Why I Don’t Buy Latest Bearish Sentiment on S&P 500

Last week’s video, “2 things that really matter, revisited” must have struck a chord with investors. Why? Because I guess based on that video, I got a few inquiries about whether our 1h24 outlook (1h24=1st half 2024 for the viewer who asked) and S&P 500 forecast of 5000 was still what we were looking for.  They took my tone and the content as negative vs. short term cautionary.  This week’s video title?  Chris S&P 500 = 5000? Why so bearish?

The OHFG investment team likes to look behind the scenes at some more institutional type data, financial instruments, and trading series than many other financial advisors.  With most of our team coming from larger institutional backgrounds, many of these factors lead markets and can be somewhat “predictive” of future moves more than most data series that are parroted by many on TV.  But remember investors, nothing is ever both 100% accurate and precise.  There is no “Perfect” in investing which is why one of the cardinal sins that most strategists will try to avoid is forecasting both time and price together.

Last week we readdressed our thoughts on real time inflation, which is once again rising, regardless of what last week’s investor inflation sentiment survey said. Here’s the updated chart on 2-year, real time, inflation.

Chart 1: the updated chart on 2-year, real time, inflation.

The cautious tone, and that’s all it was was tone,  I had during last week’s video, arises from the fact that inflation is seasonal and looks set rise throughout the rest of January into February on the back of many of the EXACT same reasons that goods inflation rose 18 months ago.

And secondly, the level and trend in the “Real” interest rate component within nominal yields. This is also called the TIPs interest rate.  This is the one that many market strategists finally discovered and started discussing as “critical”, almost universally in a negative manner, right at the market’s lows in late October 2023, right in front of the rip-roaring late 4th quarter rally.  Remember all of those CNBC and Bloomberg interviews with strategists spouting the Feds “higher for longer” message? Or discussing some academic notion of “R-Star” right at the market lows in stocks and yield highs in bonds? Unlike many others, we’ve spoken about real interest rates and real time inflation a lot over the last 2 years.  We will cover them again here.  Real time inflation and real time “real interest rates”, and unfortunately, opposite January 20th, 2023, they are currently saying to seasonally curb your enthusiasm here and there’s a pullback, that’s likely fast and furious forthcoming.

The problem now currently lies in that 1- investor inflation expectations of the symmetrical drop in inflation that our team has discussed for 18 months, have now caught up to market reality, 2- inflation is seasonal with it usually picking up in the 1st quarter, and 3 – inflation is set to rise throughout the rest of January into February on the back of many of the EXACT same reasons the repeat of the “1970’s inflation hysteria zealots” were discussing 18 months ago.

Here are a few of the current reasons for a likely seasonal upturn in inflation.  Yes, as we film, shipping rates are “skyrocketing on the back of the middle east Red Sea military exercise AND the low water levels in the Panama Canal.  Secondly, energy prices are troughing.  Whether it’s the cold weather in the US pushing natural gas prices higher the last 2 weeks, or Middle East turmoil turning the oil markets higher, higher energy prices are bad for inflation data and consumer sentiment.

Here’s a chart of real time 2-year breakeven inflation rates.  These are real time.  This isn’t government data that takes months to compile and disseminate and is revised.

Chart 2: Here's a chart of real time 2-year breakeven inflation rates

Recall that the two decent pull backs in 2023 came as inflation expectations were rising or no longer falling.  Those two time periods were in February and then late summer August through October.

Chart 3: Those two time periods were in February and then late summer August through October.

One can clearly see that historically 1- a lower trending level from a high level of inflation is good, 2 – a moderate and stable level is ok, a low level is ok if stable, but 3 -a higher trending reading is eventually a headwind for the markets.

The second thing we discussed last week was “real” interest rates. The real interest yield component of Treasuries goes a long way to determining the risk premium and PE multiple investors pay for equities.  Here’s that chart, the 2 year real interest rate.

Chart 4: the 2 year real interest rate.

The OHFG investment team’s bullish call for the S&P 500 to rally strongly into yearend 2023, back toward all-time highs was mainly due to us seeing the top and trend change in this key PE, price to earnings multiple factor.

It peaked as virtually every strategist on TV was out parroting the Fed’s phrase “higher for longer” and talking academic nonsense around theoretical R-star levels. This one piece of data and this chart is almost entirely behind the November and December stock market rallies around the world and more importantly behind last weeks rally in growth and technology stocks in the Nasdaq index here in the United States.

But Chris, why are you not more optimistic about the markets this year I’ve been asked as the market has probed new all-time highs.  I admittingly have to hold my tongue when I ask this.  Why?  Because I and by no means bearish on the markets for the first half of 2024.  How could I be, I’m one of the few CIO and analysts out there that have been out talking for over a year that while the markets have been mirroring the internet bubble od October 1998- 1h2000, that we still had room to run in the upside for the first half of 2024. My view on this hasn’t changed.

Here is the overlay of the S&P 500 then and now.  For what its worth, my 5000 objectives do understate the S&P 500 versus the prior time as a true mirror of the internet bubble could take the S&P 500 to about 5125 short term in the first half.  However, remember investors that 5000 is about a 4.25% gain over 6 months and 5125 would be slightly over 6%. At 4100 in late October of 2023, when we held our livestream. projecting S&P 500 5000 for late 1q24 yields an almost 22% gain over just 8 months.  That’s a bullish call.  The S&P 500 having done what we thought is would, its hard to be a raging bull in % terms.

As for two other dotcom period overlays.  Here’s one of the Philadelphia Sox semiconductor index then and now.

Chart 5: Here’s one of the Philadelphia Sox semiconductor index then and now.

And another of the Nasdaq Index which largely contains most of the Magnificent seven.

And another of the Nasdaq Index which largely contains most of the Magnificent seven.

And finally just for giggles, or maybe to scare some of those who remain steadfastly bearish or short.  I ask which large cap technology stock came public in early 1999 near the beginning of the dot.com bubble?  If you guessed NVDA?  You would be correct.  Here’s that overlay here and now.

Chart 7: NVDA

So, to answer my viewers question, Chris why are you so bearish?  Once again, I am not yet, but having done this for 30 years, I know, and the data says, even during the internet bubble, stocks didn’t go up every day in a straight line.  In fact the month of February 2000 was quite a wild ride for tech stocks.  And those who refrained from chasing stocks into option expiration Friday January 21st, 2000, and waited a few weeks, were happily rewarded with a better buying opportunity on most of the leading names in the markets.

Remember, the title to our first half 2024 outlook was More of the Old Normal, Searching for Goldilocks, volatility, and Presidential Cycles.

Thank you for taking the time to watch and have a blessed week and a fantastic new year.

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