It's A Wonderful Life
When You Take What You're Given
Wow, 2023 sure went by in a flash. Being consistent and sticking with my “strategies” worked well for me. You would think that after being in this industry for 55+ years it would, eh? If there is one rule to take away from what I preach it’s to “buy when they sell and sell when they buy”. Otherwise macroeconomic and geopolitical events, basic geoeconomic tools run my investment life. It’s tough to argue with simple success.
So it’s 2024 tomorrow. In addition to “thinking through” what I’m looking at over the next couple to twelve months we have lots of football games to watch and enjoy. Like always I love watching good games where contests are settled late in the 4th quarter. Otherwise I don’t really care who wins just that my fantasy league players do well. I can extrapolate that to my investment and trading strategy as well; I want my ideas to unfold in a logical and sustainable fashion and trust you do as well.
There’s Gold In The Bond Market
I’ve been a buyer of bonds, both short and long term durations for quite some time. So far so good but the bond market is sounding its most severe alarm in a half century. It could signal a big move in the stock market in 2024 or nothing at all. The question is what is the bond market’s saying and when, if ever will it become apparent what it is.
Recent signs of economic resilience have investors taking a long look for what they call a"soft landing" where the Federal Reserve successfully tamed “inflation” without causing a recession. This growing conviction propelled the three major U.S. financial indexes higher in 2023. Is there more for 2024? Maybe but i missed 2023, oops.
Analysts still see a “recession” as a distinct possibility in the next twelve to eighteen months. They’re concerned that the impact of higher interest rates has yet to make its way through the economy, and consumers have propped up the economy so far with outsized spending. This spending has depleting savings, causing many people to take on added debt. Some analysts argue that an economic downturn is possible, or even probable as those situations evolve. A potential confirmation of the analysts' fears are seen in the bond market, which is sounding its most severe recession alarm in decades.
Bond Portfolios Still Offer Good Rewards
The Treasury yield curve remains inverted. Treasury bonds are “government-issued” debt securities that pay interest based on their maturity date. The interest rate these bonds offer buyers is called the “yield”. When the yields on Treasuries with different maturity terms are plotted graphically, they form a line known as the “yield curve”.
During periods of “economic duress”, the Treasury yield curve can become inverted, where long-dated bonds offer less yield than short-dated bonds. Aggressive interest rate hikes to curb inflation sent recession fears through Wall Street. Demand drives bond prices higher and yields lower. So demand for long-dated Treasuries has pushed yields lower than short-dated Treasuries, causing the yield curve to start out at higher levels and move lower the longer out it goes. That’s why being careful economically is in order. The yield-curve inversion is the bond market's most severe recession alarm in decades; heed it.
The spread between the “yields” of the 10-year and 3-month Treasury is a very closely watched economic indicator. That portion of the “yield curve” has inverted before all eight recessions since 1968, with only one false positive in the mid-1960s, according to the Federal Reserve Bank of New York. That portion inverted in October 2022, and it remains inverted today. In the past, a recession has followed within two years, except the one false positive. This means the yield curve signals a significant probability that the U.S. will slip into a recession by October 2024. What could a “recession” mean for the stock market?
A recession could sink the stock market, but there is a silver lining. The U.S. economy has suffered 10 recessions since the S&P 500 was created in 1957. For each recession, the peak decline in the S&P 500 follows:
Recession Start Date - S&P 500 Peak Decline
August 1957 - 21%
April 1960 - 14%
December 1969 - 36%
November 1973 - 48%
January 1980 - 17%
July 1981 - 27%
July 1990 - 20%
March 2001 - 37%
December 2007 - 57%
February 2020 - 34%
As shown, history suggests the S&P 500 would fall just about 31% if the economy dives into a recession. Drawdowns are varied because recessions are unique. A “forecasting” method is just that, a guess as all tools are imperfect. Attempting to “time the market” and sell before the recession starts then buying back in when it ends most often will backfire. Understanding that very principle leads me to buy additional solid dividend stocks and it’s best that you do the same.
The S&P 500 has historically rebounded four to five months before true recessions are over, generating a median return of 30% during that time period. Investors who sit on the sidelines until data proves the economy is in recovery will miss those gains, likely leading to long-term underperformance. Follow me as I’m pretty good at being a good “bottom fisher” where certain industry sectors turn before others, like oil exploration.
The Current S&P 500 P/E Ratio Is 30.9
The P/E ratio is a classic measure of a stock's value. The current S&P 500 P/E Ratio is 30.9. That’s 52.9% above the “modern-era” market average of 20.2, putting the current P/E 1.3 standard deviations above the modern-era average. This market is overvalued.
P/E ratios can only go so high. To justify a P/E ratio, that is consistently above its own historic average for long periods of time, the US stock market must not only continue to grow, but would need to continue to grow at a continuously increasing rate. With a declining interest rate environment coupled with an inverted yield curve this is not an easy task. Interest rates come down for a reason. Short term rates often decline when “things” are not good. I’ll dig into this ratio in my next article. It’s an indicator I use. Keep your eyes and ears on this one; everyone else does and you should too.
Watch The Repurchase Agreement Market
A reliable gauge measuring actual borrowing costs on loans between banks and other participants in the U.S. repurchase agreement “Repo” market just hit its highest level ever on Friday. It was launched about five years ago.
The Secured Overnight Financing Rate ‘SOFR”, measures the actual cost of borrowing cash overnight collateralized by Treasury securities. It hit 5.4% Thursday, its highest since April 2018. A spike in the price for repurchase agreements, is a sign that cash is getting scarce, a very important funding indicator for Wall Street.
Some market participants say the recent rise was directly related to borrowing costs increasing because many dealers have closed their books for 2023, simply limiting the availability of funding. The SOFR rate was still within the federal funds rate range of 5.25% to 5.5%. I don’t buy it as everyone has an excuse for everything. I’ll just keep my eyes and ears open for what happens next year.
That’s it for the last day of 2023. I’m just about half way finished with my first article of 2024 and it will hit the threads tomorrow. Like today’s, the article is being sent to all of you as my end and beginning of the year “special”. It’s my way of saying thanks to you all and from the response it’s working. Not only are more people signing up for the “free” version of Substack, the increase in those of you paying $99.00 annually for the “paid” version surged. Thanks, there’s a lot more coming and your support is very much so appreciated.
I adore Andrew Lloyd Webber’s “Cats”; Streisand too. So putting these two together is a no brainer, especially for me. All 2023 has to offer any of us is memories. I “learned” from my mistakes; how about you? I’m a user and a believer in Artificial Intelligence, for years actually, so tell me why I missed that rally? I’ll be there for the correction as nothing goes up forever, right? Time will tell. For now it seems like another Internet rally that was “going to the moon” but didn’t make it there. In any case, happy healthy 2024 to all and thanks for all you have done for me.