Welcome back to MktContext! Improve your portfolio returns by seeing the market signals. We’ll show you how to time the stock market.
Housekeeping: I am going on vacation for two weeks. All paid subscriptions will be extended by two weeks. MktContext returns in October!
So far, our decision to buy in August has been correct. The market certainly tested our mettle with the pullback in September, but we held firm and now we are in profit.
Our foresight came from our reading of the economy (no recession = shallow pullback) and market action (unwind = temporary). We also added alpha by switching from SPX into QQQ and IWM which have both outperformed. Past posts are available in the archive for your perusal.
This demonstrates the power of what we do at MktContext. We use economic/market signals to time our investment and enhance returns. Not only does this outperform a buy-and-hold ETF strategy, it allows us to eliminate low-returning bonds from the portfolio.
Let me emphasize that: bonds have returned 4% in 2024 while SPX has returned 21%. And yet, most people have stuffed their portfolios 40% full of bonds! I’ve been using this method to beat the market for a decade.
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Today’s topics: Market review, Fed cuts 50, macro gets better, our WINNING portfolio, a look into the future, our investing edge, beware seasonality, positioning tells us direction.
Market performance
The market rallied on the back of the Fed cutting interest rates by 0.5%. All major indices broke out of their trading ranges; we remain bullish on positions initiated at the August lows. We also held through the September pullback (it came uncomfortably close to our stop-loss at one point).
In the premium section below, we reveal what our investing “edge” is and why the next 12 months look bright for our portfolio.
We are already hearing cries of "this rally is unsustainable!" from investors expecting a recession. Investors lose at the game of investing when they miss the bull run. We wrote about this phenomenon in this viral post. Suffice to say, the fundamentals support further upside in the coming months.
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Fed cuts 50bps
The Fed delivered a 50bp interest rate cut, the first in four years. Watching the presser, we saw a Fed delicately threading the needle to explain why they cut 50 if the economy was still good – and it worked.
They also guided to 2 more cuts for the rest of this year and 4 more next year. They made it clear they are eyeing the labor market and proactively supporting the economy. This is what we call a “Fed put” because they will provide stimulus at any sign of distress (in effect providing downside protection to investors, like a put option).
Powell was sanguine about recession risks, stating he doesn't see the likelihood of a downturn as elevated. He pointed to solid growth, declining inflation, and a robust labor market as reasons for optimism. Nice to hear he agrees with us!
Bottom line, the Fed is cutting rates during an economic expansion and that has historically been positive for equity markets. “Don't fight the Fed” continues to apply here. In the premium section we'll share portfolio positioning and trade ideas.
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Macro picture gets better
The chart below is a great way to visualize the labor market. Blue line represents demand for workers, i.e. firms hiring. Orange line is the number of workers. Right after Covid there was a labor shortage in which demand greatly exceeded available workers. Lately it’s come back into balance as the economy slows from a torrid pace. Unfortunately, this re-balancing is being misconstrued as recessionary.
While jobs figures grabbed headlines, retail sales and wages came in positive, suggesting that consumer spending will remain healthy. This supports the argument that softening jobs data is misleading and not signaling recession.
Consumers appear to be in a strong position. Bank of America’s checking account balances are 33% above 2019 levels. Wage growth is improving across all income brackets, the fastest being low income households. Services spending (healthcare, recreation, travel, etc.) is still growing 3% per year.
Some business managers have been stalling on hiring and capital expenditures due to uncertainty of interest rates and the election. As these are soon resolved, we could see an unleashing of pent-up demand. We should start to see business formation, hiring, and housing demand. We've previously discussed how to play this theme through small-cap stocks.
Many investors still believe a recession is imminent. Just look at the jump in defensive stocks recently. But as more investors embrace the soft landing, the resultant rotation should drive markets higher.
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Our WINNING portfolio…
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Our WINNING portfolio
1995: A look into the future
What is our investing edge?
Beware seasonality!
Positioning tells us direction
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