History Doesn't

Always Repeat Itself

It’s a big world out there. Everybody has an opinion. In my world, it would be nice if the powers that be would talk about both sides of the equation. The problem is that they do not. It’s “their way or the highway” and I’m faced with reading or listening to it with reservation.

Without mentioning posters by name, far too many on LinkedIn follow this rule. You need to dig through their rhetoric to arrive at a dual conclusion. Far too often they are trying to sell you their research. It’s not always what they believe, it’s what they want you to believe.

That’s why I’m a hedger and a firm believer that anything can, and usually will happen in today’s world. While I think the market is a little “frothy” I do not believe we are on our way to an abyss. I went long 2024 VIX December 19 call options on Friday after the inflation numbers were reported. Safety is my plan and I practice it.

Bubbles Are Overrated

Concerns about a “market bubble” often overshadow “important” data. Comparing Nvidia's (“NVDA”) position with Cisco's (“CSCO”) during the dotcom era provides clarity on why today’s tech valuations are not as alarming.

Cisco's peak “forward” P/E ratio soared to 131 in March 2000, while Nvidia's current forward P/E stands at a much lower 45. Although Nvidia isn't cheap, its valuation is far from the extreme levels Cisco reached in 2000, and it's also well below Microsoft's (“MSFT”) P/E in 1999.

Nvidia's historical performance does not imply an inevitable collapse. It's crucial to understand that Nvidia does not have to follow the same trajectory as Cisco did over two decades ago. Nvidia and Cisco are different companies.

The focus often falls on large-cap and mega-cap tech stocks driving the current bull market. This automatically puts them on the overvalued list, right? Not necessarily. These giants have frequently led rallies, and it doesn't signal an inevitable crash.

The data confirms this. The top 10 S&P 500 stocks trade at a P/E of 30x, compared to 47x for the top 10 in the 2000s. When you exclude the top 10, the remaining 490 stocks in the S&P 500 today trade at a P/E of 18x, versus 16x in 2000.

There's also chatter about narrow leadership in the market. Let's delve deeper. While 8% of the S&P 500 have returned over 30% year-to-date (YTD), it's not just the usual suspects. This impressive performance comes from a broader group of 40 stocks, not just the frequently mentioned 7.

The current 8% of S&P 500 stocks performing above 30% is actually in line with historical averages – slightly lower than the 10% average since 1990. This suggests that 2024 might be a typical year historically, and not an outlier. Last year, the S&P 500 returned almost 25%. This year it's around +15% so far, which is notable given that election years typically see stronger performance later in the year. It's important to consider that election years tend to be positive, with the stock market performing well from mid-May to September. Could this be a hint of a summer rally?

June might be ending with the S&P 500 close to a 4% gain. Notably, the worst day this month saw a mere 0.31% drop early in the week. Additionally, there haven't been any daily declines of 2% in quite some time.

The last time the market saw a daily drop exceeding 2% was February 2023. This translates to 338 consecutive trading days without such a decline, significantly higher than the typical 29 days.

While this might suggest some expected volatility, it's important to keep things in perspective – the current streak is only a third of the longest ever recorded (949 days).

Looking ahead, July has historically been a strong month for the S&P 500, with gains in 9 consecutive years and 11 of the last 12.

Over the past 20 years, July’s average return exceeds 2.5%. Given the positive trend during election years, the market could continue its uptrend through the summer months.

JPMorgan Is Usually Right

JPMorgan released a mid-year outlook, indicating a challenging environment for the continuation of recent stock market trends, which have seen significant gains driven by a small number of large-cap stocks.

The brokerage firm noted that the largest 20 U.S. stocks, which have surged 27% year-to-date, along with high-quality stocks, have markedly outperformed broader indices like the S&P 500 Equal Weight and the Russell 2000.

The bank's report highlighted that the momentum in stock prices, particularly among the largest companies, has reached extreme levels, with these stocks accounting for 65% of the S&P 500's gains over the past year and 75% YTD. JPMorgan's price target for the S&P 500 remains at 4,200, a 23% downside risk from current levels. That might be a little steep but they are my favorite.

JPMorgan is skeptical about these stocks sustaining their earnings growth rates into the second half of the year, a factor crucial for maintaining their price momentum. The bank anticipates downward revisions in consensus earnings estimates after the second quarter of 2024, as the market faces the cumulative effects of higher interest expenses and a stronger U.S. dollar.

The analysis suggests that the current market conditions, characterized by narrow leadership and extreme momentum crowding, do not support a broadening of growth. The firm also addressed broader macroeconomic concerns, including the trajectory of the business cycle, which appears to be moving sideways with low-income consumers showing signs of stress.

The market's rebound in the fourth quarter of 2023 was based on the expectation that the Federal Reserve would cut rates significantly, but this has since been adjusted to only about two cuts for the year given persistent inflation. JPMorgan recommended investors diversify their portfolios with "anti-momentum Defensive Value plays" such as Utilities, Staples, Healthcare, and Telecom, which offer a hedge against potential market volatility and risks from geopolitical events, elections, and unsynchronized global economic cycles. 

I’m hedged. It’s a simple way to maintain balance. Events come “out-of-nowhere”. It makes sense to protect your basic investments that over time will perform. What they do in the interim is what you need to protect.

Sorry folks and you too Mr. Ho but face it, your song “Tiny Bubbles” fits. I’ve read all about the prognosticators who have been right since the dawn of time. Some tried to get their names changed to Nostradamus but found out it was taken. The old story is going to prevail. If you make enough “claims” eventually you are going to be right. I look more toward hedging the obvious when the probabilities suggest doing just that. I don’t care about being right all of the time. I just want to be on the safe side more often than not.