Charts for the Beach 2024

Supply chains have NOT normalized

Although the Fed seems confident that supply chain issues have normalized, accelerating container rates seem to be suggesting supply chain have not healed.

When globalization was expanding the US “imported deflation” because import prices were generally rising more slowly than the overall CPI. However, today’s combination of contracting globalization and the US’s ongoing and enormous trade deficit means investors should now watch import prices closely for signs of “importing inflation” from abroad.

Individual investors are massive risk takers

Individual investors have become massive risk takers. The two charts below (courtesy of Michael Harnett at BofA Securities***) show private client equity allocations and the beta of their top equity holdings. At the beginning of the bull market in 2009, individual investors’ equity allocation was only 39% and their beta was a very conservative 0.75. Today, the allocation is 63% and the beta is a whopping 1.25.

We continue to believe there is a once-in-a-generation opportunity in the US and global equity markets well beyond the 7 stocks that have caught everyone’s attention.

Deglobalization remains our primary long-term investment theme

Because long-term investment returns are largely a function of the abundance or scarcity of capital, the current flood of capital toward AI investments suggests better longer-term investment opportunities might be elsewhere.

Deglobalization and the dire need for the US economy to regain its independence seems a much more ignored and, therefore, attractive long-term theme. The US economy could be in the early stages of a 10- to 20-year metamorphosis.

The next chart highlights one reason why deglobalization likely means higher secular inflation. Tariffs can sometimes be a tool used to protect under-utilized domestic production, but the US lacks enough productive capacity to meet demand so tariffs have directly contributed to higher prices. If deglobalization does indeed continue, then secular disinflation seems behind us.

Something’s gotta give

Historically, there has been a tight correlation between high yield bonds (“junk bonds”) and smaller capitalization stocks (“junk equity”) because of the extreme economic sensitivity common to the two asset classes.

Chart 5 shows how the historical relationship broke down over the past year or so as large cap stocks outperformed smaller cap stocks despite that high yield bond spreads narrowed. More recently, it appears the stock market is re-evaluating the fundamentals and the valuations of larger cap stocks, so that the historical relationship between the junk stocks and junk bonds might come back in line.

Fundamentals suggest a broader market lies ahead

Historically, investors become comparative shoppers when profits cycles accelerate, and earnings growth becomes increasingly abundant. Markets seem to be following that historical precedent, and the historically narrow market of the past year or two seems to now be starting to broaden as the US and global profits cycles accelerate.

Chart 6 shows the valuation and 4th quarter earnings growth forecasts for the Magnificent 7 stocks versus that of the world excluding the Magnificent 7, US small caps, and Emerging Markets. Investors now can buy more growth than that offered by the Magnificent 7 for a much cheaper valuation.

Bitcoin = Speculation

There might be an argument for blockchain technologies’ usefulness, but that really has little to do with the day-to-day price of Bitcoin. Bitcoin’s price is more closely tied to the abundance or scarcity of speculative liquidity.

Chart 7 shows the relationship between Bitcoin’s price and the Bloomberg Financial Conditions Index. Hopefully to no one’s surprise, the primary factor influencing Bitcoin appears to be liquidity.

The US has been penalized for fiscal imprudence for the past 13 years

The cost of debt is higher for lower quality credits. Full stop.

Chart 8 shows the spread between the US 10-Year T-Note and the 10-Year German Bund. Prior to the downgrade of US debt in 2011, Treasury and Bund yields traded within a range. However, the US 10-Year has sold at a consistent yield risk premium since the debt downgrade. At times, the US’s risk premium exceeded 200bp!

Low absolute interest rates obscured the penalty Americans were paying when the US became a lower quality credit. However, if the US had been a higher quality credit, yields on government debt, municipal debt, mortgages, car loans, and credit cards would have been even lower.

Although some believe a day of debt reckoning looms for the US, the reality is debt crises are slow and insidious. To that point, the US economy has been over the past 13 years consistently penalized for our lack of budgetary prudence.

*** Reprinted by permission. Copyright © 2024 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided "as is" and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website. The past performance of an index is not a guarantee of future results. Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends. An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results. Indices are not actively managed and investors cannot invest directly in the indices. S&P 500®: The S&P 500® Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US market. The index includes 500 leading companies covering approximately 80% of available market capitalization. Sector/Industries: Sector/industry references in this report are in accordance with the Global Industry Classification Standard (GICS®) developed by MSCI Barra and Standard & Poor’s. Magnificent 7: The Magnificent 7 are a group of 7 widely-traded companies classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by the Global Industry Classification Standard (GICS®) developed by MSCI Barra and Standard & Poor’s. These consist of AAPL, AMZN, GOOGL, META, MSFT, NVDA and TSLA. Bloomberg Financial Conditions Index: The Bloomberg U.S. Financial Conditions Index: The Bloomberg U.S. Financial Conditions Index tracks the overall level of financial stress in the U.S. money, bond, and equity markets to help assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms. Bitcoin: Bitcoin (XBT) USD Spot Rate (Price of 1 XBT in USD). Bitcoin was proposed in a white paper in 2008 by a pseudonymous software developer going by the name of Satoshi Nakamoto. It is a decentralized, fully independent, digital or virtual currency also known as a cryptocurrency. No institution controls the Bitcoin network and it is not tied to a country as transactions can be performed cryptographically.

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