Barron’s Weekend Summary: The 2024 Barron's Roundtable predicts a disappointing stock market
Cover:
-The 2024 Barron's Roundtable predicts a disappointing stock market with returns of minus-5% to plus-5% for the year. They don't anticipate a recession and expect the Federal Reserve to lower interest rates. However, they worry about stocks being too richly valued, leaving little margin for error. Some investors see massive capital investment, new technologies, and investor interest in the 493. The roundtable featured newcomers Rajiv Jain from GQG Partners and John W. Rogers Jr. from Ariel Investments. The group also discussed politics and investment picks.
Interview:
-No interview this week
Tech Trader:
-At CES 2024, PC makers are preparing to ship laptops powered by new processors from Intel, Advanced Micro Devices, and Qualcomm, including "neural engines" capable of running large language models and AI software. Intel's general manager, Michelle Johnston Holthaus, declared that AI is everywhere, transforming, reshaping, and reimagining the PC experience. Lenovo's president of international markets, Matthew Zielinski, believes that PC units should show low-single-digit percentage growth this year, potentially reaching double-digit growth in 2025. Microsoft is excited about the potential of its AI-powered Copilot software, which will launch keyboards for Windows-based PCs with a dedicated button. However, there is no real clarity on what AI PCs will offer, and retailers must train them to teach consumers about the benefits of AI.
The Trader:
-Tesla's stock fell by 3.67% after electric vehicle companies cut prices in China. The Model Y and Model 3 prices fell between 3% and 6%, with the base version starting at $36,000 and the Model 3 at $34,500. Tesla shares finished down 3.7% at $218.89, while the S&P 500 rose 0.1% and the Nasdaq Composite ended flat. Tesla aggressively cut prices globally in 2023 due to higher interest rates and EV competition. The pace of price cuts had slowed later in the year, with a US Model 3 starting at $47,000 in 2022 and ending at $39,000.
-FedEx's stock has dropped 11% since December 19, with the company predicting a low single-digit sales rate for fiscal 2024. The decline was attributed to a decline in shipments and rising prices. However, management maintained its profit outlook, calling for per share earnings at $17.75. FedEx is overhauling its cost structure for 2024, with analysts expecting an operating margin of 7.5%, up from 6.5% this year. Greg Branch, founder and managing partner at Veritas Financial, believes FedEx deserves the benefit of doubt as they have a cost plan in place.
Features:
-The United Auto Workers Union's record wage increases from Detroit-Three auto makers have not significantly impacted new car prices, according to Kelly Blue Book. The average transaction price for December 2023 was $48,759, up from $48,247 in November but down 2.4% year over year. This rise in prices is attributed to seasonal factors and the fourth consecutive month of year-over-year declines, which is "unique."
-Oil investors have remained relatively calm amid rising Middle East tensions, with the risk of a price shock rising. The US and Great Britain attacked areas controlled by Houthi militants in Yemen, signaling a new level of violence in a fight that has been brewing for weeks and has serious consequences for the global economy. The Houthis have almost completely shut down the Red Sea, impacting 15% of global shipping, including oil and liquefied natural gas. Despite this, oil prices have barely budged as the conflict worsens. Analyst Helima Croft suggests that oil investors may be complacent about the steepening risks related to Middle East violence, as traders are hesitant to bet on oil rising due to a fear of overreacting.
Europe:
-Tesla is set to halt production at its German factory for two weeks due to Red Sea shipping attacks extending transport times from Asia to Europe. The disruption is affecting global supply chains and threatening to derail the fight against inflation. Tesla will stop nearly all production at its factory near Berlin from January 29 and resume production on February 12. Tesla shares were down 1.6% in early trading, while the S&P 500 and Nasdaq Composite were both up about 0.5%. The delay is not the most likely reason for the drop, as Tesla cut prices on its electric vehicles in China by 3% to 6%. The company reported operating profit margins of almost 17% in 2022 and is expected to improve in 2024.
Emerging Markets:
-Javier Milei, the new president of Argentina, has been praised for his swift and decisive government, which has seen Argentina's hard-currency bonds rise to the mid-30s. He has promised root-and-branch reform, addressing the state's deficits and overregulation, which are pushing inflation past 100% annually. Milei has cut the official exchange rate of the peso, abolished controls on food prices and rents, loosened labor restrictions, and prepared state companies for future privatization. Additionally, Economy Minister Luis Caputo has unveiled a package of tax increases and spending cuts to shrink Argentina's budget deficit by 5% of GDP.
Commodities:
-US natural gas prices have surged due to cold weather and new attacks on Red Sea shipping routes. Futures for US natural gas jumped 7%, reaching their highest since November, and have risen over 13% this year. Cold blasts could increase demand and lock in production, while continued tumult in the Red Sea has added to global supply concerns. The US produces more natural gas than it consumes, selling the surplus into global markets. The Red Sea attacks could drive energy prices higher by making it more expensive to ship liquefied natural gas to Europe and Asia.
Streetwise:
-Flight demand in the US is increasing, with legacy airlines expecting strong first-quarter results. Despite the temporary grounding of Boeing's 737 Max 9 fleet, the companies appear poised for profitability in both up and down cycles. However, shares in airlines like United Airlines Holdings and American Airlines Group have been lagging behind the market. Analyst Helane Becker, who covers airline shares for TD Cowen, believes that the industry is better for trading than long-term investment due to short-lived positive investor sentiment. Other analysts are more open to the possibility of airlines outperforming for longer, with industry profits for the largest airlines down only 19% from pre-pandemic 2019, but market values down 61%.