“Darwin paid particular attention to disconfirming evidence."
The Portfolio Performance
The portfolio is UP +43.23% YTD
The S&P 500 is UP +17.57% YTD
Personal Consumption Expenditures (PCE)
PCE is the Federal Reserve's preferred metric to gauge inflation, while the Consumer Price Index (CPI) headline number gets all the media attention. I could write a book or at least a long article for those who need a sleep aid about why these two metrics tell such different stories. For today, I just want to point out that tomorrow, Thursday, August 31, 2023, we will get the latest PCE report, which will significantly impact the stock market in the near term. I should add how Powell and the rest of the FOMC voting members interpret the data will significantly impact the stock market.
S&P 500 Estimate
“I see the stock market going about 2% higher in September and 6%-10% higher through the end of the year. My year-end projection is 4,750 to 4,960.”
Based on all the analysts I’ve searched, I have the highest estimate, and I don’t mind telling you that the air is a little thin up here. My September estimate is not consensus but aligns with several bullish analysts. In addition to actual earnings projections, my year-end estimate includes some bullish market sentiment from FOMO (fear of missing out). S&P earnings are currently projected at around $234; my estimates are $250-$261. Let’s do a bit of math. 4,960/261 = 19. The S&P’s current multiple is 25.78. An S&P multiple of 19 times is higher than the historical median of 15, but I think it’s reasonable.
The macro data we have now shows that inflation is coming down, and macro data over the next few weeks should show a significant slowing of inflationary pressure. The Job Openings and Labor Turnover Survey (JOLTS) showed a softening in the labor market. The number of job openings edged down to 8.8 million, with 9.5 million expected. The number of hires slowed in July, showing a slowing in employee demand. The ratio of openings to available workers is now down to 1.5.
Tomorrow's PCE report will influence the Fed the most. Powell has commented that PCE has been stubborn, and the decline has been too slow. In the same way that the U.S. struggled to get inflation up to 2%, I think we’re setting up to see inflation plunge faster than expected. Much like a rollercoaster rising to its peak before the sudden drop, tomorrow’s report may show that we are at the beginning of that sudden downslope.
The Fed needs to stop hiking rates. We’ve just lived through the fastest series of rate hikes in history, and we saw several cracks appear due to the impact of rising interest rates. Like a pendulum that can’t control itself, the Fed seems to swing too far in both directions, but I think Powell might be the exception in this environment. My view is that the Fed is done hiking and won’t raise in September or November. For this thesis to play out, we need to see tomorrow's PCE report confirm a slowing inflation trend.
With labor markets and inflation attempting to make a soft landing, I think the chances of a Fed rate hike is 0%. A halt in rate hikes will cause a further decline in the U.S. 10-year treasury. The 10-year peaked at 4.35% and is at 4.12% now. We could see the 10-year at 4% or even below 4%. As yields decline for treasuries, we’ll see more inflows into stocks. This factor alone makes me very bullish on stocks.
What are the risks?
Jerome Powell doesn’t check in with me, so the Fed may hike another 25 basis points in September. That act alone could derail stocks for another month.
While UPS agreed to concessions with their union, several union battles are still taking place, and more are cued up. More unionization at Amazon and other tech companies could significantly negatively impact technology stocks in general.
My views are not in line with the consensus view, which I think is overly bearish. Whenever everyone runs to one side of the boat, I’m inclined to move to the other side. Just because a market view is wrong doesn’t mean the market won’t follow that view.
This looks like an excellent time to be buying stocks, regardless of what happens tomorrow or with the Fed's rate hike regime. I'm looking for companies where earnings are growing, and when compared to the stock price, the earnings are well above the stock price. Thematically I'm interested in companies that benefit from AI, infrastructure investment, and declining interest rates. These three areas have me focused on semiconductors, chip equipment makers, software companies that benefit from AI, materials, construction equipment and housing.
Let's see what tomorrow brings and then maybe we're ready to make some portfolio changes.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
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Rule #1: Don't lose money
Rule #2: See Rule #1
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
RULE #10: Being early and being late is the same as being wrong...move on.
Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
AMD, AMZN, AAPL, ARKK, ARKG, CNRG, ENPH, FB, GNRC, GBTC, GLD, HRTX, HD, MSFT, NVDA
I am invested short in these securities mentioned in this post:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.