Barron’s Weekend Summary: The stock market has seen a 130% rally since March 2020
Cover:
-The stock market has seen a 130% rally since March 2020, reaching a record high and fetching 21 times expected earnings over the coming year. However, the past year's gains are primarily due to the outperformance of seven "magnificent" stocks. The Federal Reserve is expected to delay cutting interest rates until inflation is subdued. This leaves the market vulnerable to a near-term correction, defined as a 10% drop. The best case for the stock market's continued gains depends on the outlook for a strong economy, which will generate more earnings growth for more companies, allowing the rally to broaden. A good economy is good for earnings and allows the Fed to take its time lowering rates. The US real GDP grew by 2.5% in 2023, silencing skeptics who had called for a recession or banking crisis.
Interview:
-No interview this week
Tech Trader:
-Artificial intelligence (AI) is transforming the tech sector, with companies like IBM, Salesforce, HPE, and Dell Technologies experiencing significant stock gains. IBM's WatsonX AI platform has led to a 20% increase in its stock this year and over 50% over the past 12 months. Salesforce's shares have also seen a 16% increase this year, and HPE's shares have rallied over 20% due to high hopes for its AI server business. Dell Technologies' shares have spiked 55% this year. SAP, a German software giant, has long dominated the market for enterprise resource planning (ERP) software, used for critical corporate applications like accounting, compliance, and supply chain management. Historically, installing a new ERP system was complex, requiring significant time and capital commitments, and posing a risk of business disruption.
The Trader:
-The stock market has continued its strong performance in 2023, with a shift in the top positions. Apple, Tesla, and Alphabet have fallen, while Nvidia and Eli Lilly are ascending. This is due to the growing economy and the market's potential for future cash flows from innovations in artificial intelligence and healthcare. The S&P 500 index, which has been at the top since 2018, has notched its 16th record of 2024. However, the Dow Jones Industrial Average and Nasdaq Composite fell, while the Dow Jones Industrial Average and Nasdaq Composite fell. The S&P 500's market-cap leader board has been dominated by Alphabet, Apple, Amazon.com, and Microsoft since 2018, but this reshuffling is happening beneath the surface.
-New York Community Bancorp's $1B rescue and a new CEO are expected to alleviate investor concerns about regional bank stocks. The KBW NASDAQ Regional Banking Index has lost 7% since NYCB's January 31 dividend drop and loan loss reserves increase. The industry is in good shape, with only three out of 4,700 banks in trouble last year. Capital levels and tangible book values are rising among the banks KBW follows. If the Federal Reserve's rate cuts are implemented, KBW believes bank margins and earnings should resume growth in 2025. However, regional bank valuations remain weak, with banks trading at less than 60% of the S&P's forward earnings multiple. KBW recommends large regional banks like US Bancorp and Truist Financial, while smaller regional banks like Synovus Financial and Old National Bancorp are recommended.
Features:
-The Nikkei 225 index in Japan is still near record levels, driven by economic and policy-related factors. The index hit a closing record of 40,109 earlier this month, decades after its previous record close at 38,915 in 1989. The Tokyo market has gained roughly fivefold since its bottom in 2009, at around 80% below its peak. Despite a slight dip to just under 39,700, the Nikkei is up about 18% for the year, mainly due to investors willing to pay a higher multiple of anticipated near-term earnings for stocks. The government's changes regarding corporate governance have increased earnings per share and strengthened the market's confidence in the quality of companies' financial reports, driving up valuations. Companies must provide shareholders with a clearer view of their financial condition, and the government is pushing companies to allocate capital more efficiently.
-Boeing is overhauling incentives for some workers in its commercial aerospace division, with safety and quality metrics determining 60% of annual bonuses. The balance is a mix of financial-based metrics, with safety and quality metrics remaining 25% of bonus scores in Boeing's defense business. Boeing COO Stephanie Pope emphasized the importance of delivering a safe and quality product to customers. Boeing stock closed down 2.2% in Friday trading at $198.49, signaling that fixing quality, manufacturing, and design problems is a long process. The recent moves come after an emergency door plug blew out of a 737 MAX 9 flight operated by Alaska Air in early January. The FAA grounded all MAX 9 jets after the incident, but they were returned to service after inspection and repairs. All MAX jets were grounded worldwide between March 2019 and November 2020 following two deadly crashes tied to faulty flight control software. Boeing stock was north of $400 a share before the second fatal MAX crash in March 2019.
Europe:
-Farmers across Europe are protesting against the EU's environmental and foreign policy, with some even threatening to show police with liquid manure and eggs. This wave of protests could help far-right parties gain a quarter of the European Parliament in the upcoming elections. Agriculture is an under-recognized contributor to pollution and climate change, emitting nearly two-thirds of the carbon emissions in Europe. European Commission President Ursula von der Leyen has championed a green revolution in farming, aiming to halve the use of pesticides and chemical fertilizers by 2030. However, Russia's natural gas cutoff has increased energy and fertilizer prices, and soaring interest rates have restricted farmers' ability to borrow. As of 2024, farmers can't afford the burdens, and the focus on the environment has led to a U-turn away from the ambitious Green Deal. The EU's long-pending free trade deal with South America's Mercosur bloc is likely to be a casualty, as negotiations are unlikely to be concluded under these conditions.
Emerging Markets:
-No update this week
Commodities:
-Gold is trading at a record of $2,200 an ounce, with alternative currencies like Bitcoin also gaining attention. The VanEck Gold Miners exchange-traded fund trades at roughly half of what it fetched back in 2011. ETFs have shown a waning interest in alternatives to government-issued money, with the SPDR Gold Shares' total assets exceeding those of the SPDR S&P 500 Trust. However, gold has continued its bull market, with central banks being active buyers, adding 1,037 tons in 2023, just shy of the previous year's 1,082 million purchases. China continues to be an active buyer, holding 2,245 tons at the end of 2023. Gold has advanced despite headwinds from higher interest rates and a firm dollar. John Hathaway, senior portfolio manager at Sprott Asset Management, believes that gold has decoupled from its traditional inverse correlation with interest rates. The gold mining industry's stock market value is about $300B, less than that of Mastercard or Home Depot alone. Gold mining stocks are valued at steep discounts to the current gold price, setting the group up for a sharp mean reversion.
Streetwise:
-Jack Hough has changed his Bitcoin rating Incognito Unclear, indicating uncertainty about its future price. Other assets, such as gold and U.S. stocks, have also seen significant growth, with the S&P 500 being deemed "egregiously expensive" by Bank of America. However, Bitcoin has tripled in value over the past year, reaching $67,000. The author first wrote about Bitcoin in June 2011 for SmartMoney.com, calling it the "top-performing money in the world."
JP Morgan has used the model of treating Bitcoin like digital gold due to their shared characteristics: limited supply, fungible and divisible stores of value, not under government control, and durability. Bitcoin has outlived the publication where it first wrote about it, with the value of all mined gold estimated at close to $15T. Private investors hold gold at $3.3T, and Bitcoin's market cap is around $1.3T.
JPM adjusts Bitcoin's fair value downward for its volatility, but Reda Farran, an analyst at Finimize, believes this adjustment is too harsh due to Bitcoin's falling volatility and slower supply growth than gold. Farran suggests that if Bitcoin is as good as gold, it might point to a substitution effect pushing gold's price lower, rather than reaching record highs.
Furthermore, Farran points out that central banks have been offsetting this substitution effect by buying gold, which is evident in ETF flows. While the author is too square to turn bullish now, there are creative workarounds for those tempted by bitcoin ETFs or wondering when to sell.