Big Picture, Little Picture
When the summer rolls around, thing become lazy, hazy. You look for things to write about but it’s 76 degrees out and beautiful. Mind gets distracted. It’s also a time of little news. Sure we get the same data that we get every month, every week. None of it seems to move the needle much and markets will find reasons to move up or down or nowhere.
One of the axioms that I actually do believe in is that the present market is pricing economic conditions six to nine months ahead. Unless there is some major event, this has held true since I started on Wall Street and I am sure for decades before that.
Investor expectations generally don’t go much farther out than that. We are not Warren Buffett. Buffett looks at things with a much wider lens. He can do that because he is Warren Buffett, the rest of us look at things with a much narrower mindset. Even though we may be investing for our future, however far away that is, subconciously, as an investor, it’s much shorter.
Based on this, you could make the assumption that the economy after the election will be pretty good. The Fed will probably have made at least one cut by December and maybe a second rate cut in the first quarter of 2025.
Normally, a Presidential election year has some positive momentum going into that election Tuesday because amazingly, the Federal government tends to ramp up spending. Wonder why? Maybe a coincidence. In any event Federal spending is a lever to move the needle in favor of the incumbent.
This year, not so much. The Biden Administration spent like there was no tomorrow and we had an inflation spiral, the likes of which we haven’t seen in decades. They caused it by putting too many dollars into a system that was not prepared for it. That is the main reason, that little tactic is not being employed this year.
What is being employed is the administration gloating about how they have wrestled that inflation demon to the ground while still having an economy operating on all cylinders.
I am going to be in the minority here but I believe that any President, Republican or Democrat would have done almost the same thing. The economy during the Pandemic needed government intervention. Historians and economists can argue about the level of that intervention and I don’t think there will ever be a clear winner in that regard.
What the Biden Administration did was double down and then double down again and that is where I think things differed. This aditional spending added trillions and trillions of dollars of debt and while some of the spending was probably much needed, I think that having an open checkbook for manufacturers who may try and compete with low cost competitors around the World is a recipe for disaster.
The US has been a leader in new patents for decades yet we have lost the ability to produce what we create. Yes, at first the Japanese took those patents and created products that Americans loved. Then the Chinese took (or stole) those patents and used cheap labor to create products that Americans could not do without.
Now, what makes you think that spending 16 billion dollars on a chip manufacturing plant in Arizona or 20 billion dollars on a plant in Ohio is going to level the playing field. If history has ever shown us anything, the only time America has stretched it’s industrial prowess successfully was during wartime. I am not saying that it is not possible to recreate chip manufacturing supremacy in the United States, what I am saying is that we are 12 years behind our competitors in Taiwan and the Netherlands and it will take ten years to build the capacity. Will the technology they use in these plants be state of the art or something in between? Advances still happen in the industry at a rapid pace and those advances cost a lot of money. Will Intel be willing to add 10 billion dollars more to their investment in Ohio or will 2nd term Joe Biden write another check?
My point is that spending a trillion or two trillion tax payer dollars to reinvent a sector on US soil is not a wise investment. No matter how well these factories do, that investment by taxpayers will never be repaid. Look at how we messed up solar panel production in this country. Billions to build an industry to have it fall apart because the Chinese could do it better and cheaper.
One last point about the Biden spending packages. The massive investment in infrastructure that was going to repair roads, fix bridges, yada, yada, yada has not materialized in New York. There is no trickle down effect apparently because where I live on Long Island, roads are still mediocre at best. Some roads are so bad that I have to go see my dentist to have my fillings replaced. It has been over two years and I have seen very little improvement in infrastructure in New York. Oh wait, we vote Democrat blindly, we don’t need coercion.
I know I am rambling. Looking to fill my allotted column space but I like to sometimes throw out multiple ideas and see what I end up with. It’s a stream on conciousness thing.
Back to the market.
We have a great run up this year, mostly from five stocks and that concerns me. This group is up over 45% this year and their influence is huge. A little more 25% of the S&P is tied up in Meta, Alphabet, Microsoft, Amazon and NVidia. Money, smart and not so smart is moving into these five stocks because of AI. I do not fully understand all that you need to know about Artificial Intelligence and how it will impact society and the bottom line of companies. Saying that it will be bigger than the Internet is a pretty bold prediction.
My limited experience is with ChatGPT. Some free version I downloaded. I used it exactly five times and getting information that is relevant up until Sept of 2022 does not do it for me. Yes, yes I know that it is so much more than that but you have to pay for the upgraded versions and it’s amazing. Google is amazing. ChatGPT is not.
Google is free. Google knows everything there is to know in the World, ever. Google is very easy to use and when you ask it a question, it gives you 1,890,900,000 answers. Google has free email that works great and it has a zillion features that I have never explored. Google is free.
ChatGPT is annoying and stupid and it wants me to pay for it so it stops being stupid and offers information. Pay? Never.
Again, I veer off somewhere dark.
Sorry.
I may be wrong but I don’t think the market has a whole lot of upside at this point. Maybe another 5%, if that. Earnings will be ok, maybe even muted a touch because of the fact that comparisons will be made to last year which was tremendous. The economy is doing well despite the persistent inflation, slower growth and high interest rates. It’s actually a mixed bag and frankly, that’s ok. Economies can get sloppy, it isn’t the worse thing in the World.
Having a sloppy economy tends to mute stock price gains. Too many moving parts within different groups makes it hard for any continued sustained rally. What this market has is investors chasing potential at elevated evaluations.
That could be a problem coming down the road.
The bull rush into AI related stocks may carry the S&P to record highs everyday but the higher the market goes, the 90% of the economy that is not related to this new sector will be pulled up as well. Earning multiples that they do not deserve and causing a fracture.
I won’t forecast a crash because that is next to impossible to do, but what I will say is that there will be a correction. Maybe not today or tomorrow but it is coming and it will hurt.
The correction comes when the expectations are not realized. You have a stock up 20% because of the index it may be in has garnered a lot of attention but it’s stock price begins to get ahead of the actual companies earnings and growth prospects. This is where we are now. Groups are being bought with less regard for the individual components. That is one of the weaknesses of ETF investing. Some companies get swept into that pool but they really are not at the point where the price earnings multiple is fair. At some point, non ETF funds will start selling the individual stocks that have gotten ahead of themselves. This is what causes a sloppy market.
We are getting there.
The correction comes when the star players in any individual group do not meet expectations. I think we will see that shift in the next few months, maybe into the fall.