Barron’s Weekend Summary: On November 5, US voters will face the same choice for president as in 2020
Cover:
-On November 5, US voters will face the same choice for president as in 2020: Joe Biden or Donald Trump. The electoral outcome will likely remain a close call until the final ballots are counted. However, there are important differences this time around, for better and worse. The US economy is booming in ways unimaginable back when the nation voted in 2020, and the nation's debt load is also booming. The US owes its creditors a record $34T, and the net cost of interest on that debt now stands at $650B. Biden and Trump are vying to lead the country in profoundly different directions, which means a new spin on familiar questions about America's indebtedness and sharply divergent views on taxation, regulation, and the role of the state.
Interview:
-This week, Barron’s has interviewed Daleep Singh. The Biden administration has rehired Daleep Singh, former deputy national security adviser for international economics and global chief economist of PGIM Fixed Income, who was confirmed to be resigning from his government role. Singh was involved in the response to Russia's invasion of Ukraine in 2022 and helped design the price cap for Russian oil by the Group of Seven countries, including the U.S. He also has a background in private markets. Singh recently spoke to Barron's about the intersection of geopolitics and markets.
Tech Trader:
-Wall Street has been accused of miscalculating the value of public companies, as seen in recent tech earnings reports. The sum-of-the-parts strategy, which suggests that a company's assets are worth more than its current value, has not always been effective. For instance, in a July 2022 cover story about Amazon.com, the author argued that the stock could double or triple based on a sum-of-the-parts analysis. However, Amazon's recent 40% rally was largely due to the emergence of artificial intelligence, cost-cutting in logistics, a growing ad business, and a rebound in e-commerce. Similarly, SoftBank Group, a Japanese tech holding company, was undervalued by up to 50% based on its underlying assets. Despite the initial success, SoftBank's stock has since fallen 16%. Today, SoftBank's biggest asset is its 90% stake in Arm Holdings, a chip design firm worth $116B. The sum-of-the-parts math remains compelling, but caution should be exercised.
The Trader:
-Investors are increasingly realizing that macro conditions don't warrant rate cuts soon, and if recent job-creation trends continue, there might only be two or three cuts in total this year. Deutsche Bank's chief US economist, Matthew Luzzetti, suggests that investors might even consider the possibility that there will be no cuts in 2024. He offers three conditions for this to happen: the Fed's estimate of the neutral rate needs to be adjusted higher to about 3.5%, unemployment needs to remain below 4% while other economic data remain solid, and inflation must remain sticky. The second and third conditions merely require January trends to continue, with the first a matter of debate. However, the market might be able to withstand a handful of fewer rate cuts if a strong economy and robust labor market are good for corporate revenue and earnings.
-The S&P 500 index has seen a 28% return over the past year, outperforming the Stoxx Europe 600, Canadian S&P/TSX Composite, UKX, and China's Shanghai Composite. Tokyo's Nikkei 225 has topped the S&P 500, but it is still 2% below its all-time high set 34 years ago. This outperformance has led experts to argue that the end of American exceptionalism is near. The S&P 500 currently trades for 21 times expected earnings in 2024, compared to 20 times for the Nikkei, 13 for the Stoxx 600, and 11 for the FTSE 100. However, international stocks are not as cheap as they appear. The gap in valuations and recent returns is due to the composition of the indexes and the type of companies traded on each exchange. The Nikkei has 28% of its market value in tech, which has outperformed, resulting in higher valuations.
Features:
-General Motors has nearly doubled the network of roads open to its Super Cruise hands-free driving technology to 750,000 miles, making it the largest network in North America. Super Cruise can perform many driving tasks and requires human supervision 100% of the time, just like other auto makers' systems. Tesla drivers may be confused by the largest comment, as their driver assistance tech, Enhanced AutoPilot and Full Self-Driving, works anywhere but requires drivers to touch the steering wheel to show the system they're paying attention. Both systems enforce safety and require drivers to pay attention and not game the systems. Tesla doesn't limit its driver assistance to a set number of roads, but its systems will tell a driver to take over if it can't see road lines or bad weather. Tesla's aggressive approach to self-driving technology deployment is one reason its technology is more heavily scrutinized than other auto makers.
-Eli Lilly, a drugmaker, has seen a 140% increase in its stock price over the past 12 months, prompting Morgan Stanley analyst Terence Flynn to question if the stock could reach a market value of $1T. Flynn raised his price target to $950, implying a 25% increase from the stock's closing price. Lilly is on track to close with a market capitalization of $749.2B, making it the eighth-highest valued stock in the S&P 500. The stock is on track for a record high, with shares rising 4.1% to $788.58. To reach $1T, the stock would need to reach $1,053.40.
Europe:
-Germany's economic prospects are reminiscent of the term "PIIGS" used during the euro zone crisis to describe struggling Southern European countries. The country's current economic situation raises the question of expanding the acronym to include Germany and spell "PIIGGS" from now on. Europe's economic taskmaster has proven incapable of urgent structural reforms for over a decade. Germany's structural reform needs focus on allowing the private sector to succeed, as its "social market economy" relies on its private sector's output. Simplifying regulatory burdens and digitizing public sector planning processes are essential for achieving goals like housing stock building and decarbonizing energy infrastructure. The German government should encourage technological solutions to core problems rather than prescribing specific paths. The country's rise in the Green Party has led to technological skepticism, which does not align with the country's success in world markets.
Emerging Markets:
-no update this week
Commodities:
-The Producer Price Index (PPI) has revealed a 0.8% rise in services excluding trade and transportation, the second largest monthly rise in over 14 years. This is not a good look for an economy already grappling with sticky services inflation. The PPI raises the risk that even the January PCE will come in hot, potentially causing the hearty inflation results to spill over into February. The real test will be whether the hearty inflation results spill over into February, as many firms are seizing on the calendar turn to hike prices.
Streetwise:
-Nvidia, the third-largest company in the S&P 500, has surpassed Amazon.com and Alphabet to become the third-largest company in the market, behind Apple and Microsoft. This has given it a significant pull on index fund returns, with its $1.8T market value being more than 4% of the S&P 500. Nvidia's rise is a key reason why the index has returned 22% over the past year. However, the same bull who compares Nvidia to Apple also warns that Nvidia will have to "thread the needle" when it reports its fourth-quarter financial results. This is concerning, as the best-case scenario involves twisting, a bit of saliva, and hopefully no blood. Ben Reitzes, head of technology coverage at Melius Research, believes that Nvidia's stock will have to "thread the needle" when it reports its fourth-quarter financial results.