April 8, 2022
By Steve Blumenthal
“Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.”
– Bill Dudley, Senior Advisor, Griswold Center for Economic Policy Studies, Princeton University. Former President Federal Reserve Bank of New York
Kryptonite was introduced to the comic book world in 1949. When exposed to the mineral, Superman and other Kryptonians would experience muscle weakness and pain. If that exposure continued, it would turn a Kryptonian’s skin and blood green, and eventually kill them.
In an economy dependent on ultra-low interest rates, inflation is the kryptonite to the Fed’s zero interest rate policy. If Powell fights inflation, the economy will move quickly toward recession. He risks economic collapse and recession-like declines in stocks (the average is 36%). On the other hand, if he lets inflation continue to run rampant, he risks social and political chaos. Facing an inflation challenge not seen since the 1970s—with fists clenched—Powell appears determined to fight.
In an opinion piece penned for Bloomberg, Bill Dudley writes:
It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.
Market participants’ heads are already spinning from the rapid change in the outlook for the Fed’s interest-rate policy. As recently as a year ago, they expected no rate increases in 2022. Now, they foresee the federal funds rate reaching about 2.5% by the end of this year and peaking at more than 3% in 2023.
Whether that proves right will depend on a number of hard-to-predict developments. How quickly will inflation come down? Where will it bottom out as the economy reopens, demand shifts from services to goods, and supply-chain disruptions ease? What will happen in the labor market, where annual wage inflation is running at more than 5% and the unemployment rate is on track to reach its lowest level since the early 1950s within a few months? Will more people come off the sidelines, boosting the labor supply? Together with moderating inflation, this could allow the Fed to stop raising rates at a neutral level of about 2.5%. Or a tightening labor market and stubborn inflation could force the Fed to be a lot more aggressive.
Among the biggest uncertainties: How will the Fed’s tightening affect financial conditions, and how will those conditions affect economic activity? This is central to Fed Chair Jerome Powell’s thinking about the transmission of monetary policy. As he put it in his March press conference: “Policy works through financial conditions. That’s how it reaches the real economy.” Source
The Nifty Fifty
It’s not just inflation taking us back to the 1970s. There is another eerie similarity in today’s financial landscape: Too much money printing and high investor concentration in too few names. Back in the 1960s and 1970s, investors referred to a group of about 50 large-cap blue-chip stocks on the NYSE as the “Nifty Fifty.” Historians credit the Nifty Fifty with driving the early ’70s bull market.
What caused the 1973–1974 market crash?
Here’s a brief history from Wiki.mises.org:
The U.S. had printed too much money during the 1960s and had caused a “run” on the dollar by foreign central banks who sought to cash in their dollar holdings for gold. Despite his promises to the contrary, Nixon also instituted comprehensive wage and price controls in an attempt to block the rising price inflation before his reelection campaign. The Bretton Woods system, where currencies had fixed values in terms of gold, inevitably collapsed.
The stock market bubble of the 1960s and subsequent collapse has been well chronicled by John Brooks in his book, The Go-Go Years. The “go-go 60s” refers to the market for technology stocks during the 1960s when the “Nifty Fifty” emerged as a list of “one decision” stocks that could be bought and held forever.
“History doesn’t repeat itself, but it often rhymes”
– Mark Twain.
Repeat? No. Rhyme? Yes. Let’s take a look.
“The Fabulous 5” Make Up 24.2% of the S&P 500 Index
There are a total of 6,018 stocks listed on the U.S. stock exchanges: 2,167 on the New York Stock Exchange; 3,647 on the NASDAQ; and 204 on the American Stock Exchange. As of 12-31-21, the total market capitalization of the entire U.S. stock market is $53.37 trillion. The total market capitalization of the top 500 U.S. stocks is currently $42.37 trillion. 500 out of 6,018 stocks account for almost 80% of the total market value of all U.S.-based public companies listed on the New York Stock Exchange, and the Nasdaq Stock Market. Sources: NDR and SiblisResearch
In January 2021, Seeking Alpha wrote the following about S&P 500 concentration risk:
S&P 500 is a float-adjusted market-cap-weighted index. Designing the index this way has several benefits. For example, it minimizes turnover and trading costs. However, it can also lead to distortions in the long term. The float adjustment means that companies with high insider ownership have a proportionally smaller weight in the index. Perhaps more importantly, market cap weighting is effectively a momentum strategy because as an index fund receives new money it must buy more and more of the stocks with the highest market cap, regardless of valuation. Inevitably, during a long bull market, it will become more concentrated in a small number of stocks. Moreover, it will come to hold a larger and larger portion of the float in its top holdings. Consequently, indexation will eventually become the world’s most crowded trade.
Eventually? I argue that day has arrived. According to Ned Davis Research, the top five largest stocks make up 24.2% of the S&P 500 Index. You know them by heart: Apple, Microsoft, Alphabet (Google), Amazon, and Tesla.
We have not seen this high of a concentration of too few names since the Nifty Fifty days of the 1970s. Take a look at the following chart. It plots the top five S&P 500 stocks by market cap as a percentage of the total S&P 500 market cap, with data back to 1972. Note the current level of 24.2% (orange, to the far right-hand side) compared to the peak in 1973 at the same level (orange—far left-hand side). We sit higher than the concentration reached at the “tech bubble” bull market peak in March 2000!
Conclusion: The combined value of the five largest stocks makes up 24.2% of the combined total value of all the stocks in the S&P 500 Index. Combined, all of the stocks in the S&P 500 index make up approximately 80% of the total value of the entire U.S. stock market. That means that the combined value of the five largest stocks makes up nearly 20% of the combined value of the total U.S. stock market. Wash, rinse, re-read. The “Fabulous Five.”
How About the Top 10 Stocks?
The top ten stocks make up 31.4% of the value of the S&P 500 Index, 25% of the entire U.S. stock market, and ~ 14% of the entire value of the global stock market.
Total Value Globally
The total value globally of all publicly traded stocks is ~ $97 trillion. By country, the largest stock markets in the world—as of January 2021—were the United States (about 55.9%), followed by Japan (about 7.4%), and China (about 5.4%).
Grab that coffee and find your favorite chair. Axios Markets wrote this week, “Say Goodbye to Buybacks.” Increased regulatory and political scrutiny of share buybacks has become a cornerstone of the way the American stock market functions. You’ll also find a summary and link to last Wednesday’s Trade Signals.
Don’t turn green. Avoid the kryptonite and channel your inner Sir John Templeton. Need some sage advice from the late great Sir John? Here are 35 famous Templeton quotes.
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Say Goodbye to Buybacks
April 5, 2022
By Matt Phillips and Emily Peck (Courtesy of Axios Markets)
“Goldman Sacs estimates that companies will purchase $700 billion worth of stock this year — even after netting out stock issuances — making them by far the largest purchaser of equities.”
The big question now facing CEO Howard Schultz: Will Wall Street allow him to quit buybacks cold turkey? Corporate leaders have increasingly leaned on stock buybacks to keep their equity prices aloft. But Starbucks yesterday halted a plan to spend billions buying back its own stock this year, Matt writes.
Why it matters: Critics of buybacks have said that the boom in share repurchases has eaten into corporate spending on wages and the kind of business investment that drives economic growth, a view Schultz tacitly acknowledged in making the announcement.
What he’s saying: “This decision will allow us to invest more into our people and our stores — the only way to create long-term value for all stakeholders,” said Schultz, who just reclaimed the reins of the coffee giant, in a statement.
- Starbucks shares fell 3.7% on the announcement. The company has already drastically underperformed the market this year.
State of play: The decision comes as Starbucks — heavily reliant on its 235,000 workers in American stores — faces a historically tight labor market.
- Climbing wages, one of the company’s largest costs, have eaten into profit margins.
- The company’s high-end Reserve Roastery in New York’s Chelsea neighborhood voted to unionize on Friday — the 10th location to do so over the past several months.
The big picture: Starbucks’ move to freeze buybacks also comes amid increased regulatory and political scrutiny of a practice that has become a cornerstone of the way the American stock market functions.
- The SEC has proposed new rules that would require faster disclosure of corporate stock purchases and more info on their justification.
- Companies themselves are the largest buyers of stock in the U.S. markets, according to Goldman Sachs analysts.
- Goldman estimates that companies will purchase $700 billion worth of stock this year — even after netting out stock issuances — making them by far the largest purchaser of equities.
SB Here: Insider stock sales hit a record in 2021 as executives unloaded over $170 billion in their company’s stocks. Hmmm
Not a recommendation for you to buy or sell any security. For information purposes only. If you have more than $500,000 to invest and are an accredited investor, email me at Blumenthal@cmgwealth.com if you would like to see what we have on the shelf in the CMG Mauldin Kitchen.
Trade Signals: 10-year Treasury Spikes to 2.60%, Mortgages to 5%
April 6, 2022
Posted each Wednesday, Trade Signals looks at several of my favorite equity markets, investor sentiment, fixed income, economic, recession, and gold market indicators.
For new readers – Trade Signals is organized into three sections:
- Market Commentary
- Trade Signals — Dashboard of Indicators
- Charts with Explanations
Notable this week:
Notable this week:
I made a design change in the Trade Signals — Dashboard of Indicators summary that follows next. It’s pretty intuitive. Note the green and red arrows. A reader asked if I could show prior signals with up and down arrows over recent weeks. I liked the idea. Let me know what you think. My top three personal equity market indicators are NDR CMG Large Cap Long/Flat Index, Long-term Trend (13 over 34-weeks moving average), and Volume Demand vs. Volume Supply. Two of the three remain in buy signals and nearing sell triggers (NDR-CMG and 13/34-week MA). Volume Demand vs. Volume Supply is in a sell (more sellers than buyers). I also like the S&P 500 Index Daily MACD for short-term direction and the Monthly MACD for longer-term trend. Both are in sell signals. Don’t Fight the Fed is in a -1 sell signal.
Fundamentally, the stock market is late in its bull market cycle; valuations are high, stock ownership is concentrated in just a handful of names, and margin debt is high and unwinding. Add to this mix inflation, which has not presented as an issue for more than 35 years, and a hawkish Fed. In the what to do category: I favor diversifying to a handful of diverse trading strategies and hedging long-term equity market exposure with put options. My friend Felix Zulauf sees a global economic slowdown into mid to late summer with a potential 30% stock market correction. To be followed by a rebound in prices tied to Central Bank money printing (more QE). His best guess is for a secular bull market peak in 2023 or 2024. He’ll tell you it’s his working hypothesis and subject to change. Much is dependent on Central Bank monetary policy and other government fiscal responses. Famed investor Jeremy Grantham calls our current state a “Super Bubble.” If you missed it, see On My Radar titled “Three Sigma – Three Events in the Last 100 Years (Until Now).” Grantham is warning of an 80% decline from recent highs.
Honestly, we really can’t know for sure. Keep your seat belt fastened.
Interestingly, the Zweig Bond Model has flip-flopped twice over the last few weeks. It is back in a buy signal. I may take a short-term trade in my personal account. Looking at the above chart, perhaps Lael Brainard’s comments have helped the market price in another 100+ bps in Fed rate hikes. My bet is they will hike 50 bps at the next Fed meeting (May) and 25 bps in the Fed meeting that follows—then done. A meaningful global economic slowdown will cause the Fed to pause. My best fundamental guess. I could be wrong. Not a recommendation for you to buy or sell any security.
The Dashboard of Indicators follows next. Click HERE to see the Dashboard of Indicators in Wednesday’s Trade Signals post.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon, and risk tolerances.
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Personal Note – A Congratulator
“People who have achieved great things and understand how hard it is to be really good at something are the first people to congratulate you.”
– Geno Auriemma, Legendary UConn Women’s Basketball Head Coach
Every day, I receive an email from Admired Leadership Field Notes. It’s a group led by Dr. Randall Stutman. Randall studied the traits of some of the world’s best leaders and coaches CEOs using what he’s learned (you can sign up for Admired Leadership’s free email here). I read most of the Field Notes I receive and think to myself, I sure could do that better.
I thought you might like this one. I sure did… (Hat tip to Michael Gale). Here you go:
Offering congratulations tells people who receive the compliment that others celebrate their success. Sharing joy with others propels both parties to a happier and more positive place. The power of offering congratulatory feedback should never be underestimated. It is a booster shot into the arm of any relationship.
As leaders, when we think of offering congratulations, we often make the mistake of believing the act is primarily about the person receiving them. The term congratulations, after all, puts on record the accomplishments of others. But congratulatory feedback actually says a great deal about the congratulations-giver. When we congratulate people, we exclaim loudly that we stand for people and relationships. Offering congratulations tells people they count, and that you are the kind of leader who does the counting.
Too many occasions pass without leaders offering congratulations. Leaders who are not on the lookout for congratulatory-worthy deeds miss dozens of opportunities each month to tell others who they are as leaders. Leaders who go out of their way to find people to congratulate share a reputation of caring and self-confidence. We admire leaders who would take the time to consistently acknowledge others and will do just about anything for them.
It’s time to join the club of serial congratulators. There is always someone in your world who is worthy of a congratulatory message. Find them. Congratulating others as a habit will supercharge your attitude and underline your appreciation for the effort every milestone requires. As legendary coach Geno Auriemma reminds us, “People who have achieved great things and understand how hard it is to be really good at something are the first people to congratulate you.” SOURCE: Admired Leadership
The Masters is on TV this weekend and Tiger is off to a great start. It’s got me feeling nostalgic.
As a young kid, I’d lay on the floor in front of the TV and watched the Masters. My old man would be on the couch with his favorite beer (a Michelob Ultra) in hand. Tried one the other day. Not as good as a New England hazy IPA.
Two days before dad crossed over, I sat next to him in his hospital bed. He was fading in and out of consciousness, but he was mostly checked out.
Day four (Sunday) of the 2011 Masters was on TV. Earlier in the day, daughter Brianna had called and asked me if “Pop” and I wanted Starbucks lattes. Dad smiled and like a young child asked, “Am I allowed to have one?”
Thirty minutes later, Brie walked into the room. There must have been some magic in the caffeine that day. Dad looked at the TV and smiled, “The Masters is on,” he said. He stayed awake the rest of the day and we watched Charl Schwartzel birdie the final four holes to win over Adam Scott and Jason Day by two strokes. That was a very good day.
With cold IPA held high, I’ll be watching with many fond memories of my father in my heart.
Wishing you and your family the very best!
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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