“I think there are some groups of stocks that are highly vulnerable because they’re in cuckoo land in terms of valuations.” These words from the controversial but always entertaining Marc Faber1 could not be more succinct given current equity market conditions. The post-pandemic rally in global stocks has the All-Country World Index (ACWI) up almost 150% from the lows in 2020. The S&P 500 has been even stronger over the same timeframe leaving stocks in expensive territory. Some would argue that valuations don’t matter because global stocks have been expensive for years and they keep marching higher. Further, the S&P 500 is especially overpriced relative to the rest of the world according to numerous indicators including the Cyclically Adjusted Price-to-Earnings Ratio (CAPE2), but the U.S. market has generally outperformed since the end of the 2008/2009 financial crisis (Chart 1). It’s important to note that valuations should not be looked at in isolation. Sometimes higher valuations are warranted by higher growth prospects.
Q3 2024 Market Outlook
Maybe it really is different this time. A typical business cycle usually consists of an overheating economy followed by higher policy rates imposed by central banks. This eventually leads to a slowing economy, and in 6 out of the last 7 monetary tightening episodes in the U.S since 1970, the economy has fallen into recession. Higher lending rates slow consumption, leading to layoffs, which further slows consumption and more layoffs, and so on. However, this cycle has been different so far. When the Fed began raising interest rates in 2022 to fight inflation, the personal consumption response was much more muted than usual, thanks to previous emergency pandemic stimulus. The U.S. economy has slowed somewhat in response to tighter monetary policy, but employers have been mostly reluctant to implement significant layoffs with the fresh and painful memory of the 2020-2021 pandemic reopening when consumer demand rebounded sharply but employers had a hard time finding workers to satisfy demand. So-called “labor hoarding” has become a significant attribute of the current economic cycle, which has contributed to the relative strength in the labor market, consumption, and the economy in general.
Q2 2024 Market Outlook
As we reflect on the events of the second quarter, it is increasingly evident that we are witnessing a persistent tale of two markets in the U.S. It’s been the best of times for the largest U.S. stocks which have consistently delivered exceptional returns, fueling much of the stock market's ascent to all-time highs. These companies, characterized by strong fundamentals, sustainable growth prospects, and resilient business models, have exerted a disproportionate influence on global stock market performance. The U.S. stock market is now more concentrated than ever, with the top ten stocks representing 35% of the S&P 500. Even during the dot-com era, the combined weight of the top ten stocks peaked at only 25%, albeit the technology companies of today have stronger profitability and more sustainable business models. To look at it another way, the Magnificent 7 stocks are now worth more than the combined stock markets of Japan, Canada, and the U.K. Stripping out these seven stocks, the rest of the U.S. market has performed in-line with the rest of the world since the beginning of 2023. While some sectors and companies have shown resilience and growth, a significant portion has not kept pace with the highflyers.
GenAI, Utopia or Dystopia?
In the last 18 months, generative artificial intelligence, or GenAI, has inspired the world’s imagination for a brighter future, a future where we can get things done more easily and contribute to solving problems from healthcare to climate change, to education, to poverty and hunger. Some have equated the transformations that AI might bring to the industrial revolution or the introduction of electricity. Before we get carried away, what exactly is GenAI? In its simplest definition, GenAI is the ability of computer systems to process vast amounts of data, learn from it iteratively and present solutions in a very timely manner, sometimes better and faster than our own human intelligence.
Q1 2024 Market Outlook
Incredibly, we’re now four years removed from the start of the COVID-19 pandemic, which ushered in a period chock-full of uncertainty. We witnessed the uncertainty personally, a lived experience that will never be fully conveyed in future generative AI searches. But we also saw it expressed in the global stock market. Sharp stock market moves, whether up or down, typically result from significant surprises — an unexpected event, technological innovation, or profit impact that companies or investors did not foresee. Perhaps we can define a sharp reaction as a stock market that is up or down by more than 5% in a calendar quarter — an annualized move of more than 21%. Over the past four years, 81% of quarters have seen a move in the All Country World Index (ACWI) global stock index of greater than 5%, including this past quarter. How does that compare with prior years? In the dozen years immediately preceding the pandemic, only 56% of quarters had moves of more than 5% in either direction. The start of the 2020s has certainly been far from boring.