Past
Commentaries
7/21/2023
Current Commentary
To My Clients, Friends & Observers:
If, as and when we have our next recession, the market seems to be telling that it will be brief, shallow or not at all. The variety of analysts I read have the probability of a recession of some sort between 35% and 95%. The Federal Reserve continues to raise rates a quarter point at a time and odds are it will raise again this month but not in September. Inflation is sticky but declining. Money supply growth is nil, credit card balances have expanded, corporations are raising prices as much as they can get away with, consumers’ confidence and expectations have improved and they will continue to spend until they can’t. Slower growth suggests that may be happening.
The S&P 500 Index was up 8% in the second quarter. While we use the Index as a proxy for “the market,” it is worth noting that seven stocks in The S&P 500 have grown to fully 25% of the Index’s total, a significant overweighting. Those stocks, the “magnificent seven,” are Microsoft, Apple, Nvidia, Amazon, Meta, Tesla and Google. There is not a lot of breadth in the advance. In fact only 48% of NYSE stocks are trading above their 30 week moving average. It should be over 75% to confirm bullish momentum.
The Index advance resulted in P/E expansion. The S&P now trades at over 26 times its earnings, with a dividend yield of 1.5%. Second quarter earnings actually slowed. Stocks that “beat analysts expectations” did so because analysts continually lowered their estimates. So a combination of lower E and higher P resulted in multiple expansion. Looking at the index sectors, the greatest price advances were in industrials. Financials, telecom, basic materials, healthcare and utilities were all down.
It's worth noting that the drop in oil prices from $98 a barrel a year ago to $76 today has been a significant contributor to inflation relief and economic stimulus.
Eventually the S&P will return to 4,800 and beyond. It’s not if, it’s when. Presently, the market is overbought and due for a breather.
The Federal government debt reached 129% of GDP as of December 2022. However, the total debt, state, federal, corporate and institutional in the U.S. is 340% of GDP.
The cost of servicing that debt, the higher interest payments with current higher rates, is a concern. The debt service is presently 13% of tax revenues. When it reaches 14% it has typically resulted in austerity of some type.
Ray Dalio, founder of Bridgestone Associates, the world’s largest hedge fund, looks at the global landscape from a historical perspective and makes three observations:
- We are experiencing the greatest debt assumption and fastest money printing since the period 1930 – 1945;
- We have the greatest gaps in wealth, income and values, and the greatest growth of populism since 1930 – 1945;
- We are experiencing the greatest international conflict since 1930 – 1945, between the U.S. and China.
Ian Bremmer, political scientist and global consultant (president of Eurasia Group) considers the possibility of a two-superpower cold war but does not write off the considerable influence of Japan and India and the potential for a cooperative, digital, re-globalization. The new, third, global superpower – the elephant in the room if you will - is technology and the corporations that control it. You can google his most recent TED talk. It’s an excellent presentation.
I close with the remarks of Thaddeus Meadows, an intern at the American Institute for Economic Research, which is a vendor to Brae Head, Inc., on why he studies economics:
“When I look at the world now, I see literally billions of people who have never met one another, who know nothing of one another, all working in pursuit of their own interests. But those billions of free wills are coordinated through the mechanism of prices to satisfy the needs and wants of just as many billions. Let me say that again. Billions of free wills, and you can predict their behavior with a couple of crossed supply and demand curves.”
Kind regards,
Dennis M. O’Connor
