However, that ended yesterday, as earnings reports from Microsoft and Meta led to a selloff that took out that key support. Unsurprisingly, the support break triggered the algorithms to sell as pre-election derisking finally took hold. The good news is that the 50-DMA remains the next key support level but was tested yesterday. While the 100-DMA is just below, it is important for the markets to hold support at the 50-DMA. As we have been warned, the break of the previous rising wedge and the MACD “sell signal” suggested that risk was elevated for a corrective phase. While it can seem at times these signals are wrong, mostly, it is a function of timing.

With yesterday’s end-of-the-month trading and a slate of events over the next few days, from employment to the election and the next FOMC rate announcement, it is unsurprising that markets are “taking some chips off the table.” We suggest not overreacting to yesterday’s market move as the post-election factors still provide a bullish backdrop to the market into year-end.

Continue to manage exposures but remain allocated for now.

Market Trading Update

Boeing Offers Another Example Of Buybacks Gone Bad

From 1998 to 2019, Boeing bought back nearly half of their shares. Such a robust buy-back policy contributed to significant price growth of its stock, as shown below courtesy of Wolf Street. Since 2020, its share count has risen as investors have been diluted to help pay for losses and lawsuits related to its faulty aircraft. Earlier this week, Boeing announced an approximate $19 billion equity and convertible fundraising, which will dilute current shareholders by roughly 15%. The equity raise will help replenish its equity value, which has fallen to negative $23 billion. In other words, the value of its assets is $23 billion less than its liabilities.

We bring this up to discuss a drawback with buybacks. Had Boeing spent its earnings on its production facilities and invested more in technology, its recent problems may never have occurred. Furthermore, their growth trajectory and customer satisfaction would certainly be higher than they are. As the Wolf Street graph shows, Boeing stock is at 10-year lows. Most of the stock the company purchased was at higher prices than the price at which they just issued new shares. Simply, not only did they waste money on buybacks, but they set the company back significantly.

boeing buybacks and share price

Providing Perspective To Higher Yields Following Rate Cuts

Jim Bianco’s graph below shows the yield change in ten-year notes following the first rate cut of each rate-cutting cycle since 1989. As shown, it’s not uncommon for yields to rise after the first cut. However, the recent incident is greater than the six previous examples. What might that mean?

Jim argues that the market is concerned that the Fed is too aggressive and “will overstimulate and create a resurgence of inflation, especially if Trump wins and fiscal and inflationary stimulus comes with it.” The counter to his comment is twofold. First, bond yields were greatly oversold technically going into the Fed meeting. It is hard to draw an apples-to-apples comparison without providing information on the technical situations surrounding the other examples. Second, he presumes that fiscal stimulus is inflationary. While the massive pandemic-related fiscal actions were certainly inflationary, they were against a backdrop of broken supply lines. Over the last forty years, excluding the pandemic, there is scant evidence that fiscal spending is inflationary. The negative multiplier economic thesis contends that it’s deflationary.

ten year yields fed rate cuts

Tweet of the Day

returns sharpe ratio

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Will Halloween Fear Bring November Cheer For Bondholders?

The last two Halloweens capped off a few frightful months for bondholders. However, as we share below, 10-year bond yields reversed course on Halloween in 2022 and 2023. Will 2024’s harrowing October for bondholders end with Halloween’s ghosts and goblins? Accordingly, will November be better for bonds as it has been for the last two years?

Despite the eerie correlation highlighted below, Halloween is insignificant to the bond market. However, what does matter is a slew of negative narratives about bond market fundamentals that cause fear in some bond investors. Additionally, famed investors Paul Tudor Jones and Stanley Druckenmill boost the fear as they publically “talk their books.” To help you navigate this tricky market, we add context around the recent bond bearish arguments to better appreciate what is happening with bond yields.

To wit:

The economy is about $8 trillion, or 33%, larger than it was on the eve of the Pandemic. Therefore, it’s not surprising the amount of debt has grown commensurate with that amount.

Following Japan’s path seems awfully bullish strictly from a bond holder’s perspective.

READ MORE….

Halloween and bond trends

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As noted yesterday, the market remains “stuck in neutral” over the last two weeks ahead of several key events. Tomorrow is “employment day,” when we will see the October numbers. A strong employment report could worry markets about reduced rate cuts from the Federal Reserve. On Tuesday is the election, with no small risk of a potential contested outcome. Then, on Wednesday is the Federal Reserve FOMC meeting, where we will get the latest update from the Fed on its rate cut decision and outlook. With the potential market volatility those events could unleash on the markets, it is quite surprising to see recent market action remain so calm.

The 20-DMA remains key support, with buyers repeatedly stepping in at that level. On the other hand, the upside remains contained to the underside of the broken rising trend line from the October lows. Notably, the previous “buy signal” has reversed to a “sell signal,” which currently limits the bulls. However, money flows are declining, which suggests that buying power is waning. With historical volatility at decently low levels, such sets the stage for a potential bearish reversal if something “unexpected” occurs.

Market Trading Update

We remain underweight equities and overweight cash in the near term with our core Treasury bond holdings intact to hedge against a sharp increase in volatility. That positioning is unlikely to change much over the next two months, and we are willing to sacrifice some performance in exchange for control over risk.

While we have discussed these simplistic rules over the last several weeks, we continue to reiterate the need to rebalance risk if you have an allocation to equities.

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against significant market declines.
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.

Keep moves small for now. As the markets confirm their next direction, we can continue adjusting accordingly.

JOLTS and ADP

With the Fed seemingly more focused on the labor markets than inflation, the JOLTs and ADP reports help add context to whatever we will learn about the labor market from the BLS employment report on Friday. As shown below, the number of job openings in the JOLTs report fell sharply by 418k. Moreover, there were 165k layoffs and another 107k quits, more than offsetting the 123k hires. The data, which is delayed a month, contradicts last month’s solid BLS employment report.

While JOLTs portrayed weakness in the labor market, ADP was stronger than expected. ADP reports the workforce added 233k jobs last month, more than double expectations and 90k more than last month’s figure. We caution with JOLTs and ADP that seasonal factors can significantly affect labor market data this time of year and won’t be fully sorted out for at least a few months. Furthermore, the hurricanes also played a role that is hard to estimate. The current consensus estimate for Friday’s BLS report is 180k new jobs, with the unemployment rate increasing from 4.1% to 4.2%

jolts job openings

GDP Remains Robust

Third quarter GDP was a mixed bag of information. GDP fell 0.2%, slightly short of estimates at 2.8%. However, the PCE prices deflator was well below the consensus estimates at 1.5%. Wall Street economists thought it would come in around 2.5%. Therefore, GDP was 1% lower than estimated due solely to overforecasting inflation. The counter to the lower prices was higher than expected consumer spending. Consumer spending grew by 3.7%, above estimates of 3.0%. Generally, the data points to a strong consumer and a continued decline in inflation.

real gdp growth contributions

Tweet of the Day

gdp defense spending

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Can Paul Tudor Jones and Stanley Druckenmiller Be Wrong?

Can famed investors Paul Tudor Jones and Stan Druckenmiller, who recently proclaimed they are short bonds, thus betting on higher yields, be wrong? Instead of mindlessly assuming such legendary investors are correct, let’s do some homework.

First, though, let’s remind ourselves that Paul Tudor Jones and Stanley Druckenmiller are known for their aggressive trading styles. Therefore, we don’t know whether their bets are short term trades for a quick profit, or longer-term bets on significantly higher yields. Moreover, maybe their negative bond commentary is just “talking their books” to get traders and investors to follow them and boost their profits. Such a proven strategy by famous traders can be a recipe for losses by those who try to mimic their trades.

The recent 50-basis point increase in longer-term yields started the day after the Fed cut rates by 50 basis points. Some bond bears claim the Fed will rekindle inflation by cutting rates while the economy remains strong. Others fear that fiscal deficits are out of control, leading to inflation. An emerging group of bond bears, led by Paul Tudor Jones and Stanley Druckenmiller, worry that a Donald Trump Presidency and Republican control of Congress will ramp up deficits, resulting in high inflation.

Let’s address the market narratives and assess their credibility. Doing so will help us decide if following Paul Tudor Jones and Stanley Druckenmiller is a good idea.

ten year yields
Ad for financial planning services. Need a plan to protect your hard earned savings from the next bear market? Click to schedule your consultation today.

Is Another Round Of Higher Inflation Likely?

Below is a review of some possible causes of inflation bandied about by the inflationist crowd.

Will High Inflation Reemerge

At its core, inflation is a function of supply and demand. The 2022-2023 bout of high inflation occurred because demand was grossly elevated by pandemic-related stimulus and unusual consumer behaviors. At the same time, the supply of many goods was significantly curtailed by global lockdowns and crippled supply lines.

Both demand and supply have since normalized. If inflation rises, it will not be for the same causes as the last round of inflation.  

A Repeat Of the 1970s Is In the Cards

Some investors argue that consecutive rounds of the 1970s-like inflation are inevitable.

That era and this era are very different, as we recently wrote in a four-part series. Instead of requoting from those articles, we share the links (ONE, TWO, THREE, and FOUR).

 “The 2020s aren’t the 1970s by any stretch of the imagination!” – Part Four

Government Spending Will Boost Inflation

Paul Tudor Jones and many others warn that uncontrollable federal deficits will boost inflation. We will also address this topic in the Debunking Deficits section, but before doing so, it’s worth a quick lesson on an economic term called the negative multiplier. To do so, we share a section from our article Stimulus Today Costs Dearly Tomorrow:

As we note, debt increasing faster than economic growth proves that borrowing and spending are unproductive. Unproductive government debt or private sector debt also results in a negative economic multiplier. Essentially, the ultimate expense of the debt outstrips its benefits over the long run.

Economists define the multiplier effect as the change in income divided by the change in spending. Over an extended period, if the change in spending is more significant than the change in income, the effect of said spending is negative. Replace GDP for income and government debt for spending to compute the government’s spending multiplier.

Multiplier = Change Income / Change Spending

Government Multiplier = Change GDP / Change Debt Outstanding

Bottom line: government debt stimulates the economy. However, the debt detracts from growth over time, more than offsetting the initial benefits. If you think the government is suddenly spending productively, then inflation may have an upward bias. However, assuming the government continues to spend unproductively, higher deficits are deflationary and weigh on economic growth.

The U.S. Will Import Inflation

Some say we will import inflation. The first graph below shows that inflation in the Eurozone, China, and the U.K., three of our largest trading partners, is falling alongside that of the United States. China’s inflation is near zero. Japan, not shown, has seen meager inflation with bouts of deflation for the last 25 years.

We also ran a multiple regression to forecast U.S. inflation based on the inflation of China, the U.K., and the Eurozone. The second graph shows a significant correlation, with an r-squared of .86. Moreover, the model states that U.S. CPI needs to fall by 0.3% to align with the historical relationship.

Both charts lead to the question of who we will import inflation from.

us euro uk china cpi trends
us inflation regression uk euro china
Ad for The Bull/Bear Report by SimpleVisor. The most important things you need to know about the markets. Click to subscribe.

Debunking Deficits

Before we put context to the recent deficit spending, it’s important to caveat that we believe, and have written on many occasions, that the nation’s consistent deficit spending and accumulating debt are a considerable headwind to economic growth. We, in no way, condone the recent deficit spending or the excessive spending for most of the last forty years. We are also well aware that countries with debt-to-GDP ratios above 1.0 have not fared well. 

That said, considering bond returns for the next year or two, we must assess the situation for what it is today and not let the narratives and hyperbole surrounding the market sway our decision-making.

We now review a few popular arguments claiming that the trajectory of deficits has changed considerably, and the change is inflationary.   

Recent Spending Is Obscene

A common argument from the emerging bond bears is that recent deficits are obscene compared to past ones. Accordingly, bond bears think these increased deficits will be inflationary and require higher yields to satisfy Treasury investors.

While that may be true, the argument lacks context. They fail to mention that the economy has grown significantly over the last few years.

The economy is about $8 trillion, or 33%, larger than it was on the eve of the Pandemic. Therefore, it’s not surprising the amount of debt has grown commensurate with that amount.

The graph below shows the debt-to-GDP ratio and its trend line since 1980. After the ratio jumped higher on massive COVID-related spending, it settled down slightly above where it was before the Pandemic. Furthermore, it has been flat for the last two years.   

debt to gdp deficits

Now, let’s take the analysis one step further and theoretically calculate what the current debt growth would look like had the Pandemic never occurred. We admit that this is not a traditional way to assess debt, but it does provide unique context on the debt outstanding compared to GDP.

To do this, we reduce the debt by the estimated $5.6 trillion spent on COVID relief. Furthermore, we assume the interest expense of the Treasury debt would have stayed on the pre-inflation trend. For perspective, this cuts approximately $500 billion of added interest expense in the past year.

The graph below shows the revised debt to GDP in orange. Might it be fair to say that without the Pandemic, current debt issuance would be on par with pre-pandemic debt to GDP levels given the economy’s size? Furthermore, despite the pandemic, spending, debt, and GDP growth have primarily been aligned for the last two years.

debt to gdp excluding covid

Deficit Spending Increases The Money Supply

Money is lent into existence. Such is a fact; therefore, larger deficits (borrowing) increase the money supply. However, as the graph below shows, the money supply (M2) is on the pre-COVID trend. More importantly, M2 as a ratio of GDP, a better measure of money supply, is decently below the pre-COVID trend.

money supply

Also, for consideration, the supply of money is only part of the inflation equation. The other significant half is the velocity of money, or how often it is spent. Currently, the velocity of M2 is at the same level as at the start of 2020.

The supply and velocity of money have erased the pandemic-related anomalies and are similar to where they stood in late 2019. At that time, inflation was consistently running at 2%. The current supply and velocity of money should not lead one to believe that inflation is set to increase. If anything, the figures argue that inflation will return to the Fed’s 2% target.

We Are Following Japan’s Path

Paul Tudor Jones mentions a similarity between our fiscal situation and Japan’s. He refers to Japan’s excessive government debt and its central bank, which keeps interest rates extraordinarily low to help service the debt.

Japan has a debt-to-GDP ratio of 263%, more than twice that of the U.S. Its central bank has set interest rates at or below zero and relied on massive amounts of Q.E. for the last 20 years. The result is longer-term bond yields, as shown below, of 2% or less and sub-1 % inflation with prolonged periods of deflation. 

japan ten year yields

Following Japan’s path seems awfully bullish strictly from a bond holder’s perspective.

Ad for SimpleVisor. Get the latest trades, analysis, and insights from the RIA SimpleVisor team. Click to sign up now.

More From Jones

Paul Tudor Jones also believes that inflating away the debt is the only way to resolve the issue without taking strict fiscal steps. Maybe he knows something we don’t, but Japan proves that is not necessarily the case, at least not yet.

Jones also comments that we need to “get to the point where we stabilize debt to GDP to where it is right now.” As we showed earlier, the debt to GDP is stable and not rising.

Donald Trump and a Republican Sweep

Paul Tudor Jones and Stanley Druckenmiller voice concern over inflation and bond yields if Donald Trump becomes the President and the Republicans sweep Congress.

Let’s take their assumption a bold step further and assume Donald Trump immediately attempts to cut taxes, spend like crazy, and rack up massive deficits. Even so, he must contend with Democrats, who will still have nearly 50% of the votes in Congress, and the Republican Freedom Caucus, which wants to curtail government spending and balance budgets. The Caucus and Democrats could be strange bedfellows in that circumstance.

Summary

The bearish arguments we discuss in this article have merit. However, when taken in proper context, we believe some of them are not as worrying as the headlines may seem. Further, as we see in Japan, there is quite likely more monetary policy runway before problems escalate.

We believe the slowing economic growth and lower inflation trends that persisted before the Pandemic are reasserting themselves. It may sound ridiculous today, but we wouldn’t be shocked if investors and the Fed were again worried about deflation in the coming years.

Market Turbulence Ahead: Buckle Up

Many events could roil the markets over the next two weeks and/or send them surging. Accordingly, it’s worth summarizing the political, monetary, and economic schedule to prepare for market turbulence.

The intense schedule kicked off yesterday with the JOLTs report and Google earnings.

Today is the ADP jobs report and Microsoft and Meta earnings. Thursday features Apple and Amazon earnings and the critical PCE inflation report. Furthermore, the Bank of Japan, whose actions have recently caused volatility in global markets, will set interest rates. As seen in early August, hawkish signals from the BOJ could revive the market turbulence. The PCE and Friday’s BLS employment report will go a long way to setting market expectations for next week’s Fed meeting. Current expectations point to a high likelihood they cut by 25bps.

Market turbulence continues next week, with elections on Tuesday and the Fed meeting on Wednesday. If the election results are unknown and likely contested, the Fed will have a tough decision to make. As if the election and Fed weren’t enough for the bond market to digest, the Treasury Department will conduct ten- and thirty-year auctions. Consequently, with decent odds of increased market turbulence over the next two weeks, buckle up and manage risk, as it will be an exhausting two weeks.  

Fed rate probabilities

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As noted yesterday, the market continues to grind sideways below the broken rising trend line. However, the action remains bullish as investors anticipate good earnings from Microsoft, Meta, Ely Lilly, and Abbvie today. We hold long positions in all those stocks, so today’s announcements after the bell will greatly impact portfolios tomorrow.

Market Trading Update

This earnings season has heavily rewarded companies that beat earnings estimates, but overall revenue beats have been roughly average. Such suggests the economy is slowing down, and earnings may become more challenging next year. However, that is a story we will discuss with you later.

The market continues to trend higher, holding support at key levels, namely the 20-DMA (not shown in the chart above). However, this is all positioning for earnings this week. Once those reports are finished on Thursday, we could see some derisking headed into Tuesday’s election, given that no one is certain of the outcome. As such, continue to manage risk for now, and after next week’s election and Fed meeting, we should have a better picture of how to position for the remainder of the year.

DHI Warns Of Weakening Housing Market

DR Horton (DHI) opened over 10% lower, dragging the rest of the homebuilder sector lower. DHI’s earnings and revenue fell short of expectations. More importantly, its number of completed but unsold homes rose 17% over the quarter to 10,300. This is especially concerning as it is going into a seasonally slow selling period, and mortgage rates are up by over 0.50% over the last month. Further, making matters worse for shareholders, DHI reduced its revenue guidance from $39.4 billion to $36-37.5 billion.

Further weighing on DHI and other homebuilders are homebuyers with lower mortgage rate expectations. Per its CEO:

“While mortgage rates have decreased from their highs earlier this year, many potential homebuyers expect rates to be lower in 2025. We believe that rate volatility and uncertainty are causing some buyers to stay on the sidelines in the near term.”

Lastly, the Case-Shiller housing index fell by 0.13% last month, with the year-over-year change running at 4.2%. For context, the 2022 peak was +5.5%. Moreover, flat to declining home prices support DHI’s weaker earnings and forward-looking revenue shortfall.

dr horton DHI

Key Market Indicators For November 2024

The November outlook marks a critical period with macroeconomic and election uncertainties still in play. The Fed’s dovish tone remains encouraging for equity markets, but geopolitical risks and U.S. election developments could inject volatility. As we approach the year-end, investors must remain agile and ready to respond to sudden market shifts.

READ MORE…

best six months for the market November 2024

Tweet of the Day

earnings reports this week

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Key Market Indicators for November 2024

Key market indicators for November 2024 present a complex but opportunity-filled environment for traders and investors. Following the first phase of Federal Reserve rate cuts and growing global uncertainties, the technical landscape suggests several notable shifts. Let’s explore the key market indicators to watch.

Note: If you are unfamiliar with basic technical analysis, this video is a short tutorial.

YouTube video

Seasonality and Breakout Patterns

As discussed recently, Seasonality is a crucial key market trend in November. Historically, the stock market transitions from the weaker summer months into a stronger end-of-year rally, often dubbed the “Santa Claus Rally,” beginning mid-December. On a rolling 6-month basis, November to April has both the highest percentage returns and the highest hit rate at 77%.

Best Six Months Market Returns

The seasonal trend is reinforced by the weekly MACD (Moving Average Convergence Divergence) signal crossing into bullish territory, hinting at upward momentum through the year-end. The previous two seasonal “buy signals” have worked well for investors. However, that signal does not preclude a short-term correction to moving average support levels.

Stock market  technical analysis

As noted in that previous article, the return of corporate share buybacks will be an important support to the market, adding nearly $6 billion daily to large-cap purchases.

Buybacks authorizations
Schedule an appointment

Sectors to Watch: Tech and Industrials Lead

With interest rates declining, cyclical sectors—like industrials and technology—are gaining strength. Large-cap tech companies, particularly the “Magnificent 7,” are all holding above critical moving averages. Despite more bearish investors suggesting the “AI” trade is done, the price action continues to suggest strong institutional participation, which could drive the Nasdaq higher into year-end. Such is particularly the case given that hedge funds remain significantly underweight U.S. equities versus the benchmark. On a risk-adjusted return basis, we are already seeing them increase exposure to “catch up” on performance into year-end.

Positioning by hedge funds

Notably, these stocks generate all estimated earnings growth for the S&P 500 index.

Earnings growth expectations

Meanwhile, the industrial and materials sectors, which were consolidating from March to August, are beginning to trend higher. Such is due to expectations of a Presidential election outcome that would lead to stronger economic growth, oil and gas investments, tax cuts, and reshoring of U.S. manufacturing.

Basic materials and industrials

Those policies would also generate stronger domestic employment, higher wage growth, larger investments in technology, and increased loan demand from the financial sector. This is likely why we have also seen improvement in those sectors lately.

Technology and Financials

Back to seasonality, it is also notable that many of the stocks that drive the Technology and Financial sectors are also some of the largest purchasers of their shares. As that window opens into year-end, additional price support should be provided.

Volatility Rising

Of course, while the market may be betting on a certain election outcome, over the last month, the rise in the Volatility Index (VIX) signals potential unease beneath the surface. Typically, VIX declines as equities rise, reflecting lower risk sentiment. However, the current divergence suggests investors continue to hedge against an unanticipated or contested election outcome. The chart shows the $VIX index inverted against the S&P 500 index. Normally, there is a high correlation between the inverted volatility index and the market. However, the non-correlation is currently extremely elevated, suggesting professionals are hedging their portfolios against downside risk.

Stock market versus the volatility index

While not an immediate red flag, this disconnect warrants caution. Investors should monitor for potential market reversals or volatility spikes, as rising VIX amid bullish markets can indicate heightened sensitivity to external shocks. However, if the election passes as anticipated, the reversal of volatility hedges could also provide an additional tailwind for equities into year-end.

The key point for investors is to be aware of short-term risks in the market despite a stronger bullish view into year-end. Therefore, continue to adjust strategies to incorporate volatility-based stops or other hedges to manage risks effectively.

Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

Momentum Indicators: Negative Divergences

The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator offer mixed signals on the broad market. While the broad market remains bullish, holding above key moving averages, relative strength and momentum show a negative divergence.

Market vs RSI and MACD negative divergence

These negative divergences have often preceded short to intermediate-term corrective market actions. At this point, investors tend to make two mistakes. The first is overreacting to these technical signals, thinking a more severe correction is coming. The second is taking action too soon.

Yes, these signals often precede corrections, but there are also periods of consolidation when the market trades sideways. Secondly, reversals of overbought conditions tend to be shallow in a momentum-driven bullish market. These corrections often find support at the 20 and 50-day moving averages (DMA), but the 100 and 200-DMAs are not outside regular corrective periods.

Navigating Market Uncertainty and Upcoming Catalysts

The November outlook marks a critical period with macroeconomic and election uncertainties still in play. The Fed’s dovish tone remains encouraging for equity markets, but geopolitical risks and U.S. election developments could inject volatility. As we approach the year-end, investors must remain agile and ready to respond to sudden market shifts. Therefore, investors may want to consider several strategies:

  1. Increase Equity Exposure: Large-cap stocks historically perform well during this period. You could consider increasing exposure to diversified index funds or sector ETFs that align with historical trends. If you are a stock picker, focus on large-cap, highly liquid names that generate the strongest earnings growth.
  2. Review Portfolio Risk: While the MACD buy signal is a positive indicator, you should assess your portfolio’s risk tolerance and ensure it aligns with your long-term goals.
  3. Rebalance Allocations: Now may be a good time to rebalance by reducing positions in riskier assets or diversifying across asset classes.
  4. Use Stop-Loss Orders: To manage downside risk, consider using stop-loss orders.

While the markets remain very bullish currently, rebalancing risk may lead to short-term underperformance while the “sun is shining.” However, a steady practice of risk controls ensures you won’t be caught without an umbrella which it “begins to rain.”

The trick to navigating markets is not trying to “time” the market to sell exactly at the top. That is impossible. Successful long-term management is understanding when “enough is enough” and being willing to take profits and protect your gains. For many stocks currently, that is the situation we are in.”TheBullBearReport

As we head into the Mega-cap earnings reports, that advice remains relevant this week. The trick will be to navigate the outcome without making emotionally driven decisions.

Continue to follow the rules and stick to your discipline. (Read our article on “What Is RIsk” for a complete list of rules)

Continuing Jobless Claims Diverge From Initial Claims

Along with this week’s BLS, JOLTs, and ADP labor market reports are the weekly initial and continuing jobless claims data from the BLS. While the market doesn’t seem to focus on the continuing and initial jobless claims data as much as the monthly data, it is constructive. It helps us affirm the divergences we see in the monthly data. Furthermore, it is much closer to real-time, so it quickly alerts us to potential changes.

Initial and continuing claims affirm the stale jobs market, whereas few employers are hiring and few are firing. The graph below from ZeroHedge shows continuing claims (red) are at a 3-year high and have been trending higher over the last couple of months after being rangebound for 2023 and early 2024. Furthermore, excluding the pandemic-related period of 2020 and 2021, continuing claims are above 2018 and 2019 levels. The divergence between initial and continued claims portends that the pace of layoffs is not increasing, but those laid off are finding it hard to find a new job. This data jibes with the JOLTs data, showing the hires rate is at the lowest level in 10 years.

This week, we might get further confirmation between JOLTs and the continuing claims data. Such a signal can be a leading indicator of broad-based labor market weakness in the pipeline. However, take the data with a grain of salt as it may be employer consternation leading into the election.

continuing jobless claims

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As discussed yesterday, the market has taken a breather over the last several trading days after a long and uninterrupted six-week advance. Notably, volatility remains somewhat elevated but subdued within a tight trading range. That compression, as noted previously concerning the stock market, indicates that a fairly substantial move in volatility is likely when it breaks out of that range.

We guess that the market is not hedged enough for an election outcome that favors Kamala Harris, which could send volatility sharper higher for a day or two as Wall Street repositions from their recent “Trump trade” bets. If Donald Trump wins the election, we could see volatility break to the downside into year-end as professional managers chase stock returns for year-end reporting.

To us, the volatility index suggests some short-term risk to the market. Unfortunately, we have no idea what that means. As we saw in 2016, it was assumed that if Donald Trump won, the market would crash. It did on election night, but by the time the markets opened the next day it was flat and ended up 500 points by the end of the day. That kind of overnight swing is impossible to hedge for and any potential thing you do has an opportunity to turn out wrong.

Market Trading Update

As such, we will likely stay the course for now—wait for the election and then adjust for the outcome. Furthermore, a lot of critical economic data this week, from PCE to Employment, will weigh on the Federal Reserve and their meeting next week. We also have earnings from MSFT, GOOG, AMZN, AAPL, and LLY, which will move markets.

As you can see, there are many moving pieces this week. Remain nimble and be prepared to adjust if necessary.

Hedge Funds Own The Largest Stocks

With earnings releases from some of the largest companies this week, we know hedge funds will be paying close attention. The chart below shows that the five most popular hedge fund holdings will present earnings this week. Given hedge funds’ general trading and positioning aggressiveness, the earnings reports will generate significant volatility if they over-or underperform expectations or present guidance different from market expectations. Nvidia will report its earnings in a month, but any commentary on AI from the technology companies shown below will likely influence Nvidia’s shares.

hedge fund holdings

The Healthcare Sector Lags On Election Jitters

The coming election is taking a toll on healthcare stocks. The first SimpleVisor screenshot shows that the healthcare sector is grossly oversold relative to the broader market and other sectors. Moreover, the graph on the right shows that healthcare appears to be the only sector trading poorly going into the election. While the sector is ripe to outperform the market, we caution that it could be rough until the election is over and the market processes the results.

For more detail, the second graphic zooms into the top ten underlying healthcare stocks. ISRG is the lone outperformer. That was almost solely the function of an excellent earnings report on October 18th. Thermo Fisher, Danaher, and Merck are trading the poorest of the group.

absolute and relative analysis
healthcare relative analysis

Tweet of the Day

earnings expecatations

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Compounding With Passive And Active Strategies

The Tweet on the left below from Charlie Bilello makes a strong case for a passive, buy-and-hold investment strategy. Supporting his graphical evidence is a quote from investment legend Charlie Munger, alluding that investors should buy and hold and let compounding work its magic. Consequently, investors who panicked at the market low in 2020, sold everything, and did not buy back in would have surrendered significant gains. Compounding and the fortitude to stick with a passive strategy proved to be a winning combination over the last few years. Albert Einstein once said, “Compound interest is the world’s eighth wonder.” It’s daunting to challenge Munger and Einstein, but here we go.

Bilello’s graph assumes the extreme worst-case scenario: an investor sells everything at the low and doesn’t reenter the market. Let’s take the opposite case with a perfect active strategy. What if an investor sold the market peak in January 2020 and repurchased it at the bottom in March? The green line on the graph to the right adds this scenario to Bilello’s other two scenarios.

The point of this exercise is not to claim that calling market tops or bottoms is achievable but that active management, when done well, allows investors to outperform a passive strategy. Moreover, the benefits of compounding are greatly accentuated when active investing outperforms a passive approach. Furthermore, even if an active investor doesn’t perfectly time significant peaks and troughs, active management can still help you achieve better results than the market. However, we caution that poor active management decisions can result in underperformance versus the market.

compounding

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

st week, we discussed the triggering of the weekly seasonal MACD buy signal. To wit:

“The WEEKLY S&P 500 chart, with three different signals, confirms the start of the seasonal period. With Friday’s close in the green, keeping the week broadly positive, all three seasonal buy signals have been triggered. However, just because the seasonally strong period of the year has technically started, it doesn’t mean that the markets won’t have corrections along the way. Notably, we have already had 6-straight weeks of gains, which is a long stretch without a pullback. Secondly, while the market is on a weekly “buy signal,” the market is both deviated and overbought short-term. When the market breadth is very elevated, combined with overbought and deviated markets from the 50 and 200-DMA, corrections and consolidations tend to be more prevalent.”

Unsurprisingly, the market stumbled a bit this past week, breaking the “rising wedge” pattern to the downside. While the correction has been mild, with the election looming, some further consolidation or reversal as portfolio managers “derisk” for election risk should be expected. However, the market continues to find buyers at the 20-DMA as portfolio managers are unwilling to be “out of the market” currently.

Notably, the market rallied to the underside of the rising trend line but failed at that resistance level. While the moving averages will provide some short-term support, we must remember that the negative divergence in relative strength and momentum remains.

Market Trading Update

As noted, there is currently little risk of a bigger near-term correction. However, some things could cause one, like a highly contested election. In the current political environment, such is not a low-probability event. As such, while we remain allocated to the markets, we are closely monitoring the amount of risk we take.

The Week Ahead

This week, earnings, inflation, employment, and election polling will make the headlines.

The BLS JOLTs and Employment Report will be released on Tuesday and Friday. ADP will shine additional light on the labor market on Wednesday. Economists expect to see a gain of 170k jobs, down from 254k last month. A downward revision to the previous month’s figure would not be surprising. Headline and Core PCE, the Fed’s preferred inflation gauge, are expected to increase by 0.1%. That data will be released on Thursday.

The markets have been pricing in a Trump victory with an increasing chance the Republicans take both houses of Congress. The daily onslaught of polls will either affirm the market or cause some consternation among investors.

As we share below, courtesy of TradingView, many earnings reports from some of the largest companies are due this week.

week earnings announcements

Low Forward Returns Are A High Probability Event

As stated at the outset, valuations are a terrible market timing metric. However, they tell us much about asset bubbles, investor psychology, and future returns.

No matter how many valuation measures we use, the message remains the same: From current valuation levels, investors’ expected rate of return over the next decade will likely be lower.

There is a large community of individuals who suggest differently and make a case for why this “bull market” can continue for years longer. Unfortunately, no valuation measure supports that claim.

But let me be clear: I am not suggesting the next “financial crisis” is upon us either. I am suggesting that based on various measures, forward returns will be relatively low compared to what we witnessed over the last eight years. Such is particularly the case as the Fed and central banks globally begin to extract themselves from the cycle of interventions. 

READ MORE…

forward return expectations

Tweet of the Day

retail single stock trades

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Robo-Taxi: Tesla Or Uber?

What a difference two weeks make. Despite a 15% gain on Thursday, Tesla shares are back to where they were two weeks ago. The stock fell roughly 15% when its Cybercab robo-taxi presentation was a dud. As further attestation to the problems besetting Tesla’s robo-taxi program, shares of Uber and Lyft rose 10%. Today, shares of Uber and Lyft trade lower as hope for Tesla’s robo-taxi program is revived. Despite numerous setbacks to its robo-taxi production, Elon Musk believes robo-taxis are potentially a $5 to $7 trillion opportunity. On the earnings conference call, Musk provided an optimistic outlook.

I do feel confident of Cybercab reaching volume production in ’26, just starting production, reaching volume production in ’26. And that should be substantial, but we’re aiming for at least 2 million units a year of Cybercab– Elon Musk

As investors, we can bet on robo taxi success with Tesla shares or against its progress via Uber. To put a shorter-term technical context to the decision, we share the analysis from SimpleVisor below. The top blue line charts the price ratio of Tesla versus Uber. Over the last year, as demonstrated by the lower ratio, Uber has outperformed Tesla. The second graph from the top is a proprietary trading signal we created. Like the MACD and stochastic graphs below it, our model signals that Tesla is set to outperform Uber. Accordingly, given the immense profits from robo-taxis, this analysis argues that Tesla is likely to gain support from shareholders for its robo-taxi program.

uber and tesla analysis

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As noted yesterday, the market broke out of the “rising wedge pattern” to the downside. This likely begins the correction/consolidation process heading into the election. With traders largely offside, having chased stocks over the last week, reversing some of those trades seems logical heading into the election in two weeks.

Yesterday, the market held the 20-DMA, which continues to act as support with the MACD “sell signal” triggered. We suspect the market may attempt a rally to the bottom of the rising trendline and then turn lower into the election as portfolio managers “derisk” portfolios for the possibility of a contested outcome. Such would likely coincide with a test of the 50-DMA, which would get markets decently oversold short-term. The 100-DMA slightly below that is certainly possible. However, such a correction would be ideal for a year-end rally as portfolio managers try to make up performance for the year and buybacks return at a robust $6 billion/day clip.

Market trading update

The bullish momentum remains, although it is diminishing a bit, which suggests remaining long-biased equity exposure for now. However, such does NOT mean that you should not continue a process of risk management along the way.

Stock And Bond Volatility

One reason for the recent increase in bond yields is that the odds of Trump winning and a Republican sweep of Congress are growing. Presumably, according to the media, such a scenario would foster tax cuts and increased deficit spending. It’s not just yields that highlight this concern, but volatility. The Bloomberg graphs below show the implied volatility for the stock and bond markets. Bond market volatility (MOVE) is the highest it’s been this year. Yet, despite the concerns, stock market volatility has risen but remains well off prior levels.

The election and, more importantly, future fiscal policies are unknown. Therefore, we need to ask why the bond market is so concerned about the election and, ultimately, changes in fiscal policies while the stock market is sanguine.

stock and bond volatility

Election Handicapping Is Fraught with Risks

As we previously noted, the bond market narrative driving yields higher is that a Trump victory and Republican sweep of Congress will result in higher government spending. While that is highly debatable, we instead focus on the polls that point to a Trump victory. The table below from Real Clear Politics is simply an average of national polls. Harris has a slight lead, with the underlying individual polls mixed and incredibly close. More importantly, focus on the yellow highlighted section “This day in history.”

On this day in 2020, President Biden had a big lead over Trump. On this day in 2016, Hillary Clinton had a decent lead over Trump. Biden went on to win by a slim margin in 2020, and Clinton, despite being the odds-on favorite, lost. Bottom line: polls can be misleading. Thus, making investments based on said polls is fraught with risk. Furthermore, market assumptions on what a president may or may not do are often proven false. For gamblers and speculators, the environment is ripe for trading. Investors should sit back, wait to see who wins, and give the new president and Congress time to see what they will and won’t enact.

election polls

Tweet of the Day

tesla stock gain

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Lower Forward Returns Are A High Probability Event

I was emailed several times about a recent Morningstar article about J.P. Morgan’s warning of lower forward returns over the next decade. That was followed up by numerous emails about Goldman Sachs’ recent warnings of 3% annualized returns over the next decade.

Goldman Sachs 10-year Return Forecast

While we have previously covered many of these article’s points, a comprehensive analysis is needed. Let’s start with the overall conclusion from JP Morgan’s article:

“The investment bank’s models show the average calendar-year return for the S&P 500 could shrink to 5.7%, roughly half the level since World War II. Millennials and Generation Z might not enjoy the robust returns from U.S. stocks that helped swell the retirement accounts of their parents and grandparents.”

While such a statement may seem obvious to long-time students of markets, the outsized returns over the last decade have many questioning whether “this time is different.” As we discussed in “Portfolio Return Expectations Are Too High.” To wit:

The chart shows the average annual inflation-adjusted total returns (dividends included) since 1928. I used the total return data from Aswath Damodaran, a Stern School of Business professor at New York University. The chart shows that from 1928 to 2023, the market returned 8.45% after inflation. However, after the financial crisis in 2008, returns jumped by nearly four percentage points for the various periods. After over a decade, many investors have become complacent in expecting elevated portfolio returns from the financial markets. However, can those expectations continue to be met in the future?”

Bar Chart of "Arithmetic Average S&P 500 Annual Total Real Return Over Different Periods" with data from 1928 to 2023.

After over a decade, many investors have become complacent and now think that these elevated rates of return are “normal.” However, the reality may be quite different.

The stock market is a complex ecosystem with various factors influencing outcomes. Those factors include valuations, inflation, monetary policy, and political regulations. Investors should consider the impact on future stock market returns as we enter a period of potentially higher average inflation (compared to the last decade), less monetary accommodation from central banks, and growing political uncertainty.

Stock Market Valuations: Are We in Bubble Territory?

Valuations are one of the most critical factors in determining future stock market returns. However, valuations are a terrible market timing tool. Valuations only measure when prices are moving faster or slower than earnings. In the short term, valuations are a measure of psychology and the manifestation of the “greater fool theory. As shown, there is a high correlation between our composite consumer confidence index and trailing 1-year S&P 500 valuations.

Consumer confidence vs valuations

However, where valuations matter is in the long term. Historically, over a decade or more, future returns tend to be lower when stock prices are high relative to earnings. Metrics like the price-to-earnings ratio or P/E ratio often measure such. Conversely, when valuations are low, future returns tend to be higher. The scatterplot chart below compares valuations and returns over a rolling 10-year period.

Forward 10-Year Returns based on Valuations

There is little argument that U.S. stock market valuations are elevated compared to historical averages. The S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio remains well above its long-term exponential growth trend. High valuations reflect optimism but can also signal caution. If the market is pricing in perfection, any disappointment can lead to significant corrections

Cape Valuations Deviation From Trend.

However, here is the crucial point. High valuations do NOT mean that every year going forward over the next decade will experience a low return. It means the “average” return over the next decade will be low. The chart below shows hypothetical annual market returns with a 10-year average of just 3%. Notice that while 70% of the years provided a return of 10% or more, the 30% of the years with negative returns dragged the average substantially lower. This is the problem of market declines and time.

Annual Vs Average Returns

Inflation also presents another challenge to future returns.

Less Monetary Accommodation: The End of Easy Money?

The Federal Reserve and other central banks worldwide have spent the last decade engaging in highly accommodative monetary policies. Near-zero interest rates and massive asset purchases (known as quantitative easing) provided tailwinds for stock market returns by reducing the cost of borrowing and encouraging risk-taking. However, if inflation settles in at or above the Fed’s 2% target rate, central banks may be forced to pull back on these policies. While the Federal Reserve has been reducing its balance sheet, Government spending (The Inflation Reduction and CHIPs Act) has continued supporting economic growth and earnings.

Government Interventions and the stock market

While the Federal Reserve has started cutting interest rates, it has stated that it does not foresee the Fed Funds rate returning to zero. Therefore, if central banks maintain a higher interest rate environment and continue reducing their balance sheets, reversing “easy-money” conditions may weigh on future returns.

Political and Regulatory Changes

Political uncertainty is another factor that could impact stock market returns. As we look ahead, several potential regulatory changes could influence markets. For instance, increased taxation, stricter environmental regulations, and changes to labor laws could all create headwinds for corporate profits.

One key area of concern is the potential for higher corporate taxes. While the current administration in the U.S. has discussed raising taxes on corporations and high-net-worth individuals, it remains unclear whether such measures will pass through Congress. If corporate tax rates increase, companies may see their after-tax earnings decline, which could put downward pressure on stock prices.

Another area to watch is the regulation of the tech sector. Major technology companies have been under increasing scrutiny by regulators worldwide for issues ranging from privacy concerns to monopolistic practices. Any new regulations aimed at curbing the power of big tech could have significant implications for stock market performance, given the outsized role that technology companies play in today’s market.

Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

This Time Isn’t Likely Different

As stated at the outset, valuations are a terrible market timing metric. However, they tell us much about asset bubbles, investor psychology, and future returns.

No matter how many valuation measures we use, the message remains the same: From current valuation levels, investors’ expected rate of return over the next decade will likely be lower.

There is a large community of individuals who suggest differently and make a case for why this “bull market” can continue for years longer. Unfortunately, no valuation measure supports that claim.

But let me be clear: I am not suggesting the next “financial crisis” is upon us either. I am suggesting that based on various measures, forward returns will be relatively low compared to what we witnessed over the last eight years. Such is particularly the case as the Fed and central banks globally begin to extract themselves from the cycle of interventions. 

That statement does not mean that markets will produce single-digit rates of return each year for the next decade. There will be some great years to invest during that period. Unfortunately, most of those years will be spent making up for the losses from the coming recession and market correction.

Conclusion

That is the nature of investing in the markets. There will be fantastic bull market runs, as we have witnessed over the last decade, but to experience the ups, you will have to deal with the eventual downs. This is part of the full market cycles that make up every economic and business cycle.

Despite the hopes of many, no one can repeal the cycles of the market and the economy. While artificial interventions can delay and extend the cycles, the reversion will eventually come.

No. “This time is not different,” and in the end, many investors will once again be reminded of this simple fact:

 “The price you pay today for any investment determines the value you will receive tomorrow.” 

Unfortunately, those reminders tend to come in the most brutal of manners.  


If you want to learn more about how to position your portfolio for the future or seek personalized investment advice, contact our team at RIA Advisors. Schedule a free consultation, and let’s discuss how we can help you meet your financial goals, even in this changing market environment.

The Bougie Broke Cut Back On Starbucks

In March, we wrote an article on the Bougie Broke. This consumer group spends above their means while sharing their purchases on social media. Importantly, these consumers shed some light on consumer confidence. Simply, it’s easier to be Bougie Broke and flaunt your purchases when you are more confident in your wages and job than when you are less confident. We think Starbucks provides a good window into the confidence of Bougie Broke and consumers in general.

In early May, after Starbucks released its first-quarter earnings report, we wrote the following on cheap luxury items:

Starbucks latest earnings report sends the message that consumers may finally be retrenching after a few years of spending above their means. Cheap luxury items are low in price by definition and include items that we do not necessarily need but are nice to have. When consumers have confidence in the economy and their jobs, they tend to reward themselves by consuming more cheap luxury items. Conversely, concerns about their job status or doubts about whether they will get a raise lead many consumers to tighten their wallets. For many consumers, cheap luxury items are the easiest items to cut back on when their confidence wanes.

On Wednesday, Starbucks released its third-quarter earnings results. The news was not good. In fact, they pulled forward guidance for 2025 after the third consecutive decline in sales. Furthermore, it reported a 7% decline in same-store sales and a 10% decline in the U.S.

With sales of cheap luxury items falling and many labor market measures weakening, might the Bougie Broke and other consumers’ confidence be waning?

Starbucks bougie broke

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

Yesterday, we discussed why I took a trading position in Treasury bonds. The decision was based entirely on the short-term bond market’s “technical” backdrop. Speaking of technicals, we spent yesterday morning reviewing the basics of Technical Analysis on the Real Investment Show.

This brings us to today’s market update. We have recently noted the market’s “rising wedge,” which can pose a rising risk. As shown, as the market rose, that advance became more narrow. That compression of price is ultimately resolved with a break out of that compression. If it breaks to the upside, it tends to lead to further gains. A break to the downside usually denotes the start of a correction or consolidation process. Yesterday’s market sell-off took the index below the rising trend line from the August lows. Such suggests that we may see more corrective action heading into the election. Furthermore, we also triggered a short-term MACD sell signal, which confirms a more negative market bias.

Market Trading Update

With the election rapidly approaching, we are not surprised to see the market take a break after its torrid advance over the last six weeks. Furthermore, we also previously suggested that a correction was possible even as the seasonally strong period of the year had started. Continue to manage risk for now; however, look for any correctional process to be contained in the 20 and 50-DMA.

A Historic Winning Streak

The chart below from Sentimentrader helps explain why investors appear overly confident despite the coming elections and the possibility of a contested outcome. The graph shows the number of days in a row where the market hasn’t posted two consecutive down days. Per Sentimentrader:

It has rarely gone this long without at least small consecutive losses. The current streak ranks among the best since 1928. It’s even better on the Nasdaq, and similar streaks preceded one-year gains 100% of the time.

sentimentrader  winning streak

Memory Inflation Warps Bond Yields

The Mayo Clinic defines Post Traumatic Stress Disorder, or PTSD, as “a mental health condition that’s caused by an extremely stressful or terrifying event — either being part of it or witnessing it.” Within the field of PTSD research is a concept called “memory inflation.” Memory inflation occurs when memories of traumatic events become more intense over time.   

Memory inflation of past events amplifies one’s emotions and behaviors. Accordingly, distress from recent price inflation is causing many investors to overly fear that a similar situation will reoccur.

Given the tight relationship between inflation and bond yields, memory inflation negatively affects bond prices. Additionally, memory inflation may prevent some investors from seeing an opportunity to profit from the distorted market views.

READ MORE…

inflation and fed funds

Tweet of the Day

s&P 500 call put skew

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Donald Trump Or Fundamentals? Whats Irking The Bond Market

Bloomberg states: “The presidential race is still a coin-toss with two weeks to go, but Republican Donald Trump has the advantage over Democrat Kamala Harris in betting markets. His support for higher tariffs and looser fiscal policy has been seen as unfriendly to bonds because it means faster inflation and more debt.” Furthermore, the graph on the left supports their statement. It highlights that yields and the betting odds of Donald Trump winning have recently been well correlated. While one can make a narrative that Trump’s plans may result in larger deficits, inflation, and ultimately higher yields, we caution that correlation is not causation. In other words, the relationship between yields and Donald Trump’s reelection odds may not be as robust as some assume.

Two of our recent Commentaries (HERE & HERE) showed the correlation between bond yields versus oil prices and the Citi Economic Surprise Index surprise index. In both cases, the relationships are often strong regardless of the President and political composition of Congress. The Goldman Sachs graph on the right supports our opinion that economic and inflation fundamentals are primarily responsible for higher bond yields. Their graph attributes five basis points of the 35 basis points increase in ten-year yields to the shift in election odds favoring Donald Trump. We, Wall Street nor the betting markets, know who will win the election. Moreover, knowing which campaign promises will ultimately be enacted and which are vote-getting fodder is extremely challenging. Accordingly, focus on oil prices and economic data to assess the future direction of bond yields.

donald trump and bond yields

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

In yesterday’s update, we discussed the onset of seasonality and the market. The full blog post is linked below for your review. Yesterday, in my personal trading account (not our client accounts) I took a speculative long position in the iShares 20+ Year Treasury Bond ETF (TLT). I also bought December call options at the money for a trade.

My reasoning is purely technical. As shown in the chart below, TLT is pushing well into 3-standard deviations below the 50-DMA, with a deeply oversold MACD and RSI. Historically, it has been a decent setup for a reflexive trade higher, particularly after a 50% retracement of the rally from the previous lows. I am maintaining a short-term price target of $96-$98/share and will close out my call options early. However, the long position of TLT may well be maintained longer if evidence of economic weakness becomes more apparent, which I suspect will be the case.

Market Trading Update

So, why did we not do this for client accounts? Great question.

  1. In our client portfolios, we work to buy longer-term positions for capital appreciation and create tax efficiencies over time.
  2. This is my personal account. If I am wrong and lose money, I can live with that. However, I don’t speculate with our clients’ money, which they are dependent on for their financial goals.
  3. Furthermore, our client portfolios already have significant bond holdings. Taking on additional bond risk for a speculative trade will not create a return sufficient to warrant the increased portfolio risk and volatility.

However, I wanted to be transparent about my personal actions. We discussed previously why the recent bond correction was likely. I believe we have completed the correction between now and the end of the year..

We will see if I am right.

Bank Of Canada And The ECB Mull Faster Rate Cuts

While the Fed and U.S. investors are backing off of rate cuts, other countries are moving to ramp up rate cuts. ECB member Mario Centeno sees the risks skewed toward undershooting its inflation target rather than higher-than-target inflation. With ECB inflation running at 1.7%, below its 2% target, Centeno will find support to cut rates more quickly from other voting members. The first graph below shows Euro inflation is back to normal.

The Bank of Canada is expected to cut rates by 50bps to 3.75% at today’s meeting. The action is being taken against the backdrop of lower inflation. The latest core CPI for Canada was 1.6%, as shown in the second graph. Per Bloomberg:

“Arguably the Bank of Canada is well behind the curve,” Jason Daw, head of North American rates strategy at Royal Bank of Canada, said by email. “They had to wait due to inflation uncertainties, but with price growth normalizing quickly, the economy no longer needs the current degree of restrictiveness.”

Global inflation is slowing and quickly returning to pre-pandemic levels. Quite frequently, inflation in most developed Western nations tracks each other. While U.S. inflation is still running above target, its trend and that of other countries, as we note, will likely keep the Fed cutting rates, even if economic activity remains firm.

euro cpi ecb
canada cpi

Seasonality: Buy Signal And Investing Outcomes

For investors, this seasonality signal could be an opportunity to increase exposure to equities, particularly in large-cap stocks that tend to drive the broader market. However, it’s essential to recognize that while the MACD signal aligns with historical trends, it does not guarantee future performance.

Despite the historical reliability of seasonality and the MACD buy signal, investors must still be aware of risks.

  • Monetary Policy: Inflation, interest rates, and global economic uncertainty could weigh on stock performance, even during a seasonally strong period. Given the recent bout of strong data, if the Federal Reserve slows the pace of rate cuts, this could disappoint markets. A good example is 2018, where the Federal Reserve’s more hawkish stance preceded a 20% correction in November and December.
  • Geopolitical Risks: Ongoing geopolitical tensions, whether in Eastern Europe, the Middle East, or relations between major economic powers, can quickly disrupt financial markets. Unexpected events, such as escalating conflicts or trade wars, could derail the seasonal trends.
  • Market Volatility: Volatility can spike unexpectedly, leading to sharp market corrections. Even during strong periods like the “Best Six Months,” short-term market corrections are always possible. Investors should be prepared for heightened volatility, especially if other risk factors, like earnings surprises or economic data, create uncertainty.
  • Historical Trends Are Not Guarantees: Past performance, while instructive, does not guarantee future results. Although the MACD buy signal has been a reliable indicator in the past, external factors could reduce its predictive power. Investors must be cautious and not rely solely on seasonality and technical signals.

Most crucially, the technical backdrop also poses near-term risks. The market has been up six weeks in a row, which historically is a very long stretch without a correction.

READ MORE…

S&P 500 weekly consecutive gains

Tweet of the Day

buybacks

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Memory Inflation Warps Bond Yields

The Mayo Clinic defines Post Traumatic Stress Disorder, or PTSD, as “a mental health condition that’s caused by an extremely stressful or terrifying event — either being part of it or witnessing it.” Within the field of PTSD research is a concept called “memory inflation.” Memory inflation occurs when memories of traumatic events become more intense over time.   

Memory inflation of past events amplifies one’s emotions and behaviors. As we will discuss, distress from recent price inflation is causing many investors to overly fear that a similar situation will reoccur.

Given the tight relationship between inflation and bond yields, memory inflation negatively affects bond prices. Additionally, memory inflation may prevent some investors from seeing an opportunity to profit from the distorted market views.

Apollo Management’s Chart Crime Amplifies Memory Inflation

The following graph from Apollo Management has been circulating in social media for nearly a year. We believe it keeps yesterday’s high inflation fresh in people’s minds and stokes memory inflation, which warps investors’ current view of inflation.

apollo management inflaiton comparison

The graph insinuates that inflation is perfectly tracking the 1970s and 1980s. The graph prompted us to write a four-part article (ONE, TWO, THREE, and FOUR) explaining why the current environment vastly differs from the 1970s and 1980s. The series made a strong case that another round of inflation is not likely, barring an unpredictable black swan event.

Within the article, we created a more accurate graphical comparison, as shown below, between the two periods and explained why the graph is deeply flawed. To wit:

First, the two vertical y-axis scales on Apollo’s graph are different. This makes it appear that the inflation rates of the 1970s and today are nearly identical.

Second, the horizontal axis doesn’t compare apples to apples. From 1960 to 1965 (not graphed), inflation fluctuated below 2% a year. In 1966, inflation started to increase consistently. In the modern time frame, the year 2020 is when the wheels for inflation were set into motion.

Therefore, the recent data for comparison should start in 2020, not six years prior, when there was little inflationary impulse. The graph below adjusts both axes and provides a better comparison.

Our graph below has been updated since it was initially published.

inflation vs 1970s
Ad for financial planning services. Need a plan to protect your hard earned savings from the next bear market? Click to schedule your consultation today.

Inflation Rates Versus Price Levels

When most people discuss inflation, they talk about how the prices of many goods and services are much higher today than only a few years ago. For instance, “Dinner for my wife and I now runs close to $100; it used to be $50 or $60”, or “Can you believe a gallon of milk is now $6.” Those statements reflect the price differences between today and the past but do not reflect the recent rate of change. The difference may sound trivial, but it is substantial.

When discussing inflation, economists will note the annual or monthly rate of change and not the absolute price level. For instance, they may say, “The price of milk is only up 1.2% this past year.” Or “Used car prices are down 7.5% year over year.”

We elaborated on the stark difference in inflation views between economists and citizens in Why Economists and Citizens Have Different Inflation Realities. To help better appreciate the inflation perspective of economists and citizens, we shared the graph below and wrote the following:

Economists focus on the blue line, graphing the year-over-year change in new vehicle prices. Over the last year, the price index of new vehicles has decreased by .60%. Economists can say the cost of buying a new vehicle is in a deflationary state.

While the chart may warm the hearts of economists and the Fed, most individuals see the orange line, the CPI price index for new vehicles instead. It shows that new vehicle prices are up about 20% since the pandemic. Yes, they may have recently declined slightly, but today’s prices are nowhere close to where they were four years ago. In their minds, there is significant inflation in new vehicles.

Which statement is more stressful?

  • A new car costs $55,000 compared to $35,000 a few years ago.
  • The price of a new car is down 1% over the last year.

We venture to say every reader picked the first bullet point. Both statements can be correct. However, one statement induces stress and the other tranquility. As consumers, much higher prices for many goods and services are constant reminders of the high inflation. The recurring cues invoke memory inflation in all of us, except for the most committed economists.

Bond Investors Should Think Like Economists

Whether logical or not, memory inflation of inflation creates fear that another bout of inflation is coming. For bond investors, this can create an opportunity if you believe, as the Fed and we do, that inflation is heading back toward 2% and will likely stay there, barring an unforeseen event.

Today and throughout time, bond investors should always seek a yield that compensates them for inflation and credit risks. The higher the perceived risk, the greater the yield. We believe that the memory inflation of inflation subconsciously pushes many investors to demand higher bond yields. This condition will persist. However, assuming inflation continues to head toward or below the Fed’s 2% target, the fear will diminish over time. As it fades, bond yields will catch down to inflation rates.

From a bond investor standpoint, we need to appreciate what is truly going on with inflation now versus battling memory inflation of years past. When analyzing bonds, we must try to forget that cars now cost $60,000+ and milk is $5 a gallon. Instead, think like an economist and focus on the rate of change in inflation.

Ad for The Bull/Bear Report by SimpleVisor. The most important things you need to know about the markets. Click to subscribe.

The Fed Also Has Memory Inflation

If you worry that your inflation worries will persist even as evidence strengthens that inflation is fading, you are not alone. The Fed also fosters the same problem.

As of September, the Fed’s long-run GDP and PCE price forecasts are 1.80% and 2.00%, respectively. In 2019, before the pandemic, the Fed’s long-range forecast for GDP was 1.90% and PCE at 2.00%. In other words, growth prospects slipped slightly, and their inflation forecast is unchanged. However, despite virtually identical economic and inflation outlooks, the lowest long-range Fed Funds rate forecast for the 19 Feb members is 2.40%, well above the average Fed Funds rate in the post-finance crisis era.

federal reserve fed fund expectations
Ad for SimpleVisor. Get the latest trades, analysis, and insights from the RIA SimpleVisor team. Click to sign up now.

Summary

Memory inflation of inflation results in bond yields trading above where they might have had the recent bout of inflation not occurred. It also results in a relatively conservative monetary policy.

Memory inflation will not disappear overnight, but as the distress of higher inflation ages, the bad memories will subside. Dare we say memory disinflation will kick in?

Historically, bond yields have a solid relationship with inflation and economic growth. When one considers that today’s economic fundamentals are not much different than before the pandemic, one may question why bond yields remain high. Some will blame the massive deficits or foreign selling of Treasury bonds. We think a lot of the yield premium rests on the shoulders of memory inflation and not the truest fundamental driver of yields, actual inflation.

Amazon Is Challenging The Work From Home Trend

Starting in January, Amazon workers will be expected to work in the office five days a week. While most other companies are adapting to work-from-home schedules and even offering them as a benefit, Amazon is bucking the trend. From a macroeconomic standpoint, the question that is most important is whether Amazon successfully gets its entire workforce back into the office full time.

The job market remains robust. However, as we share below, job openings have steadily declined for two years, and the hiring rate is now at ten-year lows. Regarding Amazon employees, the trends indicate that they may not have an easy time saying no to Amazon. A recent survey by Blind, in which 2,585 Amazon employees were asked their sentiment regarding the full-time office plans, shows significant discontent. 91% of those questioned said they were dissatisfied with the coming office-only schedule. Moreover, 73% said they are considering another job because of the in-office policy.

Due to the trends we graph below, Amazon will likely retain most of its employees in January. But will they be as productive if their morale is lower? Amazon’s plan will be an interesting data point for the labor markets and corporate employers.

job openings job hires

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

As noted yesterday, the market has triggered a “seasonal buy signal.” While that is certainly bullish and the subject of today’s blog post, there are risks to seasonality.

Despite the historical reliability of seasonality and the MACD buy signal, investors must still be aware of risks.

  • Monetary Policy: Inflation, interest rates, and global economic uncertainty could weigh on stock performance, even during a seasonally strong period. Given the recent bout of strong data, if the Federal Reserve slows the pace of rate cuts, this could disappoint markets. A good example is 2018, where the Federal Reserve’s more hawkish stance preceded a 20% correction in November and December.
  • Geopolitical Risks: Ongoing geopolitical tensions, whether in Eastern Europe, the Middle East, or relations between major economic powers, can quickly disrupt financial markets. Unexpected events, such as escalating conflicts or trade wars, could derail the seasonal trends.
  • Market Volatility: Volatility can spike unexpectedly, leading to sharp market corrections. Even during strong periods like the “Best Six Months,” short-term market corrections are always possible. Investors should be prepared for heightened volatility, especially if other risk factors, like earnings surprises or economic data, create uncertainty.
  • Historical Trends Are Not Guarantees: Past performance, while instructive, does not guarantee future results. Although the MACD buy signal has been a reliable indicator in the past, external factors could reduce its predictive power. Investors must be cautious and not rely solely on seasonality and technical signals.

Most crucially, the market has been up six weeks in a row, which historically is a very long stretch without a correction.

Consecutive weekly gains.

From a purely technical view, with the markets deviating well above MONTHLY moving averages and overbought, a correction or consolidation is becoming increasingly likely before the year-end advance can take shape.

Monthly market chart

Navigating Into Year-End

With the S&P 500 now in a seasonally strong period, bolstered by the weekly MACD buy signal, investors may want to consider several strategies:

  1. Increase Equity Exposure: Large-cap stocks historically perform well during this period. You could consider increasing exposure to diversified index funds or sector ETFs that align with historical trends.
  2. Review Portfolio Risk: While the MACD buy signal is a positive indicator, you should assess your portfolio’s risk tolerance and ensure it aligns with your long-term goals.
  3. Rebalance Allocations: Now may be a good time to rebalance by reducing positions in riskier assets or diversifying across asset classes.
  4. Use Stop-Loss Orders: To manage downside risk, consider using stop-loss orders.

Yale Hirsch’s research on market seasonality, paired with the power of the MACD signal, offers a disciplined approach to navigating historical market trends. The recent MACD buy signal for the S&P 500 provides investors with a potentially advantageous entry point into the market as we head into the historically strong “Best Six Months” period. However, it’s crucial to remain aware of the risks, including macroeconomic headwinds and market volatility.

Trade accordingly.

Groceries Are Getting Cheaper

Not surprisingly, most people are very sensitive to the recent bout of inflation. However, we also find that they do not consider inflation on a relative basis. Double-digit inflation can be crippling, especially for the lower and middle classes. However, if wages keep up with inflation, the effect is minimal. For example, the graph below shows that it now takes about 3.5 hours of work to afford a week of groceries. That is down an hour from 1990 despite the price of groceries being up significantly.

That said, the graph has potential flaws. For starters, it uses average salary versus median. Furthermore, it doesn’t address the quality of food or the types of food people buy. We also presume it doesn’t fully capture “shrinkflation.” Lastly, how has the basket of groceries the BLS uses changed over time, and does that accurately reflect what the average consumer buys?

groceries prices

SimpleVisor Excess Return Analysis

On Tuesdays, we typically review the SimpleVisor sector and absolute technical scores to see which sectors or factors are overbought and oversold. This analysis allows us to forecast better which sectors or factors may lead or lag the broader market going forward. Today, we take that analysis a step further.

The first graphic shows that the healthcare sector is very oversold relative to the S&P 500. Moreover, it has an absolute score near zero despite the market hitting record highs. Note that many other sectors have absolute scores of moderately to highly overbought. If we wanted to shift our holdings toward healthcare and away from another sector, which sectors would likely give us the biggest bang for the buck doing this?

The second page below shows the correlation of excess returns for each sector. Remember, the excess return is the performance versus the S&P 500. Accordingly, the page compares the correlation of the two sector’s excess returns. So, if we scan down the healthcare sector (XLV) correlations, we find that XLV has a strong positive correlation with staples and a strong negative correlation with technology. Therefore, if one wants to add to healthcare and is looking for a sector to reduce, technology would be a likely choice. Moreover, staples could be a reasonable substitute if one wants to add to healthcare but worries about the political climate surrounding the sector heading into the election.

The third graphic helps us appreciate the current excess return relationship compared to the prior 21 and 63 days. One can argue that XLV is due for a bounce versus technology on a short-term basis. Still, over the more extended 63-day period, technology may likely continue to do better than healthcare.

sector and absolute scores
sector relationships
healthcare and technology simplevisor relationship

Tweet of the Day

cpi less shelter and insurance

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Seasonality: Buy Signal And Investing Outcomes

Seasonality has long influenced stock market trends, offering insights into predictable cycles of strength and weakness throughout the year. Yale Hirsch, the creator of the Stock Trader’s Almanac, is one of the most well-known contributors to studying these patterns. His research has highlighted that certain periods of the year consistently present better opportunities for investors to generate returns, while other times warrant caution.

The adage ” Sell May and Go Away “ is a common topic of discussion that many investors are familiar with. The historical analysis supports that the market tends to be the weakest of the year during the summer months. Hirsch’s Stock Trader’s Almanac introduced the idea that the stock market follows a seasonal rhythm, where certain times of the year offer greater return potential. This work has helped investors identify key windows where market performance historically improves, allowing them to align their strategies accordingly.

  • “Sell in May and Go Away”: One of the most famous adages in market seasonality, this concept reflects the tendency for stocks to underperform during the summer months, roughly from May through October. Investors are often advised to exit or reduce exposure during this time to avoid potential downside risk.
  • The Best Six Months: Conversely, the period from November through April has been historically stronger for stocks, with higher average returns. This seasonal trend is based on data showing that a significant portion of stock market gains often occur during this half of the year.

The Math

The chart below shows that $10,000 invested in the market from November to April has significantly outperformed the amount invested from May through October.

Strong vs Weak Market Periods

Interestingly, the max drawdowns are significantly larger during the “Sell In May” periods. Previous important dates of major market declines occurred in October 1929, 1987, and 2008.

However, not every summer works out poorly. Historically, there have been many periods when “Sell In May” did not work, and markets rose. 2020 and 2021 were examples of massive Federal Reserve interventions that pushed prices higher in April and subsequent summer months. However, 2022 was the opposite, as April declined sharply as the Fed began an aggressive interest rate hiking campaign the preceding month.

Technical analysis, however, can improve outcomes.

Schedule an appointment

The Role of the MACD in Seasonal Investing

While the seasonal trends provide a useful framework, Hirsch’s research goes further by applying technical indicators like the MACD to refine entry and exit points. The seasonal MACD (Moving Average Convergence Divergence) signal, in particular, serves as a trigger that confirms when it’s the right time to re-enter the market after the weaker summer period.

The MACD is a momentum-based indicator that measures the relationship between two moving averages of a security’s price—typically the 12-day and 26-day exponential moving averages (EMAs). When the shorter-term EMA crosses above the longer-term EMA, it generates a buy signal, indicating the potential start of an uptrend. In seasonal investing, this technical indicator is combined with Hirsch’s seasonal trends to offer more precision in market timing.

  • Seasonal MACD Buy Signal: This signal typically triggers near the end of October or early November, aligning with the start of the “Best Six Months” period. It confirms that market momentum is shifting upward and is a favorable time to re-enter the market.
  • Seasonal MACD Sell Signal: Similarly, at the end of the “Best Six Months” (usually in late April or early May), the MACD sell signal indicates weakening momentum, suggesting it may be time to reduce equity exposure.

On Friday, October 11, 2024, the S&P 500 index triggered its seasonal MACD buy signal, marking the beginning of what has historically been a seasonally strong period for the stock market. This signal arrives just before November, reinforcing Hirsch’s findings that the months ahead tend to deliver better returns.

3-Market Supports For Seasonality

In 2024, three primary drivers will likely support markets from the middle of October through year-end and likely into early 2025.

Earnings

The first is earnings season, which has proved normal so far, although this week and next will be very important in corporate outlooks. As discussed in the latest BullBearReport, analysts significantly lowered the “earnings bar” heading into the reporting season. As noted in “Trojan Horses,” analysts are always wrong, and by a large degree.

“This is why we call it ‘Millennial Earnings Season.’ Wall Street continuously lowers estimates as the reporting period approaches so ‘everyone gets a trophy.’” 

The chart below shows the changes for the Q3 earnings period from when analysts provided their first estimates in March 2023. Analysts have slashed estimates over the last 30 days, dropping estimates by roughly $3.40/share, but nearly $18 lower than their initial estimate.

Q3 Earnings Estimates

Of course, lowering the bar will generate a high “beat rate” by companies, which will help fuel stock prices in the short term.

Performance Chasing

Secondly, according to Morningstar, during the first half of 2024, only 18.2% of actively managed mutual and exchange-traded funds outperformed the cap-weighted S&P 500 index. There are several reasons for this, including the lack of allocation to the “Magnificent 7,” dispersion in returns of holdings, and lack of allocation to non-traditional assets.

Performance of select assets

This underperformance occurs during the best presidential election year in roughly 90 years, which will pressure fund managers to play “catch up” with performance moving into year-end reporting. Given the “career risk” to managers of significant underperformance, additional buying pressure could manifest.

224 is the best presidential year for stocks in nearly 90 years

Corporate Share Buybacks

Lastly, corporate share buyback windows will reopen in November and December as companies exit their earnings “blackout period.” Notably, the last two months of the year represent the best two-month period for corporate executions as companies rush to complete buybacks for the current tax year. With nearly $1 Trillion in authorizations for 2024, the pace of buybacks will be exceptionally strong this year.

Share buybacks authorizations

As noted by Goldman Sachs:

“The VWAP machines will be lining up to buy $6bn worth of equities daily during November and December.”

Yes, that is $6 billion each trading day, which provides sufficient buying power to lift asset prices into year-end.

Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

Seasonality: Not A Risk-Free Adventure

For investors, this seasonality signal could be an opportunity to increase exposure to equities, particularly in large-cap stocks that tend to drive the broader market. However, it’s essential to recognize that while the MACD signal aligns with historical trends, it does not guarantee future performance.

Despite the historical reliability of seasonality and the MACD buy signal, investors must still be aware of risks.

  • Monetary Policy: Inflation, interest rates, and global economic uncertainty could weigh on stock performance, even during a seasonally strong period. Given the recent bout of strong data, if the Federal Reserve slows the pace of rate cuts, this could disappoint markets. A good example is 2018, where the Federal Reserve’s more hawkish stance preceded a 20% correction in November and December.
  • Geopolitical Risks: Ongoing geopolitical tensions, whether in Eastern Europe, the Middle East, or relations between major economic powers, can quickly disrupt financial markets. Unexpected events, such as escalating conflicts or trade wars, could derail the seasonal trends.
  • Market Volatility: Volatility can spike unexpectedly, leading to sharp market corrections. Even during strong periods like the “Best Six Months,” short-term market corrections are always possible. Investors should be prepared for heightened volatility, especially if other risk factors, like earnings surprises or economic data, create uncertainty.
  • Historical Trends Are Not Guarantees: Past performance, while instructive, does not guarantee future results. Although the MACD buy signal has been a reliable indicator in the past, external factors could reduce its predictive power. Investors must be cautious and not rely solely on seasonality and technical signals.

Most crucially, the technical backdrop also poses near-term risks. The market has been up six weeks in a row, which historically is a very long stretch without a correction.

Consecutive weekly gains.

From a purely technical view, with the markets deviating well above MONTHLY moving averages and overbought, a correction or consolidation is becoming increasingly likely before the year-end advance can take shape.

Monthly market chart

Navigating Into Year-End

With the S&P 500 now in a seasonally strong period, bolstered by the weekly MACD buy signal, investors may want to consider several strategies:

  1. Increase Equity Exposure: Large-cap stocks historically perform well during this period. You could consider increasing exposure to diversified index funds or sector ETFs that align with historical trends.
  2. Review Portfolio Risk: While the MACD buy signal is a positive indicator, you should assess your portfolio’s risk tolerance and ensure it aligns with your long-term goals.
  3. Rebalance Allocations: Now may be a good time to rebalance by reducing positions in riskier assets or diversifying across asset classes.
  4. Use Stop-Loss Orders: To manage downside risk, consider using stop-loss orders.

Yale Hirsch’s research on market seasonality, paired with the power of the MACD signal, offers a disciplined approach to navigating historical market trends. The recent MACD buy signal for the S&P 500 provides investors with a potentially advantageous entry point into the market as we head into the historically strong “Best Six Months” period. However, it’s crucial to remain aware of the risks, including macroeconomic headwinds and market volatility.

Trade accordingly.

Why Are Bond Yields Rising? Lets Ask The Oil Market

It’s no secret that bond yields are heavily impacted by inflation and inflation expectations. Moreover, oil prices have a high correlation with inflation. So, to answer why bond yields are rising recently, it’s helpful to check the oil price. Since May 2023, as we share below, crude oil prices and ten-year UST yields have been tracking each other closely. But, you will see that oil tends to lead bond yields when the trends change. The lower graph shows the running 1-year correlation of oil and bond yields on a long-term basis. While there is a long-term positive relationship, it does vary significantly over time.

Crude has fallen rapidly in the last week as it appears Israel will not target Iranian oil facilities. With the relatively sharp decline lower, oil is again approaching significant support at $67 a barrel. A break below $67 could lead oil toward $60 or lower. Thus far, yields haven’t followed the decline. Is the highly tight correlation breaking? Or are bond yields waiting a couple of weeks, as they have in the past, before following crude oil prices lower?

crude oil and bond yield correlation

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

Last week, we discussed the triggering of the seasonal MACD buy signal. To wit:

“On Friday, the market broke out to the upside of that wedge pattern, triggering a “seasonal MACD buy” signal. Notably, that buy signal also marks the beginning of the seasonally strong 6 months of the year. The series of high lows, now combined with higher highs, remains a significant bullish backdrop for investors. With earnings season starting in earnest this coming week, the bias remains to the upside, but risk management protocols should not be abandoned.”

The chart below is the WEEKLY S&P 500 chart, with three different signals to confirm the start of the seasonal period. With Friday’s close in the green, keeping the week broadly positive, all three seasonal buy signals have been triggered.

Market Trading Update 1

However, as noted last week, just because the seasonally strong period of the year has technically started, it doesn’t mean that the markets won’t have corrections along the way. Notably, we have already had 6-straight weeks of gains, which is a long stretch without a pullback. Secondly, while the market is on a weekly “buy signal,” the market is both deviated and overbought short-term. When the market breadth is very elevated, combined with overbought and deviated markets from the 50 and 200-DMA, corrections and consolidations tend to be more prevalent.

Market Trading Update 2

We expect that the market will experience a short-term consolidation or correction. However, there are three reasons why such will likely provide a better entry point to add exposure.

  1. The current bullish trend remains intact, and bullish sentiment is very strong. This has led to significant and continuing inflows into the market, which will support asset prices.
  2. Corporate buybacks will resume at the end of the month and will amount to roughly $6 billion per day into year-end.
  3. Many managers lag in the market and must play catch-up by year-end for reporting purposes.

These three reasons will likely push asset prices to our target of 6000 on the index by year-end. However, do not get too complacent, as 2025 will be a year of increased volatility.

The Week Ahead

Corporate earnings will make the headlines this week, as there is little economic data. Many large and small companies report, including Google on Tuesday, Tesla on Wednesday, and Amazon on Thursday. As we wrote in this past weekend’s Newsletter, earnings expectations have come down significantly over the last month. Accordingly, the odds are that most companies beat expectations. However, forward guidance often plays a more significant role than actual earnings and revenues regarding the stock’s immediate performance.

Bastiat And The Broken Window

Recent events, particularly the devastation caused by Hurricanes Helene and Milton in 2024, provide a clear example of why destruction does not create long-term economic prosperity. Despite the short-term boost in economic activity from rebuilding efforts, the broader economic implications are far more detrimental. In this post, we will delve into Bastiat’s Broken Window Theory, apply it to the aftermath of the hurricanes, and explain why destruction and the need to replace lost goods drag forward future consumption rather than create new economic value.

READ MORE…

bastiat hurricanes and economic activity

Tweet of the Day

S&P 500 multiple expansion

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Taiwan Semiconductor Nullifies ASML Fears

Wednesday’s Commentary discussed the shockingly weak booking numbers from ASML. Given that ASML is a large manufacturer of chip-making machines, we asked: “If the chip industry is facing insatiable demand, why such a stunning decline in the need for chip-making equipment?” ASML earnings introduced concern amongst semiconductor sector investors, leading many semi-stocks to decline decently. Taiwan Semiconductor’s (TSM) earnings released yesterday morning will help investors forget about ASML.

Taiwan Semiconductor is the primary chip maker for Nvidia and Apple. In their optimistic earnings call, they reported that net income handily beat expectations. Moreover, they hiked their outlook for revenues. Equally important, they confirmed that the demand for AI chips remains incredibly strong. The CEO quotes a “key” customer claiming that demand for AI chips is “insane.” The CEO supported his commentary by declaring, “We get the deepest and widest look of anyone in this industry.” AMD earnings on October 29th, and ultimately Nvidia in later November, will help us further appreciate if the demand for AI chips remains off the charts. But for now, we put much more stock in Taiwan Semiconductor’s earnings than ASML’s. The graph below shows Taiwan Semiconductor is up over 80% this year while ASML is down about 10%.

tsm taiwan semi

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

Yesterday, we discussed the issue of seasonal buy signals and market risk, which can exist simultaneously. As we head into the busiest week for earnings, the market continues to hold above the rising trend line from the August lows. While on a “buy signal” currently, that signal is occurring very high, which likely limits any near-term upside. Notably, momentum indicators are also negatively diverging, suggesting some price weakness.

While there continues to be no momentary reason to be overly bearish, the risk/reward balance currently does not favor adding new equity exposure to portfolios. The good news is that any corrective action heading into the election is likely limited and will provide a better entry point for investors.

Market Trading Update

My big concern continues to be the outcome of the election. The markets will likely rally strongly into December if it is a clean election with a clear winner and a divided Congress. However, if the election is contested and drags out until December, that may be a different story.

Speaking of the election, this fits into the “awkward” category:

“In January 2025, Vice-President Kamala Harris will be in charge of certifying the election. In other words, if Donald Trump wins, the person he was running against will be in charge of certifying his victory. This is a major defect in our system, and it could potentially set the stage for widespread chaos if things do not go smoothly.” – Most Important News Blog

As I said, it’s awkward and could provide the catalyst for volatility.

For now, continue to manage risk accordingly.

S&P 500 Dividend and Earnings Yields Are Rich

The first graph below, courtesy of Charlie Bilello, shows that the dividend yield on the S&P 500 is at its lowest level since 1999. There are several reasons for this. First, valuations are high, so investors willingly sacrifice dividend yield for the promise of price growth. Second, many companies sacrifice dividends and buy back their stock instead, which promotes price returns over dividend returns.

The second graph, courtesy of Bloomberg, shows that investors are paying high relative valuations. The earnings yield on the S&P 500 (earnings/price) is now below that offered by a risk-free 10-year UST. Again, one has to go back about 25 years for a similar situation.

Neither graph portends an immediate re-valuation of stock prices, but they should alert investors to a possible drawdown to normalize valuations.

S&P 500 dividend yield
earnings yield

New Home Inventory is Rising

The graph below, courtesy of John Burns Research & Consulting, shows that the pandemic-related shortage of new homes for sale has ended. The ratio of homes per community is now above the pre-pandemic average and at levels last seen in 2012 when the housing market was still recovering from the financial crisis.

Mortgage rates above 6% are certainly part of the culprit. However, some of the high rate impact was offset by home builders offering buyers loans at reduced rates. The other issue facing homebuilders is that they shifted to more spec construction in 2021 and 2022. That model, which means you build before there is a buyer, works well with low supply. However, as builders have now found out, there are drawbacks when demand is weaker.  The bottom line is that either mortgage rates fall and spark demand to reduce the number of finished new homes, or builders will be forced to lower prices to spark demand. Either point to margin pressure ahead for new home builders.

John Palacios Jr, Director of Research at John Burns, sums up his thoughts on builders in a recent WSJ article as follows:

“The playbook for home builders is going to have to slowly shift, at least from our perspective, from buydowns, buydowns, buydowns to OK—wait a second here,” he said. “It’s going to be a tougher market.”

finished new homes

Tweet of the Day

corporate insider purchases

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

Bastiat And The “Broken Window”

In times of disaster and destruction, a common narrative often emerges that rebuilding efforts will lead to economic growth. The idea that repairing damage and replacing destroyed goods creates jobs that spur consumption and stimulate economic activity is tempting. However, as French economist Frédéric Bastiat explained in his famous “Broken Window Theory,” this reasoning is fundamentally flawed. Rather than generating net economic benefits, destruction diverts resources and wealth that could have been used for more productive purposes, ultimately stifling real economic growth.

Recent events, particularly the devastation caused by Hurricanes Helene and Milton in 2024, provide a clear example of why destruction does not create long-term economic prosperity. Despite the short-term boost in economic activity from rebuilding efforts, the broader economic implications are far more detrimental. In this post, we will delve into Bastiat’s Broken Window Theory, apply it to the aftermath of the hurricanes, and explain why destruction and the need to replace lost goods drag forward future consumption rather than create new economic value.

The Broken Window Theory: A Lesson in Opportunity Cost

Frédéric Bastiat introduced the “Broken Window Theory” in his 1850 essay “That Which is Seen, and That Which is Not Seen.” The theory is illustrated by a simple example: A boy throws a rock through a shopkeeper’s window, breaking it. While some may argue that this destruction benefits the economy—after all, the shopkeeper must now pay a glazier to fix the window, creating work—the key insight lies in what is not seen.

Had the shopkeeper not needed to replace the window, he could have spent that money on something else, perhaps new inventory, equipment, or even personal savings. The repair creates no new wealth; it merely replaces what was lost. The shopkeeper’s forced expenditure on the window diverts resources that could have been used to improve his business or save for the future.

Bastiat’s principle extends beyond a broken window to any form of destruction, whether natural or man-made. Destruction leads to the misallocation of resources, pulling future consumption forward and leaving society no wealthier than before. This is a critical point that often gets overlooked in post-disaster economic analysis.

RIA Advisors advertisement for investment management services

Hurricanes Helene and Milton: Real-World Examples of Bastiat’s Theory

The devastation caused by Hurricane Helene and Hurricane Milton in 2024 offers a stark reminder of why destruction does not foster economic growth. The two hurricanes ravaged communities, destroying homes, businesses, infrastructure, and entire industries across the affected regions. In the wake of these disasters, some economic analysts argued that the rebuilding efforts would boost local economies, creating jobs in construction and stimulating demand for materials, goods, and services. The chart below is an economic composite of wages, inflation, and interest rates compared to economic growth. There are two crucial points.

The first is that inflation, wages, and interest rates track economic growth trends because of their interrelationship. Thus, predictions of higher future inflation are incorrect unless there is a surge in accompanying economic activity. Secondly, while bumps to activity did occur following hurricanes, the long-term downtrend in economic growth was unaffected.

Economic growth vs Economic Composite of wages, inflation, and rates

It is correct that there will be a likely surge in economic activity as government, insurance, and private donations support reconstruction efforts. However, the longer-term trend of economic growth will continue to decline. Here’s why:

1. Dragging Forward Future Consumption

As Bastiat’s theory suggests, rebuilding homes, businesses, and infrastructure replaces lost wealth. The destruction caused by the hurricanes forced families, businesses, and local governments to divert future resources toward rebuilding. Such actions divert money from savings, investing for growth, or purchasing new goods and services. In other words, pulling forward future consumption limits future growth.

For instance, residents who plan to upgrade their homes or purchase new vehicles in the coming years are now using those funds to repair damages instead. Businesses, particularly small ones, must spend on repairs rather than expansions or new product lines. The chart below shows the annual rate of change in retail spending of control purchases versus hurricanes and the economic cycle. Unsurprisingly, hurricanes did precede bumps in retail spending that quickly faded.

Monthly retail spending vs hurricanes

The net result is an economy that’s not growing faster but using its resources inefficiently to return to its pre-hurricane state.

2. Misallocation of Resources

Disasters also lead to the misallocation of economic resources. Economists should want capital invested in productive investments that drive future growth, such as innovation, technology, and infrastructure improvements. The “wealth creation” process depends on capital investment spending that leads to growth. Unsurprisingly, there is often a short-term boost to capital expenditures and economic growth, which fades once spending is complete.

GDP vs CapEX

In the case of Hurricane Helene and Milton, local governments will redirect funds to emergency relief and rebuilding. Again, we will see a pickup in economic growth in the short term. However, those actions now deprive funds for future projects like education and infrastructure development without further increases in debt issuance. Private businesses face the same dilemma. While insurance will provide some relief, future companies will redirect future capital expenditure plans to rebuild and repair existing damage. Such actions limit future growth and, thereby, the “wealth creation” process.

3. Destruction of Capital Stock

When hurricanes destroy homes, businesses, and infrastructure, they destroy valuable capital stock. This includes everything from machinery and tools to roads, bridges, and factories. The destruction of this capital leads to a significant loss in productivity, as businesses must either shut down temporarily or operate at reduced capacity until they can replace damaged assets. Such is seen in the chart below of productivity versus economic growth.

GDP vs Productivity Growth

Consider the industries hit hardest by the hurricanes, such as agriculture, fishing, and manufacturing. Businesses in these sectors often lost physical assets and weeks or even months of productive capacity. While rebuilding may create short-term jobs, the loss of capital stock and the resulting decrease in productivity will have longer-lasting effects on the economy.

Ad for SimpleVisor. Don't invest alone. Tap into the power of SimpleVisor. Click to sign up now.

The Earnings Illusion

The key takeaway from Bastiat’s “Broken Window Theory” is that destruction creates the illusion of short-term economic growth by shifting resources around. In the case of the recent hurricanes, there will be a temporary uptick in GDP. Notably, the recovery actions will delay the onset of a recession for a while longer. However, that boost to activity merely represents the replacement of lost wealth, not the creation of new wealth.

There is an impact on financial markets for investors. Since investors value stocks based on forward earnings, the impact on corporate earnings is generally negative at first, with companies in the path of these storms experiencing production halts, infrastructure damage, and supply chain disruptions. However, the aftermath of these events often reveals a more complex picture.

Immediate Earnings Impact:

  • Negative short-term effects: Companies, particularly those in retail, hospitality, and energy, face sharp revenue declines due to operational shutdowns. For example, after Hurricane Katrina in 2005, several industries along the Gulf Coast saw significant revenue disruptions.
  • Rising costs: Insurance, construction, and raw materials companies often see surges in demand after a hurricane, but rising labor and materials costs can squeeze their margins.

Post-Hurricane Rebuilding Phase:

The economic activity that follows the destruction—rebuilding homes, infrastructure, and businesses—can temporarily boost sectors such as construction, utilities, and consumer goods. For instance, following Hurricanes Harvey and Irma in 2017, rebuilding efforts fueled a temporary rise in construction earnings and increased demand for durable goods.

However, that surge is temporary, not permanent. Once the rebuilding phase concludes, earnings for these companies return to pre-storm levels. Moreover, widespread destruction often diverts resources from more productive investments, dampening long-term growth prospects. As shown, the annual rate of change of earnings tracks economic growth. If economic growth does not receive a long-term benefit from destruction, neither will earnings.

GDP vs stock market rate of change

Conclusion

Analysts’ use of Bastiat’s argument that destruction creates economic prosperity rests on a misunderstanding of wealth creation. True economic growth occurs when new goods and services production increases society’s overall wealth. On the other hand, destruction forces the replacement of existing goods and services, leading to no net increase in wealth.

Think about it this way: if destruction is beneficial to economic prosperity, why not have an annual event where the Government carpet bombs a major city? When viewed in this manner, the illogic of the argument of “creative destruction” becomes evident.

While necessary, the rebuilding efforts after Hurricanes Helene and Milton do not represent economic progress. Instead, they highlight the cost of destruction. The resources spent on rebuilding can no longer be available for more productive purposes. In the long run, this diversion of resources stifles economic growth by reducing the capital available for investment, innovation, and future consumption.

Rather than creating prosperity, destruction imposes significant economic costs that hinder long-term growth. Policymakers, business leaders, and investors must recognize that while rebuilding is necessary, it does not represent real economic progress. The same applies to government interventions, welfare increases, and tax credits.

True growth comes from policies that support increases in productive investments, innovation, and the efficient allocation of resources. As investors, we should hope for those policies. As citizens, those are the policies we should demand.

Cava: A Hot Trend Comes At A Dear Cost To Investors

Since going public in June 2023, Cava (CAVA) has taken the fast-casual restaurant industry and Wall Street by storm. Cava describes itself as a “Mediterranean fast-casual restaurant brand that brings heart, health, and humanity to food.” As the chart below highlights, Cava shares are up 250+% since its IPO. The return is 5x its chief competitor Chipolte and 8x the S&P 500. Before Cava, Chipotle was a great growth story in the restaurant industry. Since 2007 it has increased the number of restaurants from 700 to 3500. Its earnings followed a similar growth rate.

At Cava’s current valuations, investors are betting that Cava can be the next Chipotle and then some. Enterprise value per store is a metric investors use to value and compare the profitability of restaurant chains. Enterprise value is a measure of a company’s total value. When divided by the number of stores, it provides a rough estimate of the value of each store. Cava has an enterprise value per store of approximately $35 million, almost double that of Chipotle. However, their AUV, measuring revenue per store, is only $2.7 million. Simply, Cava is trading at much higher multiples than Chipoltle and even more so against other restaurant chains.

Cava shares undoubtedly have value. However, is its share price getting ahead of its growth prospects?

cava and chipotle shares

What To Watch Today

Earnings

Earnings Calendar

Economy

Economic Calendar

Market Trading Update

Due to a technical glitch in yesterday’s commentary, our market trading update was lost. However, I wanted to address a question I received about the “seasonal buy signal” and the confluence of overbought conditions. In this past weekend’s newsletter, I discussed the issuance of the seasonal buy signal, which was confirmed by the triggering of the weekly MACD crossover. The chart is shown below.

As shown, when you confirm “buy signals” on a weekly basis, markets tend to rise. The 2020 signals were triggered early due to the massive stimulus programs and remained intact through 2021. Interestingly, they did NOT trigger a “buy signal” in October 2021, which turned out well for investors. The next “buy signal” was triggered in November 2022 and again in November 2023. The signals have again triggered as of last month.

Market Trading Update 1

This is where the confusion seems to have set in. While the markets are indeed on a buy signal, we have suggested taking profits, rebalancing risks, and managing portfolios in the near term because they are overbought and deviated above longer-term means. The seasonal buy signals do not preclude the markets from having 5-10% corrections along the way higher.

Furthermore, negative divergences are also forming as momentum and relative strength are failing to pace the market higher. This suggests that buyers are becoming more scarce.

Market Trading Update 2

It can be confusing to have a bullish “buy signal” for the seasonally strong period while managing risk and rebalancing portfolios simultaneously. However, the two are not mutually exclusive. The confluence of the buy signal with overbought conditions does tell us that pullbacks and corrections will likely be shallow and will present investors with opportunities to increase equity exposure as needed.

As is always the case, how you manage your portfolio is up to you. However, for now, the bulls are winning the market argument.

Import Export Prices And The UK Point to Further Disinflation

U.S. import prices fell 0.4% last month following a 0.2% decline in the prior month. Export prices fell by 0.7%. On a year-over-year basis, import prices are down 0.1%, and export prices are down by 0.7%. Lower import prices will help on the U.S. inflation front, specifically the prices of food and energy. It is worth noting that typical supply and demand factors affect import and export prices, but the dollar’s value is equally important. A stronger dollar results in weaker import prices and vice versa.

British CPI fell to 1.7%, down from 2.2%. The inflation reading was .20% below estimates and, importantly, lower than the Bank of England’s (BOE) 2% goal. The BOE is now widely expected to cut rates at its November 7th meeting. As the Bloomberg graph below shows, the prices of goods are the chief culprit behind lower inflation, but services prices are also slowly decreasing. The sharper-than-expected decline results in the pound losing ground against the dollar. Since the beginning of October the pound has depreciated about 4% versus the dollar. Thus, import prices of British goods will be commensurately lower.

uk inflation

The VIX and the Market Climb- Should We Care?

With the presidential election in a few weeks, the Fed changing course on monetary policy, and Israel potentially attacking Iranian oil facilities, the increasing level of implied risk should not be shocking. Will the elevated VIX persist alongside the rising market, or will the market correct?

READ MORE…

the vix and market climb together

Tweet of the Day

soft landing headlines

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

MicroStrategy Is A Leveraged ETF In Disguise

Per its website, MicroStrategy “provides software solutions and expert services that empower every individual with actionable advice.” While Microstrategy’s mission description may seem like a profitable enterprise, reality has a different opinion. Since 1997, the company has a cumulative net loss of $1.108 billion. Accordingly, the graphs below show its revenue has been flat to slowly deteriorating for over ten years. Its EPS on the right also shows the company’s poor fundamental status. However, as both graphs show, the price of Microstrategy has risen by over 1,300% over the last five years.

Microstrategy has a market cap of $42 Billion. The reason for such a high market cap and stock performance is clearly not their underlying business. Exciting shareholders are its holdings of approximately 250k bitcoin. At current prices, its Bitcoin holdings are worth nearly $17 billion. Furthermore, Microstrategy is using approximately 2.5x leverage. If you multiply the leverage by their holdings, you get $42.5 billion, a value almost perfectly aligned with its market cap. So, what is MicroStrategy? It’s a leveraged Bitcoin fund disguised as a non-profit technology company.

microstrategy bitcoin

ASML Takes Some Steam Out Of The Chip Bubble

The SimpleVisor graph below shows that ASML Holdings fell by over 10% yesterday on a weak earnings report. ASML makes chip-making machines widely used by the semiconductor industry. ASML’s bookings were only 2.6bn euros, about half the expected number. The company also cut sales and margin guidance. Thus, the question is, if the chip industry is facing insatiable demand, why such a stunning decline in the need for chip-making equipment? Per the CEO:

While there continue to be strong developments and upside potential in AI, other market segments are taking longer to recover. It now appears the recovery is more gradual than previously expected

ASML’s earnings caused the chip sector to weaken. However, it’s important to note that the weakness appears not to be coming from AI-related machinery. Consequently, this earnings report made earnings season for chip developers, manufacturers, and related companies much more interesting.

asml stock price

Greed And How To Lose 100% Of Your Money

Few stories are as staggering or cautionary as this one. An investor turned an $88,000 investment into a mind-boggling $415 million through Tesla stock, only to lose it all. It’s a story that captures extremes of financial success and failure. It is a story of greed and the false confidence that comes with exponential returns. However, a deeper examination of the circumstances that led to this loss clarifies that there were warning signs. Common-sense strategies and risk management tools to prevent financial catastrophes were abandoned.

READ MORE…

greed tesla

Tweet of the Day

s&P 500

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.


Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The VIX And Market Climb: Should We Care?

The financial media frequently opines on what the daily gyrations of the VIX (implied volatility index) signal regarding investor sentiment. Despite how often it is quoted and discussed, many investors do not truly appreciate what implied volatility measures.

We take this opportunity to help you better understand implied volatility. Furthermore, we discuss other lesser-followed measures of implied volatility that help better assess whether implied VIX readings infer bullish or bearish sentiment. 

The timing of this article is essential as the VIX has been rising alongside the market in a non-typical fashion. With the presidential election in a few weeks, the Fed changing course on monetary policy, and Israel potentially attacking Iranian oil facilities, the increasing level of implied risk should not be shocking. Will the elevated VIX persist alongside the rising market, or will the market correct?

What Is The VIX

The VIX volatility index, aka the “Fear Index,” is a well-followed measure of investor sentiment. Many investors believe that an increase in the VIX indicates that market participants are growing concerned about the stock market. While that is often true, it is not always true.

The VIX uses the prices of many one-month calls and put options on the S&P 500, weighing them based on their time to expiration and the difference between the strike price and the current price of the S&P 500. Based on the prices, the expected variance of the S&P 500 is estimated. After some advanced math, the VIX value is provided and expressed as an annualized percentage. Furthermore, the VIX is quoted as a one-standard deviation change. In other words, there is a 68% probability the S&P 500 will stay within the VIX percentage.

For example, a VIX of 15 implies expected annual volatility of 15%. In this case, the options market expects, with 68% certainty, that the S&P 500 will trade in a 15% range from the current level over the next year.

The graph below puts the recent range in the VIX in context. It shows how much change is and was expected for the S&P 500 based on the current (22), highest (37), and lowest (12) levels of VIX over the past year. The ranges vary significantly based on the VIX.

implied sp 500 range vix

The VIX defines what market participants, in aggregate, think the possible market range will be. However, it doesn’t determine whether the put or the call has a larger influence. Accordingly, it doesn’t disclose whether the market is speculatively betting more on the upper band of the range or whether investors are aggressively protecting against the lower band.

Fortunately, as we now discuss, other volatility measures shine additional light on market expectations.

Ad for financial planning services. Need a plan to protect your hard earned savings from the next bear market? Click to schedule your consultation today.

Put Call Skew

Put call skew measures the difference between put and call option prices at various strike prices for the same index or asset. When the price of a put and call differs despite being equally distanced from the strike price and with identical expirations, skew exists. Skew simply measures if investors are paying more for calls or puts.

A lower skew means investors are more aggressively buying call options than put buyers are looking for protection. Conversely, a positive skew implies investors seeking protection via puts are more aggressive than bullish call buyers.

The put-call skew helps us better appreciate whether bullish or bearish investors have a more significant impact on the VIX.

The graph below, courtesy of Market Chameleon, shows the put-call skew and its 20- and 250-day averages. Currently, it’s on its shorter 20-day moving average and above its longer-term averages. Thus, investors are more aggressive in buying puts than calls compared to recent history. This graph, like the VIX, implies that investor sentiment is bearish.

put call skew

Put Call Ratio

Unlike the skew and VIX, the put-call ratio gauges sentiment by measuring the volume of options contracts. The ratio divides the volume of put options by the volume of call options over a specific period. A ratio below one suggests bullish sentiment, as more call options are being purchased than put options. Conversely, a ratio above one reflects a bearish sentiment.

As shown below, the index is currently at one year lows and the second lowest level since March 2022. Simply the volume of call buying is more than double that of puts. More simply, stock hedgers are few and far between.

put call ratio
Ad for The Bull/Bear Report by SimpleVisor. The most important things you need to know about the markets. Click to subscribe.

CBOE Skew Index

Unlike the VIX, which measures expected market volatility with an expected one standard deviation or 68% band of accuracy, the Skew Index calculates the likelihood of extreme tail events defined as those of two to three standard deviations. While the Skew index and the VIX tend to move in the same direction, any differences can provide clues. Like the VIX, the Skew Index does not enlighten us on whether call or put trading drives the index.  

The Skew Index uses the prices of out-of-the-money (OTM) S&P 500 options. The index typically ranges from 100 to 150. Readings of 120 or less tend to reflect a stable environment. As it rises above 120, it suggests investors are increasingly betting on or hedging against a more outsized market move.

The table below, courtesy of VIXFAQ.com, quantifies the volatility implied by the Skew Index. For example, an Index reading of 130 indicates a 10.40% chance of a two-standard deviation move in the next 30 days and a 1.92% chance of a three-standard deviation change.

put call skew standard deviation ranges

The graph below, courtesy of StockCharts, shows that the CBOE Skew Index is near its highest level in the past five years, suggesting investors are betting on higher-than-average levels of implied volatility to continue.  

daily skew graph

Current Situation

We wrote this article to help better explain the VIX and implied volatility. Moreover, it’s important to consider whether the rising VIX alongside the market might be a warning worth heeding.

Such behavior is not typical, but it’s not unprecedented either. The first graph shows that the uptick in the VIX is still very mild in the context of its 30-year history. The second graph pinpoints similar periods where the S&P 500 was within 1% of a record high. As it shows, it may ultimately signal a significant drawdown, but that signal may be too early. In fact, based on history, it could be years too early.

vix
vix greater than 20 at record highs

In addition to the VIX, we presented other implied volatility calculations. The two skew measures support the theory that the higher VIX is more of a function of put buying than call buying. However, the put-call ratio, which sits at a one year low, does not confirm the negative sentiment. In fact, it is quite bullish.

The message we take away from the mixed options data is that the market is anxious but not fully committed to an overly bullish or bearish stance. As we note at the beginning, plenty of potential events warrant unease.

Ad for SimpleVisor. Get the latest trades, analysis, and insights from the RIA SimpleVisor team. Click to sign up now.

Summary

If the VIX remains elevated or continues to increase and the other indicators confirm that put buying is driving the VIX higher, stay alerted for changes in market patterns. Pay closer attention to technical analysis, including where prices lay compared to their key moving averages.

The VIX is currently warning of the potential for bearish price action. While the warning is helpful, remember that if one were solely positioned according to the VIX between 1997 and 1999, they would have forfeited massive profits.