February 2024
WHAT YOU NEED TO KNOW
The following facts and statistics describe the financial situation in the United States from January 1 to February 14, 2024
The S&P 500 is up 5 percent from January 2 to present.
The S&P 500 P/E ratio currently is at 23, trailing 12 months and has a forward P/E based on issued guidance of 20.3 (the 15 year forward P/E is 16.1).
The NASDAQ up 6 percent from January 2 to present.
The Dow Jones Industrial Average is up 2 percent from January 2 to present.
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
The PCE price index (a favored index by the Federal Reserve) for December increased 2.6 percent for the same month one year ago. Prices for goods increased less than 0.1 percent, and prices for services increased 3.9 percent. Food prices increased 1.5 percent and energy prices decreased 2.2 percent. Excluding food and energy, the PCE price index increased 2.9 percent from one year ago.
According to ADP Employment 107,00 jobs were added in January with an annual pay increase of 5.2 percent. Nela Richardson, Chief Economist at ADP says, “Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay. Wages adjusted for inflation have improved over the past six months, and the economy looks like it's headed toward a soft landing in the U.S. and globally.
Job openings increased by 1.1 percent from 8.925 million in November to 9.026 million in December.
The U.S. unemployment rate for January is 3.7 percent, remaining unchanged from November and December.
The Employment Cost Index-- Compensation costs for civilian workers increased 0.9 percent, seasonally adjusted, for the 3-month period ending in December 2023. Wages and salaries increased 0.9 percent and benefit costs increased 0.7 percent from September 2023.
The Consumer Price Index for All Urban Consumers increased 0.3 percent in January on a seasonally adjusted basis after rising 0.2 percent in December. Over the last 12 months, the all items index increased 3.1 percent before seasonal adjustment.
The Core CPI (all items less food and energy) index rose 3.9 percent over the last 12 months, the same increase as the 12 months ending December. The energy index decreased 4.6 percent for the 12 months ending January, while the food index increased 2.6 percent over the last year.
Advance retail sales declined 0.8% for January, down from a 0.4% gain in December and worse than the estimate for a 0.3% drop. Sales at building materials and garden stores were especially weak, sliding 4.1%. Miscellaneous store sales fell 3% and motor vehicle parts and retailers saw a 1.7% decrease.
The yield curve between the 2-year and 10-year Treasury Bonds currently is -.32 and currently has been in this range since the beginning of November. The last 6 recessions have happened after the 2-year and 10-year yield curve reversed and turned positive.
The Federal Reserve’s Balance Sheet currently shows $7.633 trillion in assets. The Fed’s Balance sheet was at its highest in April, 2022 at $8.965 trillion in assets. The Federal Reserve has removed 15 percent in liquidity, but still remains 83 percent elevated above its pre-pandemic assets.
QUESTION FOR CONSIDERATION
With the continued rally in the stock market, despite the hotter than expected inflation data, is there still room for stocks to appreciate in value? With earnings season underway, as of February 8th, 67% of the companies in the S&P 500 have reported results for Q4 2023. Of those companies, 75% have reported earnings above estimates, which is above the 10-year average. Are we in a bull market, and does that mean every stock is a good investment?
THE BOTTOM LINE
Investors often fall into the trap of conflating the quality of a company's products, services, and brand with its investment potential. While it is undeniable that a strong business model, innovative products, and a reputable brand with consumer demand are crucial components of success, the critical factor that determines whether a company is a great investment is its valuation relative to its future earnings potential.
Consider the case of many tech giants. These companies have revolutionized their respective industries, redefined consumer expectations, and amassed legions of loyal customers. Yet their stock prices have at times soared to astronomical levels, far exceeding any reasonable assessment of their future earnings potential. In such instances, investing in these companies becomes less about the underlying business fundamentals and more about speculating on future growth, a risky endeavor fraught with uncertainty.
The allure of investing in great companies often blinds investors to the importance of valuation discipline. They become enamored with the company's success stories, innovative prowess, and market dominance, they overlook warning signs that the stock price has detached itself from reality. As a result they end up paying a premium for the company's perceived greatness, only to realize later that the lofty valuation was unjustified.
One of the most famous examples of this phenomenon is the dot-com bubble of the late 1990s. Investors poured billions of dollars into internet companies based solely on the promise of future growth, disregarding traditional valuation metrics like price-to-earnings ratios. When the bubble inevitably burst, many of these once-great companies saw their stock prices plummet, wiping out billions in shareholder value.
In contrast, some of the best investment opportunities often lie in companies that are overlooked or undervalued by the market. These companies may not boast the same level of fame or recognition as their high-flying counterparts, but they possess solid business fundamentals, attractive valuation metrics, and the potential for sustainable long-term growth.
Warren Buffett, arguably the most successful investor of all time, famously espouses the principle of "value investing," which emphasizes buying high-quality companies at reasonable prices. For Buffett, the key to successful investing lies in identifying companies with a durable competitive advantage, a strong management team, and a reasonable valuation relative to their intrinsic value.
Ultimately, the paradox of great companies underscores the importance of maintaining a disciplined and rational approach to investing. While it is tempting to chase after the next big thing or invest in companies with a stellar reputation, the true measure of investment success lies in buying great companies at the right price. By focusing on valuation and exercising patience, investors can avoid the pitfalls of speculation and position themselves for long-term wealth creation.
In conclusion, great companies do not always make great investments, especially when their valuation is disconnected from their underlying fundamentals-- which is happening right now to many stocks with the recent rallies. Investors must remain vigilant, resist the allure of hype, and focus on assessing a company's intrinsic value relative to its market price. By doing so, they can navigate the complexities of the market landscape and uncover hidden gems that offer the most promising investment opportunities and that’s the long and short of it!