Secular Bull Market – Part III

Friday’s (12/8/23) November ’23 nonfarm payroll report’s headline business survey number was +199,000 net, new jobs created, but if you subtract the downward revisions to the prior two months of 35,000 and the 37,000 jobs cited by CNBC’s Steve Liesman as auto workers returning from the recent UAW strike, then the “net, net” headline numbers turns out to be 127,000 for November, ’23.

Speaking of circumstances or conditions surrounding secular bull or bear markets, to my knowledge there have only been two instances when the Fed/FOMC has reduced the fed funds rate, and the stock market has subsequently sold off in ensuing months:

1.) January, 2001: Alan Greenspan started cutting the fed funds rate early in January ’21, which was 9 – 10 months after the peak in the 1980’s – 1990’s secular bull market in March, 2000. The SP 500 and Nasdaq rallied for the month of January ’01, and then the bottom fell out with Cisco’s earnings and guidance in early February, ’01. (YCharts doesn’t have the data in their total return calculation table for the Nasdaq returns from the late 1990’s, and then the decade from 2000 to 2009, but the SP 500 fell 9.12% in February, 2001, and it got far uglier from there.)

2) September, 2007: the Fed / FOMC began reducing the fed funds rate in September, 2007 after the Bear Stearns mortgage hedge fund issues. Looking back on it, the banking sector saw almost all their earnings written down in Q3 and Q4 ’07, and remember this was well before Lehman and September, October, 2008.

The lesson is, if the FOMC starts cutting the fed funds rate, and you don’t see a positive stock market reaction, it should get your attention.

In 2019, which is the only circumstance that the FOMC has raised and subsequently reduced the fed funds rate since the 2000’s, SP 500 earnings growth was flat versus 2018 ($161.93 in 2018, vs ’19’s $162.93), while the SP 500 rose 31%, and the AGG rose 8.5%.

Liquidity trumps earnings (and just about everything else).

Corporate high-yield credit:

As one final comment on the time left in this secular bull stock market, the fact that corporate high-yield credit is up 10% in 2023, with seemingly no material increase in default rates, is a positive sign for the bull market to continue. In 2001 – 2002, the corporate high yield rose to between 13% – 14% by 2003, thanks to credit issues within “tech, media and telecom” and then in 2008, it was lights out for any risk credit as corporate high yields rose to 25% by early, 2009.

Corporate high-yield credit has always been the “early warning” tell for a problematic recession – I remember watching high yield spreads in late 2007, early 2008, and thinking “they’ll reverse and start to tighten” and – well – that wasn’t a great call.

Rick Rieder, Blackrock’s fixed-income CIO showed up on CNBC last week saying corporate high-yield credit has “excellent technicals” today, which is a good vote of confidence from the largest asset manager in the world.

Summary / conclusion: 2024 should be another positive year for capital market returns, specifically the major equity and fixed income benchmark indices, with the big question mark being whether the mega-cap or so-called “Magnificent 7” stocks (the top 10 names by market cap within the SP 500) continue to carry the water for the benchmark.

As Part I and Part II of this series addressed how much time might be left in this secular bull market, there is a one big similarity today between the late 1990’s and today’s SP 500. Most readers are too young to know that the “Nifty 50” stocks of the early 1970’s, like Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ), which had a period like the late 90’s tech giants, prior to the 1973 – 1974 bear market in the SP 500, where the se Nifty 50 stocks ran up materially in price, so that “narrow leadership” issue has presented itself once again.

The other similarity is that the non-mega-cap sectors like small and mid-caps, or international and emerging markets, have really not done much looking at recent returns, and that is very similar to the late 1990’s. (It’s almost like the mega-caps become this giant tornado, sucking up all the alpha a market can offer, generating out-sized returns and forcing every investor into the asset-class, before the returns evaporate right before your eyes, like 1973 – 1974, and 2001 and 2002.

Unlike the late 1990’s AI is just getting started, and come May ’24, it will be 12 months since Nvidia’s absolutely “lights out” earnings report, really lit the fire under the developing AI story and AI became a commonplace daily topic in financial media. Microsoft’s December ’23 quarter (in my opinion) will be important since we will get a look at Copilot and the numbers the launch generated from November 1, ’23. Microsoft sure looks like a leader within AI, so the numbers and detail will be important, just like tracking Azure’s progress was important with the emergence of the cloud. A lot of companies are “talking AI” just like a lot of companies talked the internet in 1995, and the following years, but for many companies it was more talk than action. They could never figure out how to execute.

It would be very helpful to see any company talking AI around January – February ’24 earnings to start quantifying the metrics.

In terms of SP 500 earnings, given all the recent concern about what ’24 might look like, fed funds rate cuts, if they are forthcoming, will likely trump earnings issues. The current expected SP 500 EPS growth of 11% – 12% for 2024 will likely decline into early January ’24 and after companies start offering hard guidance on ’24 revenue and EPS growth, we’ll know how corporate managements are viewing ’24 growth. Remember, in this kind of environment, unlike the late 1990’s, there is no reason for management’s to be aggressive in terms of guidance, unless they are very certain the numbers will be met. I expect most management’s to be cautious around ’24 guidance, which is ultimately a plus. Under-promising. and over delivering, is never a bad strategy.

Thanks for reading. None of this is advice or a recommendation, rather consider it “perspective”. As Warren Buffett often says, “if examining history would result in great investment results, librarians would be the best investors”. (Hope that was quoted correctly.) Past performance is no guarantee of future results. Investing can involve loss of principal. Clients Top 10 holdings were updated in mid-November, ’23. The Blackrock fund was sold for tax-loss purposes shortly thereafter, and then all of the fund was sold by November’s end. A short review of ’24 performance will be offered at year-end. Capital markets change quickly. Readers should gauge their own appetite for market volatility and adjust portfolios accordingly.


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