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- Charts of the Month - January
Charts of the Month - January
No Fat Pitches!
Boston Red Sox legend Ted Williams was famous for how he described his batting style, stating that he “waited for the fat pitch.” Meaning he only looked to swing when the pitch was in the zone where he had the highest probability of making great contact.
Investors often apply this statement to investing. As theory goes, we should invest the same way—when the market is offering us the fat pitch.
Few would disagree, the logic is sound.
But there is a problem. Which is, it’s only obvious in hindsight when the market provides a fat pitch.
Stocks bottomed in October 2022, a time when professional investors wanted nothing to do with stocks.
The National Association of Active Investment Managers (NAAIM) Index represents the average exposure to U.S. stocks reported by active managers. When the S&P 500 bottomed in Oct. 2022, active equity managers held their lowest allocation to stocks in roughly two years.
NAAIM
The reason is obvious: The news was horrible!
But that’s when stocks usually bottom. When the news is so terrible, it requires Pepto-Bismol before looking at account statements.
The good news is that turbulent periods eventually pass, and it seems like we’ve finally reached that point.
Welcome Back All-Time Highs
Author Morgan Housel has a great quote about market declines. In his words:
“All past declines look like an opportunity; all future declines look like a risk.”
The Oct. 2022 market lows officially transitioned to opportunity last month, as the S&P 500 made its first new all-time high in over two years on Jan. 19.
Morningstar Direct
Two years was the longest streak without making a new all-time high since 2008.
Now, this is great news for those who were fully invested. But as any advisor knows, many clients are not fully invested after large market drawdowns.
And as markets fire back to new highs, many clients who missed the ride up will likely be skittish re-entering the market.
But context matters, and while the S&P is up more than 37% since the Oct. 2022 lows, it’s only up 3% over the past two years.
Morningstar Direct
And the median stock in the index is actually negative during that time!
So, while some investors may convince themselves, “I missed it!”—there’s ample evidence that may not be the case.
Further, deeper analysis tells an even more interesting story. Specifically, all-time highs usually don’t happen for no reason. In fact, all-time highs generally tend to be a great indicator of more all-time highs.
For example, the last time the market made a new-all time high after a pronounced bear market was in March 2013, which was the first new all-time high since 2008. In the year that followed, we saw 52 new all-time highs.
Morningstar Direct
Expanding the data set to 1929, you can see a larger pattern emerge, showing all-time highs tend to cluster. And it’s not abnormal for them to last for many years.
Creative Planning
In plain English, things are pretty good—that’s probably the simplest way to describe what the market is reflecting.
Let’s dive into some of the details.
Observations from Earnings Season
The consumer is the economy—70% of U.S. GDP comes from consumption, which means consumers play the largest single factor in how the economy performs.
If consumers aren’t spending or feeling good, we have a problem. Fortunately, consumers are feeling good.
The big banks and major credit card companies reported their annual results last month, providing a glimpse into the state of the consumer.
The details?
Spending continues unabated. American Express (AmEx)—one of the largest credit card issuers globally—reported payment volume growth across all key categories.
AmEx Investor Presentation
AmEx’s CFO added that they, “continue to see (spending) growth across all generations and age cohorts, with millennials and Gen Z driving the highest growth.”
And the spending isn’t a debt-fueled binge, either. Credit metrics continue to be better than they were pre-pandemic.
AmEx Investor Presentation
Of course, one could argue that AmEx has a wealthier customer than what would typically be defined as the average consumer.
But all its peers—which have different customer profiles—echoed similar sentiment. Here’s a sample of that commentary:
“The way we see it, the consumer is fine.” – JPMorgan CFO
“Consumer spending remains resilient.” – Visa CEO
“The financial health of our consumers remained strong.” – Wells Fargo CEO
“Strong year driven by healthy consumer spending.” – Mastercard CEO
Now, all those comments speak to the past. And markets care about the future.
One way we can glean insights into the future is by looking at consumers’ cash pile.
A popular—and negative—theory has been: Once consumers depleted the cash pile saved up during the pandemic, spending would slow down, and the fallout would be slower economic growth.
Bank of America’s CEO tackled this idea, stating:
“If you think back, as we ended 2022 and entered 2023, the great debate was how much the pandemic surge in deposits would dissipate. But looking today, we ended 2023 with $1.9 trillion of deposits, only (slightly less than) we had at year-end 2022 and 4% higher than the trough in May of last year. The total average deposits in the fourth quarter remained 35% higher than they did in the fourth quarter of 2019.”
BofA Investor Presentation
Bank of America is the largest retail deposit bank in the U.S., so that statement certainly carries weight.
What should we infer from it?
At the very least, people are probably going to spend if they have the money to do so. And the economy should mimic those consumer trends.
Of course, the consumer picture could look very different six months from now—but for now, the path of least resistance appears to be higher, and that should help support equity markets.
Dow 1 Million
The day-to-day is noisy. It’s easy to become inundated by the daily news flow and lose sight of the bigger picture.
Barron’s recently hosted its annual investing roundtable with a few prominent investors to discuss markets, trends, and general outlooks.
The panelists were asked to make predictions on the markets coming-year calendar return.
Answers were the usual suspects:
“Up 5%.”
“Down 5%.”
“Positive mid-single digits.”
Nothing that stopped you in your tracks.
Then Mario Gabelli—CEO of Gabelli Asset Management—spoke:
“The Dow will be the equivalent of 1 million in 40 years, and it was under 1,000 40 years ago. So, invest long term.”
One million in 40 years???
Today, the Dow sits right around 38,000.
In Morgan Housel’s new book, Same as Ever, he makes an interesting point about how easy it is to discount the progress that is achievable.
He uses an example.
If someone were to say, “What are the odds the average person will be twice as rich 50 years from now?”—it sounds preposterous.
It feels far too ambitious.
But if that same person said, “What are the odds we can achieve 1.4% average annual growth for the next 50 years?—it sounds extremely reasonable. Maybe even pessimistic.
But those two sentences, of course, are the same.
It’s an interesting reference point while sorting through Gabelli’s prediction.
The Dow would need to return 8.8% annually between now and 2064 to hit 1 million.
If you look at capital market assumptions, an 8.8% annual return is well above any long-term forecast.
But if you look at the previous 40-years of U.S. market returns, it’s slightly below what investors actually experienced. Over the past 40-years, U.S. stocks returned more than 10% annually, using Morningstar data.
In short, the Dow reaching 1 million in 40 years is in the realm of possibility, even if unlikely.
Einstein’s quote, “Compounding is the eighth wonder of the world” comes to mind. Most of us are not very good at understanding the exponential function, or in simpler terms, rapid and continuous growth.
Specific to compounding, one fact that usually flies under the radar: Most of compounding’s magic doesn’t happen until the end.
The early years of compounding have a “yawn factor” (translation: boring) associated with them.
For example, the path to Dow 1 million—under Gabelli’s assumption—likely wouldn’t be what you expect.
If the Dow were to hit 1 million in the next 40 years, it would take 32 years before it even reached 500,000.
Then eight years later, it would eclipse 1 million.
If you’re investing for decades, the biggest gains in absolute dollars happen in the last couple of years of the investing period.
As Einstein alluded, compounding is like magic. But it takes a while, which makes it easy to ignore.
For investors, the minutia of the day is what we often spend the most time debating.
Can the Mag 7 hold up?
Do new all-time highs mean a sell-off looms?
Will an election year cause the world to end?
The future will bring bumps and bruises—this is obvious.
But don’t forget about the slow and subtle progress that isn’t always visible. And pay heed to the fact that a lot more might be achievable than we might realize.