TSP Smart: 13 August Market Commentary

When it rains it pours…BCC…BCC…BCC…BCC

Time to catch up on some charts I could not post the last week.

Here is a chart I’m watching to see if the Bank of Japan intervenes in the market again like last October helping the US stock market bottom and US yields to pull back. We are approaching the same level, but it is possible that as long as the rise is orderly they will let it go this time.

…but the mega cap drivers of the rally broke trend (see green plot). This greatly increases the odds we have a peak in and more of a pullback coming.

Within the Mega Caps are the Magnificent Seven who hold about 25% of the entire US markets value. The Mega Caps are the 50 largest companies and they hold more than 50% of the SP500 value. They’ve gotten a little pricey relative to the rest of the overpriced market…

Here is another perspective on the distorted gains within the US market. The largest 50 stocks have captured 28% returns while the bottom 2000 (60% of the companies) have only returned 8%.

So putting it together, the extremally over-valued mega cap stocks broke trend to the downside at the beginning of the 3 worst months of the year for stocks.

So what is taking so long for the market to adjust to higher interest rates. Primarily the false belief and false narratives that inflation will quickly fall and so interest rates will returned to their old suppressed low rates.

Energy has been subtracting from CPI for the last year, but it has now gone neutral and will soon start adding to inflation again unless oil prices plunge again. Since we depleted our strategic reserves by 40% to help oil come down in price the last year, this trick is not going to happen again.

Higher headline inflation is baked into the end of the year and beyond. The message from the Fed that interest rates will remain higher for longer will begin to penetrate the near-sighted stock market via investors soon.

For now we will consider only a pullback. The SP500 should lose 9% to return to its longer upward trend. I expect it to break below this trend line in 2023.

Another misleading statistic today is employment. What’s changed is more boomers are retiring than young people are entering the job market. This is a first. So what this means is if unemployment stays constant, we still have 800,000 fewer workers per year in America.

Some economist seem to be ignoring this. They keep expecting unemployment to creep up thanks to higher interest rates which will slow wage inflation. But again, we can lose 700,000 workers and see unemployment numbers fall and wage pressure increase.

Inflation is back to stay. Not at 9% hopefully, but 4% is the new normal in time. And that implies over 5% 10-year treasuries and 7-8% mortgages. Prices will simply have to catch down to this new reality.

The Nasdaq-100 is dominated by the Magnificent Seven and tech. It had a huge run in 2023. And it too broke the short term trend. And why not, the Magnificent Seven revenues in aggregate have been declining of over a year. The question is why did they rally on declining revenue. My members know the answer by now hopefully.

Inflation anyone

So here is my bottom line…

Invest Smart,

Michael Bond

Categories: Perspectives

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