FPC Market Outlook Summer 2024
Summary:
In June 2024, the US stock market hit new highs, with AI related stocks being the driver in a very narrow ascent to market tops.
Our value strategy remains steadfast, and we have not meaningfully participated in this increase. For traditional/legacy clients, about 32% (median client) of the portfolio is allocated to stocks depending on client risk tolerance. Around half of the stock exposure is in international equities offering attractive valuations. We like our current investments in small and mid-cap US companies with idiosyncratic catalysts and attractive valuations. We are maintaining our 5% gold exposure to help us navigate geopolitical uncertainties. The rest of our exposure is in short duration low risk selection of US bonds (9%) with specific protections and US Treasury notes & short-term money market funds making up the remainder of the portfolio.
We remain concerned about heightened recession risk/probability, valuation levels, political dysfunction and regulation hence the defensive posturing.
Read on for further details....
AI bellwether NIVDIA in June briefly became the largest company in the world at over $3 trillion in equity valuation – larger than Microsoft, Apple or Amazon, Meta/Facebook and it alone has powered the S&P 500 index to new heights. Tellingly, NIVDIA insiders are selling their stock fast and furiously. The founder and CEO sold $90 million just last week – the largest sale cluster in 19 years. Insiders often see the writing on the wall before others. We remain on the sidelines in terms of owning expensive stocks and we are skeptical that their high valuations will persist. Meanwhile, the median stock in the S&P 500 index is up modestly for the year (about 3.2%).
As for the US economy, layoffs are increasing, full-time jobs are shrinking. The household employment survey change rate has turned negative, which suggests a recession is near. Also relevant, the manufacturing new order book index (latest sales orders) is hitting lows. Often, this is a precursor to falling S&P 500 earnings. As you would expect, declining stock earnings usually means a stock market correction.
The top 10 largest companies (NVIDIA, Microsoft, Amazon, Google, Apple, Tesla etc.) have become much more expensive as the stock market hits new highs - shades of 1999 and the tech bubble. History would suggest that the valuation of the top 10 largest stocks (median P/E multiple of 30x and the S&P 500 excluding the top 10 stocks (median P/E 18x will meet again in a way that is less favorable to Big Tech than the median stock. We expect this will cause significant pain to investors.
Recent Portfolio Changes:
We have been increasing our exposure to BDC baby bonds (yields in the 7-8% range). We also initiated a small position in the Brazil ETF where we are getting paid a 6.7% USD cash yield to own the index at near term lows. We continue to be excited about our eclectic portfolio of small/mid cap value stocks, dividend payers, and biotech names all of which have various catalysts and drivers that are company specific.
Here are some of our ongoing concerns:
Signs of weakness in the US economy, including recession fears, declining housing prices in frothy markets like FL & TX, and higher interest rates impacting weaker companies.
High valuation levels in the US stock market, particularly in technology and growth stocks, may/will lead to a future market correction.
Growing chaos in the commercial real estate market and, particularly, in the office sector. Losses, realized and unrealized, are immense.
Rising inflation driven by supply disruptions in the Red Sea/Suez Canal and stricter border enforcement reducing labor supply, leading to higher costs for US consumers among other signs of increased inflationary pressures.
Aging global demographics impacting economic stability & productivity.
US political dysfunction and govt’s ability to execute constructive policy responses.
Market liquidity is drying up in some areas and correlations are breaking down – this is often seen before times of financial stress.
The unsustainable US budget deficit. Recently revised upwards to $1.9 trillion (about $5,800 per person in the US per 2024).
Disclosures: The median portfolio holding discussed above is based on a composite of client household accounts and excludes other households that have specific mandates. Individual clients may and will have different portfolios based on a variety of factors including available cash at the time of purchase for specific securities, account size and client preferences/risk tolerance. Your individual account may/or will differ. The information above concerns investment/market/economic performance and scenario analysis and is for informational purposes only. It should not be considered as financial advice or relied upon for making investment decisions.
Prospective return forecasting involves making assumptions about various variables and market conditions, which may or may not reflect real-world outcomes. Actual investment performance can vary significantly from hypothetical scenarios due to unforeseen factors and changing market dynamics. Past performance is not indicative of future results, and all investments carry inherent risks. The various macroeconomic charts presented above were sourced from various public sources and may not be correct; we have not tried to evaluate their data quality or verify their accuracy. Please reach out for any further information concerning sources.
