Secular Bull Market – Part III

Friday’s (12/8/23) November ’23 nonfarm payroll report’s headline enterprise survey quantity was +199,000 internet, new jobs created, however if you happen to subtract the downward revisions to the prior two months of 35,000 and the 37,000 jobs cited by CNBC’s Steve Liesman as autoworkers getting back from the latest UAW strike, then the “internet, internet” headline numbers seems to be 127,000 for November, ’23.

Talking of circumstances or circumstances surrounding secular bull or bear markets, to my information there have solely been two situations when the Fed/FOMC has lowered the Fed funds price, and the inventory market has subsequently offered off in ensuing months:

1.) January 2001: Alan Greenspan began slicing the Fed funds price early in January ’21, which was 9-10 months after the height within the Nineteen Eighties-Nineteen Nineties secular bull market in March 2000.

The S&P 500 and Nasdaq rallied for the month of January ’01, after which the underside fell out with Cisco’s (CSCO) earnings and steering in early February, ’01. (YCharts doesn’t have the information of their complete return calculation desk for the Nasdaq returns from the late Nineteen Nineties, after which the last decade from 2000 to 2009, however the S&P 500 fell 9.12% in February 2001, and it acquired far uglier from there.)

2) September 2007: The Fed/FOMC started decreasing the Fed funds price in September 2007 after the Bear Stearns mortgage hedge fund points. Wanting again on it, the banking sector noticed virtually all their earnings written down in Q3 and This fall ’07, and bear in mind this was properly earlier than Lehman and September, October 2008.

The lesson is, if the FOMC begins slicing the Fed funds price, and also you don’t see a constructive inventory market response, it ought to get your consideration.

In 2019, which is the one circumstance that the FOMC has raised and subsequently lowered the Fed funds price because the 2000s, S&P 500 earnings progress was flat versus 2018 ($161.93 in 2018, vs. ’19’s $162.93), whereas the S&P 500 rose 31%, and the AGG rose 8.5%.

Liquidity trumps earnings (and nearly the whole lot else).

Company high-yield credit score:

As one closing touch upon the time left on this secular bull inventory market, the truth that company high-yield credit score is up 10% in 2023, with seemingly no materials improve in default charges, is a constructive signal for the bull market to proceed.

In 2001-2002, the company excessive yield rose to between 13-14% by 2003, because of credit score points inside “tech, media and telecom” after which in 2008, it was lights out for any danger credit score as company excessive yields rose to 25% by early 2009.

Company high-yield credit score has all the time been the “early warning” inform for a problematic recession – I bear in mind watching excessive yield spreads in late 2007, early 2008, and considering “they’ll reverse and begin to tighten” and – properly – that wasn’t an excellent name.

Rick Rieder, BlackRock’s fixed-income CIO confirmed up on CNBC final week saying company high-yield credit score has “glorious technicals” at the moment, which is an efficient vote of confidence from the most important asset supervisor on the earth.

Abstract/conclusion: 2024 must be one other constructive 12 months for capital market returns, particularly the key fairness and glued revenue benchmark indices, with the large query mark being whether or not the mega-cap or so-called “Magnificent 7” shares (the highest 10 names by market cap throughout the S&P 500) proceed to hold the water for the benchmark.

As Half I and Half II of this sequence addressed how a lot time could be left on this secular bull market, there’s a one large similarity at the moment between the late Nineteen Nineties and at the moment’s S&P 500.

Most readers are too younger to know that the “Nifty 50” shares of the early Seventies, like Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ), which had a interval just like the late 90s tech giants, previous to the 1973-1974 bear market within the S&P 500, the place the NSE Nifty 50 shares ran up materially in worth, in order that “slender management” situation has introduced itself as soon as once more.

The opposite similarity is that the non-mega-cap sectors like small and mid-caps, or worldwide and rising markets, have actually not finished a lot latest returns, and that’s similar to the late Nineteen Nineties.

(It’s virtually just like the mega-caps have change into this large twister, sucking up all of the alpha a market can supply, producing out-sized returns and forcing each investor into the asset class, earlier than the returns evaporate proper earlier than your eyes, like 1973-1974, and 2001 and 2002.

Not like the late Nineteen Nineties, AI is simply getting began, and are available Could ’24, will probably be 12 months since Nvidia’s (NVDA) completely “lights out” earnings report, actually lit the fireplace below the creating AI story and AI turned a commonplace every day subject in monetary media.

Microsoft’s (MSFT) December ’23 quarter (in my view) can be necessary since we’ll get a take a look at Copilot and the numbers the launch generated from November 1, ’23.

Microsoft certain appears like a pacesetter inside AI, so the numbers and element can be necessary, similar to monitoring Azure’s progress was necessary with the emergence of the cloud.

Lots of corporations are “speaking AI” similar to a whole lot of corporations talked the web in 1995, and the next years, however for a lot of corporations it was extra discuss than motion. They may by no means work out how one can execute.

It will be very useful to see any firm speaking AI round January-February ’24 earnings to start out quantifying the metrics.

By way of S&P 500 earnings, given all of the latest concern about what ’24 would possibly appear to be, Fed funds price cuts, if they’re forthcoming, will probably trump earnings points.

The present anticipated S&P 500 EPS progress of 11-12% for 2024 will probably decline into early January ’24 and after corporations begin providing exhausting steering on ’24 income and EPS progress, we’ll know the way company managements are viewing ’24 progress.

Bear in mind, in this sort of atmosphere, in contrast to the late Nineteen Nineties, there isn’t any motive for managements to be aggressive when it comes to steering, until they’re very sure the numbers can be met.

I anticipate most managements to be cautious round ’24 steering, which is in the end a plus. Beneath-promising and over-delivering is rarely a nasty technique.

Thanks for studying. None of that is recommendation or a suggestion, reasonably think about it “perspective”. As Warren Buffett usually says, “if inspecting historical past would lead to nice funding outcomes, librarians could be the very best traders”. (Hope that was quoted accurately.)

Previous efficiency is not any assure of future outcomes. Investing can contain lack of principal. Shoppers’ Top 10 holdings have been up to date in mid-November, ’23. The BlackRock fund was offered for tax-loss functions shortly thereafter, after which the entire fund was offered by November’s finish.

A brief evaluation of ’24 efficiency can be supplied at year-end. Capital markets change rapidly. Readers ought to gauge their very own urge for food for market volatility and modify portfolios accordingly.

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Editor’s Notice: The abstract bullets for this text have been chosen by In search of Alpha editors.