AFSM - Can Q4 Redeem 2023: Here Are The Key Arguments

2023-09-27 06:34:55 ET

Summary

• I do not predict the future course of the stock market, rather, I focus on buying individual companies and ETFs for the long term.
• The Magnificent 7 stocks (Apple, Microsoft, NVIDIA, Amazon, Meta, Tesla, and Google) have performed well in 2023, but owning other S&P 500 companies has resulted in minimal gains.
• Here I present arguments for both cashing out and staying in equities, highlighting the potential impact of factors such as inflation, government shutdowns, and labor market conditions.

First things first: I am not a stock market prognosticator. I do not predict the future course of "the market." I buy individual companies and ETFs that I believe are excellent holdings for the long term. Sometimes, like everyone else, a firm or fund's fortunes change, and I sell. More often, if the reason I bought the investment is intact, but it declines, I buy more. Neither decision is based on short-term market activity.

If you are seeking someone who claims to be a market seer, you can find 50 on CNBC in any given week who will tell you the market must go up for reasons A, B, and C, and 50 others who tell you it must go down for reasons X, Y, and Z. If that is what you are looking for, this ain't the place. Here are the pros and cons to clarify the myriad of things being bandied about, along with my personal strategy for Q4.

How the market has done in the first three quarters of 2023 "might" provide some clarity. The answer to how the market has done is... Not very well .

If you owned only the Magnificent 7 - Apple ( AAPL ), Microsoft ( MSFT ), NVIDIA ( NVDA ), Amazon ( AMZN ), Meta ( META ), Tesla ( TSLA ), and Google ( GOOGL )( GOOG ), you have done quite well for yourself in 2023.

However, if you owned numerous fine companies in the S&P 500, but did not own the high-flying 7, you are basically flat for your efforts, up a bit under 5%.

Shades of the Nifty Fifty? (If you remember back that far!)

The problem for those who own only the Magnificent 7 is that, while you are up some 50% this year, your average multiple is now 50 times earnings.

I currently own none of these. If I did, I would have already placed trailing stop orders on some portion of each holding. I am not looking to buy any of these. If they decline to a mere 40 times earnings, they are still too volatile for my taste or my clients' to deal with. What if these 7 were to next decline to 30 times earnings? Simply too much volatility. I leave this sort of occasionally successful conjecture to the quants and the hedge funds.

Trying to identify the key factors that will determine our path forward is always subject to facts, conjecture, and bias.

Below I have placed, first, each of the primary arguments for cashing out now and placing your money in a safe fixed-income product like a CD that will currently pay you, over the course of one year, around 5-6% or so. Taking the high side, if paid monthly, you would be making 1/2 of 1% every month. But be aware that if inflation falls and sentiment improves, your best-in-class CD will still pay only 6% while you are watching equities bound higher. (Or, if inflation climbs, you are getting 6% per annum while inflation is eating all of that and more).

After each of these, I have placed the riposte from others who see the same issues in a different light. These would be the arguments for staying in equities, expecting at least some of those 493 other excellent S&P companies to do well - or at least between capital appreciation and dividends, enough better than 6% to pay you for staying the course.

The market will decline because...

Oil and natural gas prices are going to rise even more as we enter wintertime and this will mean higher inflation. Anyone who heats or cools their home, transports goods, buys goods via the internet, or drives to their job is going to be paying more. When prices rise, that's inflation. When that happens, the market usually goes down.

The market will rise because...

The heavy summer driving season is now over. Fewer people are commuting to work these days, so there is less usage of gasoline, albeit at higher prices. OPEC+ has been at this game for a long time. They would prefer higher prices for less oil and gas, but they know enough to keep prices just below the pain point. They - and the US - can increase supply anytime to keep prices in line.

The market will decline because...

The Fed has still not been able to bring inflation under control. After keeping rates way too low for way too long they are now panicked about their mistake. So they will just keep raising rates until we are all unable to buy a home, making the lumber companies and homebuilders a terrible investment; making it too expensive to buy a car, thus the auto companies will be unprofitable; making dining out so expensive we will all be staying home and buying at Walmart, etc., etc.

The market will rise because...

Inflation is coming down, not going up. As of August anyway, the CPI (Consumer Price Index) was up just 1.9% (annualized rate). That is what the Fed claims to be their target. Just look back one year when rents were going up 10-15% per renewal year. Now? They are still rising but at a rate of closer to 4-5%, and coming down. As homebuilders build, the supply will catch up with the demand. Result? Low inflation, like 2%. Job openings are declining meaning employers do not have to pay double to get workers, and many companies are flush with cash because they borrowed when rates were low, low, low. As did homeowners, who scored as low as 2.375% fixed rates!

The market will decline because...

Those never-give-an-inch members of Congress will force a government shutdown. One of them, who represents a blue-collar district, even said there would be pain but it was for a higher purpose. Tell that to a family that is going without food because the breadwinner (or two) work for some company that only gets paid when it fulfills its contractual obligations to the federal government. No money to pay means people starving. And if Moody's follows Fitch and S&P in downgrading the quality of US Treasury bonds, it's all over.

The market will rise because...

Even though the current administration is spending wildly for an amazing panoply of social welfare programs, a government shutdown is not the worst thing if it creates a negotiation to rein in our $33,000,000,0000 indebtedness. We have had threats of shutdowns before and we have had shutdowns before. In no case did these destroy the US markets; they were temporary hiccups. The current dreadful September blahs might be caused by people forgetting that we have always worked our way out of these shutdowns. If that means the current Speaker of the House must pass his gavel, so be it.

The market will decline because...

People are just unwilling to work these days. Jobs are going begging and the productivity of our country is declining because of it. Companies have to pay huge wages all out of line with the type of work done. Some of us flipped burgers for a few bucks a day. At $20 an hour, it is no wonder companies are replacing humans with robot arms to flip burgers and dip fries in oil. But until that happens across the board, a lack of people willing to work for any amount of money will create big-time upward wage pressure on companies. Their products and services will have to be priced higher to survive. The markets will plunge when their profits deteriorate.

The market will rise because...

I read just this week that wage growth fell yet again in August, to just 5.3%. It was 5.7% the month before and 6.7% a year ago. Wage inflation is cooling because job openings are falling and because Baby Boomers, of all people, are returning to the labor force. It may well behoove younger workers to get a job before some old geezer takes it away. I am not predicting that, but it would immediately turn the tables: more people looking for work than jobs available would mean a rapid cessation of inflation, which would in turn lead to a great profit revival for America's companies, especially the 493 that have barely moved this year. Ultimately, it is always better earnings that move a stock market higher.

Where I stand

Where I stand works for me. It may not work for you. I personally have faith that buying quality firms in growing industries, while applying a touch of Kentucky windage in selecting the best sectors to be in, has been the road to success for market success stories from Benjamin Graham to Warren and Charlie to, so far, you and me.

I believe we will work our way through this decline in the market and disruption in our economy. While I have some allocation to nearly every sector, my largest sector holdings are in Materials and Energy.

The industries in Materials I most favor are steel for infrastructure and lithium and other essential materials for future energy needs. For steel, I own the VanEck Steel ETF ( SLX ). Its holdings are global because infrastructure needs are global and it is mostly large-cap because this is a tough business and you need deep pockets. For lithium, as regular readers know, I own more than these but I especially favor Albemarle ( ALB ), Sigma Lithium ( SGML ), Lithium Americas ( LAC ), and SQM of Chile ( SQM ).

In Energy, I own producers, I own service and maintenance companies, and I own pipeline and other transportation firms. Examples include producers and LNG titans BP ( BP ) and Shell ( SHEL ), service companies like Halliburton ( HAL ) and pipeline ETFs like the Alerian MLP ETF ( AMLP ).

Where Do You Stand?

It is tempting to throw the towel in the ring right now. Who knows? It may be the best thing -- for you. I hope that, by showing the fallacy of the "S&P 500 is so high it must fall" reasoning, you see that there are more nuances than just the binary look at fear and greed. 7 companies now comprise 34% of the S&P 500 total value. The rest of them -- I believe -- are selling at fair prices in most cases and screamingly undervalued prices in many others. I am willing to wait -- and add where I believe the best value and growth combination come together.

What do you think? I look forward to your comments!

Good, calm investing,

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