Investing Update: Areas of Opportunity?
What I'm buying, selling & watching
This week ended with the S&P 500 hitting a new all-time high. The January 3, 2022 all-time high of 4,818 was taken out after 511 days. Since 1950, that’s the 6th longest stretch to make a new all-time high.
Patience and riding out the ups and down by staying the course, again proves to be rewarded. Over the past 5 years the S&P 500 has now returned 81.62%.
The run to new all-time highs this week began with the retail sales report on Wednesday.
Sales increased! Retail sales rose by 0.6% in December. The estimate was 0.4%. On a year-over-year basis, sales increased the most in two years.
That makes nine consecutive monthly gains. Consumer spending remains very strong. Another strong sign that shows an economy that is not anywhere near a recession.
Then on Friday we saw the Michigan Consumer Sentiment Index reading come in with a 13% jump and to its highest level since July 2021. It’s clear that Americans believe the inflation spike is over and feel very good about the economy.
It’s should be no surprise that the stock market ended the week at new all-time highs. There are a lot of positives going on right now.
Concerns?
On the other side of the coin. Even though things seem so great, we always have to continually watch for possible signals that cause a change in course or reason for concern.
One reading that really puzzled me this week was the New York Empire State Manufacturing Index. The January print -43.7 came in at the lowest level ever (excluding COVID). It was much worse than the estimate of -5. It’s not a time where I would expect this number to be comparing to the COVID days.
Yet the six month outlook was a positive number of 18.8%. Just a very odd report that didn’t really seem right and caught my attention.
Another area that I watch very closely is the Insider Transactions Ratio. I like to know what corporate insiders are doing. Right now it shows that they’re very nervous as Q4 earnings are about to get into full swing.
For context as Puru Saxon points out;
Readings under 12:1 are bullish. Readings over 20:1 are bearish. Current ratio of insider sales/insider buys is 145:1
This big of an outlier number showing extreme bearishness is worth taking note of. If we recall, the last time we hit all-time highs there was well documented selling from some of the richest people in the world.
Another point I keep thinking about is the yield curve inversion and what it has historically done. This chart shows that over the last roughly 70 years there has never been a sustained post-inversion equity markets rally. They’ve all reversed and headed into a downturn. The current environment in 2022-2023 is proving to be an outlier so far.
Is Everyone Wrong?
Anytime that I see the overwhelming majority all agreeing on something, I begin to question it. We just saw this with the seemingly guaranteed recession that we were supposed to have. Everyone called for a recession. It never came. To start 2023, we were all told how the stock market was going to be down. The consensus among analysts and strategists was that 2023 was going to be a negative year. They were wrong.
Now we have 91% of fund managers expecting a drop in short-term interest rates. That says they expect a smooth landing and that inflation has been defeated. That’s a lot of consensus confidence that makes this worth watching.
Recession Update
Since there was such an overwhelming majority that all but guaranteed a recession, I have to continue to monitor this. My favorite chart that combines all the important readings on inflation is from Justin Wolfers. It’s such a great chart and it still continues to show strength and a lot of up. Currently there is nothing to signal any warnings.
The recent fund managers survey also shows that the fears of a recession are fading. 41% see no recession at all in 2024. A far larger number than any of the other options.
Areas of Opportunity?
There are some underperforming areas of the market that are looking like possible opportunities.
The first is what has been going on with REITs. They just saw their largest inflow since June 2022.
If we look at hedge fund positioning, it remains near the lows for the past year but has been turning.
With as much commercial real estate (CRE) fears that we’ve heard about, the fear and selling in the REITs may be over and due for a rally higher.
We also have the materials sector (XLB) at the lowest levels relative to the S&P 500 in 23 years.
The utilities sector (XLU) has set a new all-time low relative to the S&P 500.
Then we have the energy sector (XLE). Since the October 2022 lows, no sector has been a worse performer than energy.
That takes me towards two interesting names that just set new 52-week lows this week as the market hit new all-time highs.
Chevron which is now down 21.37% in the past year.
Exxon which is down 14.47% in the past year.
With growth on such a winning streak, we could see money find their way back into value names that have low PEs and high dividends. If rates start to decrease you have to believe some of the money which fled for less risky fixed income options finds it way back into these areas looking for yield and a sector rotation begins. Which is what we saw happen after the last all-time highs in January of 2022.
Here Come Earnings
The busiest weeks for Q4 2023 earnings are upcoming. For the market to hang onto these all-time highs and continue moving higher, earnings are going to have to lead the way over the coming weeks.
Here are the companies due to report earnings this coming week.
The Coffee Table ☕
I have to share one of my used sites for investing and finance. Dinkytown.net Financial Calculators This site literally has calculators for everything. Investing, retirement, auto, loan, mortgage etc. Over 400 financial calculators. It's bookmarked for me. I use it frequently.
5 Simple Investing Ideas, Executed Strictly by Darius Foroux hits the nail on the head this week. These 5 lessons on investing are on point and I couldn’t agree more with all 5. I believe people should listen to these and act accordingly.
Nick Maggiulli makes some great points on if your portfolio should be in all US stocks. Should Your Portfolio Be 100% U.S. Stocks? As usually Nick has such good data and charts to prove the point he is writing on. It was informative and I learned a few things.
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