LAC - Investing Even As I Expect S&P 500 To Be Lower By Year End

2023-11-13 05:34:58 ET

Summary

• As of the end of October, I was just a few points away from my end of 2023 S&P 500 prediction of 4,200 points, which I made at the end of 2022.
• The market is already about 5% higher since then, putting me well outside the running. While, fundamentally, I expect the market to decline, the market is not always rational.
• Even though I do expect the market to go lower from current levels to the end of the year, it does not mean that there are no opportunities to invest.

Investment thesis: With two months to go in the year, I was momentarily within just a few points from being right on the money in terms of my prediction for the end-of-the-year S&P 500 ( SP500 ) finishing at 4,200 at the end of October. I made that prediction at the end of 2022. Of course, my natural reaction was to wish for a flat market for the next two months. The market has gone up since then, so now I am wishing for a slight decline. It is a paradoxical reaction, given that to improve returns on my investment portfolio, I wish to see the market go up from current levels.

The soul-searching resulting from the conflicting feelings I currently have on the market led to some reflection on what I think we should expect going forward till the end of the year. My only logical conclusion is that while I would have been right if my prediction had been for the end of October instead of the end of the year, with two months to go, anything could still happen. In the meantime, wishing for a slight decline in the overall market to the end of the year is in no way contradictory with the hope of seeing gains in one's portfolio. There is no contradiction in looking for investment opportunities either, as I shall explain.

S&P could land anywhere within 10% of current levels by the end of 2023

While the market landed me into a seemingly very accurate position in regard to my prediction I made almost a year ago about where the market will finish in 2023 as of the end of October, I'd say my odds of coming in as the most accurate of all Seeking Alpha authors is still about the same as it is for about 80% of all other authors who made a prediction.

The way I see it, we can easily get a 10% move from current S&P 500 levels of about 4,350 in either direction, or we could end up flat at current levels.

Some of the factors that could push the market higher include Federal Reserve statements or hints of monetary easing, as well as paradoxically weaker economic data that might signal a future move to ease monetary policy at some point. Of course, this would be just a kneejerk reaction, because, at some point after the initial rally, we would have to ponder the negative effects of an economic slowdown on earnings and so on.

The one factor I see as potentially putting an end to the upswing in stock markets in the past two weeks and pushing markets into reverse is a potential oil price spike, which is a very real possibility. For instance, OPEC's latest monthly report puts total global liquid fuels demand at an average of just over 103 mb/d for the fourth quarter of this year, followed by an average daily demand in all of 2024 at 104.3 mb/d. Supplies in September, just before the beginning of the current quarter stood at 100.6 mb/d.

It is uncertain whether or not the market will react this year to what should become an increasingly obvious oil supply shortfall despite a less-than-robust global economy. Perhaps the market will continue to focus on the weak global economic trends more than they will on the seemingly tight global oil supply-demand situation, at least until the end of the year. Or perhaps we will see some reports on supply shortfalls that will start to ring the alarm bells, and the market will react.

The way I see it, if oil prices start to push toward $100/barrel before the end of the year, stock markets will most likely react negatively. Fears of inflation will be reignited, which in turn will put to rest any hopes of monetary easing. In a worst-case scenario, economic numbers may come in weak, while oil prices rally, which in theory could send stock markets plunging. Expectations of weak sales, profits, and prospects for the business sector, combined with expectations of higher interest rates in response to a need to keep inflation in check could potentially bring even some of the most pessimistic predictions for the S&P 500 into play. My take on it is that markets are currently still priced for the low-interest rate environment we saw in the 2009-2021 period.

As we can see, the S&P is trading at a P/E ratio of about 24, which is significantly higher than historical averages of about 16. A realization that the market needs to readjust to the new interest rate realities we see today may occur at any point, which would lead to a significant selloff in the broader markets. Besides the variables I highlighted, there are an endless number of factors that could come into play, which could produce a significant move in the market before the end of the year. In conclusion, just because with two months to go I placed first, it does not mean that by the end of the year, It does not mean that my odds are better at winning in this context than they are for most other analysts.

Examples of recent investments, or potential opportunities I am looking at for the rest of the year

If the S&P 500 declines about 4-5% from current levels, it looks like I will be in the running for first place. Even as I hope for the market to decline slightly from current levels, I am also looking at investments that are worth buying now or should keep an eye on for a good entry point. While it may seem contradictory from a big-picture point of view, it does make sense when we take a step back to remember that there are always some opportunities out there for a potentially good entry point in individual stocks or industries, regardless of what the overall market might be expected to do. The following are some recent investments I made, as well as some stocks of interest:

• Lithium miners:

I started a position in lithium miners after I saw a significant decline from recent highs or all-time highs. I first started buying once lithium miners' stock prices declined about a third from their highs. I currently have Albemarle ( ALB ), SQM ( SQM ), Lithium Americas Argentina ( LAAC ), and Lithium Americas Corp. ( LAC ) stocks in my portfolio. I recently bought shares in the first three. I am currently holding off on buying more Lithium Americas Corp stock because it is a pre-production bet that emerged once the original Lithium Americas split into Lithium Americas Argentina and Lithium Americas Corp. I am not particularly bullish on pre-production startups that need massive capital to ramp up within the current higher interest rate environment.

Albemarle stock is currently down almost 2/3 from its all-time highs, and SQM stock is less than half in price from its all-time high, so I figured it is a good time to add to my already-existing positions. SQM in particular is an attractive buy & hold, given that it pays a 15% dividend. Albemarle too is in many ways attractive, with a forward P/E of under 5.5 currently, which is similar to SQM, although it does not have a dividend that is nearly as generous. It does seem to have better future production growth prospects, and arguably a lower geopolitical risk profile, as I highlighted in past articles.

The dramatic decline in lithium miner stock prices has been triggered by growing perceptions of a slowdown in the EV growth trend . That in turn led to a dramatic decline in lithium spot prices.

The way I see it, a lot of the recent negativity concerning the lithium demand outlook, driven by a cooling level of enthusiasm for the EV revolution is already priced into the lithium market, while any hint of improving trends is likely to ignite a significant rebound, which should also lead to a rebound in uranium mining stocks.

• Greenbrier

I had a long-term position in Greenbrier ( GBX ) stock in the past, which I sold at the end of June, taking advantage of a positive earnings report. Its stock price recently took a significant dive, following its earnings release last month. It seems that the earnings per share of $.92, though it is a healthy result in terms of earnings/revenue, did miss expectations by eight pennies. While those focused on the shorter-term impact of earnings results see it as a time to sell, I saw the selloff as a chance to buy. I see the long-term prospects for this company as bright for the longer term, mostly on a bullish outlook I have for the rail industry because it is a more fuel-efficient way to transport goods compared with alternatives such as trucks.

Greenbrier's rail equipment manufacturing business fits in well within that long-term vision, with operations in the Americas as well as in Europe and a versatile product line. It should be noted that for the entire fiscal year of 2023 that ended in September, revenues increased from $2.98 billion for fiscal year 2022 to $3.94 billion. Earnings also increased from $46.9 million to $62.5 million for the period. With a P/E of just under 10 currently, while continued revenues and profit growth prospects look favorable from a broader global macroeconomic perspective it is an attractive longer-term investment opportunity. The dividend, currently at around 3.3% makes it an extra attractive long-term investment. The one reason to worry is the thin earnings margin when looking at revenues versus earnings, of just 1.6% currently. It is a margin that can easily evaporate, leaving Greenbrier shareholders owning shares in a money-losing company.

• Oil sector investment opportunities may arise

With oil prices down significantly this fall, I am keeping an eye on investment opportunities in the sector, if we see a decline in oil prices of perhaps another 10% to 20% from current levels.

About a quarter of my investment portfolio is already allocated to the oil sector. Suncor ( SU ) and Canadian Natural Resources ( CNQ ) are my main investments in the sector. I bought a small position in Chesapeake ( CHK ) stock this year, for some natural gas exposure, specifically with growing LNG exports in mind, which should help produce at least occasional natural gas price spikes.

Given my already sizable position in this sector, I am in no hurry to add significant new positions to my already existing ones. I might consider adding a few additional stock positions if a better entry point arises, which is entirely possible, despite what seems to be a relatively tight global liquid fuels supply/demand situation. It should be noted that for the fourth quarter of 2023, OPEC sees global liquid fuels demand at just over 103 mb/d, while global production stood at 100.6 mb/d in September.

Even if the demand assumptions turn out to be overly optimistic, it seems to me that there is a long way to go in achieving a balanced supply/demand situation. While this is true, in the short term, the market does not have to make sense from a fundamental perspective. A combination of headlines could easily drive oil prices down further before the end of the year, dragging oil stocks down with it. If it happens, I will probably refrain from adding to my sizable already-existing stock positions. I have my eye on a few other stocks, like Diamondback ( FANG ) for instance, which I recently covered, where I might entertain taking up a small position if a decent entry point presents itself.

Investment implications:

I am not optimistic about the broader market outlook for the rest of the year, at least when going on my assumption of a rational market, which is always a stretch to assume for the shorter term. I do see investment opportunities, despite an overall less-than-stellar outlook for the overall investment environment. Aside from the long-term fundamentals-based potential investment opportunities I highlighted, there are always fun, speculative investment opportunities, such as VinFast ( VFS ). I recently covered this stock, pointing out some of the advantages it may have in succeeding, though it remains a long-shot, high-risk/high-potential reward investment opportunity. Such potential opportunities tend to arise through any market conditions. In conclusion, though I expect and hope for a slight decline in the market from current levels to the end of the year, it does not mean that the quest for investment opportunities ends. There are opportunities to be found through any market conditions. One just has to make sure that the fundamental long-term reasoning and the choice of entry points are sound.

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