June 14, 2024 | Read Online

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"Just tell me the bad news; the good news will take care of itself."

— Charlie Munger on investing

Friday breakout charts

Financial markets tend to focus attention on the downside, and that is just human nature — in markets, as in life, we're always assuming things will get worse.

Usually, though, they're getting better.

The disconnect perhaps explains why equities typically outperform bonds.

We have 100 years of data showing that US equities do better than bonds over nearly every timeframe, and yet we still underprice them most of the time — probably because we're always so sure things are about to get worse, even just staying the same is an upside surprise for the stock market.

We're not always expecting the worst, of course — we do occasionally get optimistic and start expecting the best, too.

With the S&P 500 breaking out to another new high this week, it feels like we may be gearing up for one of those rare occasions.

Focusing on the upside is usually the right thing to do — even when markets are at an all-time high.

Counterintuitively, buying at all-time highs produces better returns than buying randomly.

Or maybe it's not so counterintuitive? It only requires a cursory look at a long-term chart of the S&P to see that all-time highs are most often followed by more all-time highs.

Until they're not, of course.

Our rare bouts of optimism occasionally morph into an even rarer bout of irrational exuberance and that always ends badly.

But irrational feels a long way off still — equities have been churning slowly higher, earnings estimates have nearly kept pace with prices, and no one seems particularly exuberant about things.

Our propensity to become irrational therefore remains an upside risk for markets.

The only thing that might be in bubble territory is the hype around AI.

But even that may not yet be irrational.

In a talk last week, Nvidia CEO Jensen Huang said we're only "at the cusp" of a new paradigm of computing, where data centers housing millions of GPUs will operate as vast, unified computers.

If so, the current AI boom may last longer than anyone expects, there will be a construction boom to build all the data centers needed to process it, and we'll need an energy boom to power the data centers (perhaps with the next-generation nuclear power plants that Bill Gates announced this week).

All of which would happen at the same time baby boomers start enjoying their retirement by spending down some of their $76 trillion of net assets on restaurants, cruises, healthcare and Rolling Stones tickets.

If equities melt up from here, it will all look obvious in hindsight.

It's not obvious, of course — in markets, nothing ever is.

But history suggests it pays to be optimistic, even at the all-time highs.

Let's check the charts.

The optimistic news on inflation:

Wednesday's CPI data showed consumer prices were unchanged from April to May, and this morning's data was even better: Producer prices fell 0.2% on the month. The two reports suggest the market may be overly worried about inflation and if so, equities may be poised to "crash up."

Consumers are pessimistic:

Consumer sentiment fell for a third straight month, according to the University of Michigan Survey out this morning. Are we all irrationally pessimistic?

We really don't like inflation:

Nate Silver says the recent disconnect between optimistic businesses (dark blue, above) and pessimistic consumers (light blue) is because of inflation. Companies are making money and people are getting jobs, but if you're not a company or not a job seeker (or changer), you mostly just notice prices going up.

Maybe they're all value investors, too?

If you're not invested in US mega-cap growth stocks, the equities breakout to new highs won't be doing you much good. Value investors are having an unprecedented run of underperformance.

Choose carefully or just buy them all:

The top six tech stocks have added $3.8 trillion of market capitalization this year vs. $1.8 trillion for the other 493.

Irrational yet?

The correlation between the normal S&P 500 (weighted by market capitalization) and the equally weighted S&P 500 (ticker RSP) is at a 20-year low.

The first time since the last time:

Even within the tech-heady Nasdaq, things look unbalanced. @jasongoepfert notes that while the index is making new all-time highs in nine of the last 10 days, more Nasdaq stocks have closed at 52-week lows than highs — something that's only happened once before, in 2007.

Maybe there are reasons, though?

Investors piling into mega-cap tech may be rationally following the fundamentals. @KevRGordon notes that large-cap EPS (in white) is up 12.5% from the start of 2023, while mid-cap EPS (in blue) is now 7.2%.

So, is this a buyable breakout then?

It may feel irrationally optimistic to think so, but the optimists are more often right than wrong in markets — and in life, too?

Have a great weekend, breakout readers.

— Byron Gilliam

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This episode Warren Pies Founder of 3Fourteen Research joins the show to discuss the current state of markets with oil trending lower, markets continuing to rally & a pivotal FOMC next week.

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Mohamed A. El-Erian @elerianm

In another morning of lower US yields, the 10-year is now trading below 4.20%, including on the back of indications of flows out of French bonds.
The volatility in this global benchmark has been extraordinary.
In just the last month, the yield on the US 10-year has been ...
Up… x.com/i/web/status/1…

Jun 14, 2024

251 Likes 51 Retweets 29 Replies

matthew sigel, recovering CFA @matthew_sigel

Replying to@matthew_sigel

This is my favorite chart. Investment advisors manage 20x the AUM of hedge funds. There is no way they will own the same amount of #Bitcoin ETFs in a year.