Weekly Good Reads: 5-1-1
Record Stocks, Global Risks, Financial Well-being, Long-Term Asset Returns, Thematic Investing
Welcome to Weekly Good Reads 5-1-1 by Marianne O, an investment practitioner and author of
about investing, economy and wellness ideas. Every week I include 5 links to relevant economic and investment, finance and wellness/idea pursuit as well as 1 important chart and 1 term to know. All the Weeklies are here and here is the index of charts and terms. You can easily subscribe to my newsletter by clicking below.👋 This year I will be sharing my interviews with female fund managers, investors, founders, technologists and more with the first one below. Subscribe to follow.
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Market and Data Comments
The S&P 500 hit a record high on Friday as tech stocks, fuelled by the AI boom, led the rally, and the S&P was up 1.2% for the week and 1.5% for the year. Nasdaq is up 2% this year after a 2.3% jump this week, whereas global stocks (measured by the MSCI All-Country World Index) are down 0.4% YTD.
The discounting machine, the market, is implying the next 12 months of earnings growth (from a bottom-up perspective) of 17%, while the Nasdaq is implying 40%. Before we get too excited, stock price growth is a function of earnings growth, dividend yield, and valuation (starting point and change in multiples) so one cannot translate expected earnings growth directly to what the stock market index will do for the year. Starting valuation is key to how a stock or market will perform.
In the US, retail sales, industrial production, and housing starts (hard data, also backward-looking) surprised to the upside this week, but “soft” indicators including regional Fed surveys and local business conversations, which the Fed pays equal attention to, are showing a different picture - businesses slowing under the weight of the 5%+ interest rate hikes in 18 months.
Fedspeak this week indicated interest rates will more likely be cut in 2H of 2024 and not March. The market is now pricing in a 50% chance of a rate cut in March (from 80% last week). Fed emphasized they would move “methodologically and carefully.”
As the Charles Schwab economist said (first Econ/Investment article), the recent economic data have something for everyone, satisfying both the stock market pessimists and optimists. The Treasury Volatility Index (MOVE) dropped 1.4% this week, supporting the stock market rally.
Still, from the chart above, the US 10-year government bond yield minus the Fed Funds rate is at a 22-year low and is approaching -2%, indicating long bond yield will be higher for longer. If you believe in the natural rate of interest, the long-term real GDP rate plus the inflation rate (2.5% + 2% = 4.5%), the long bond yield at 4.38% looks slightly expensive.
Elsewhere, Europe is grappling with weak growth and faster-than-expected disinflation, pointing to rate cuts likely starting in April.
China reported a real GDP growth rate of 5.2% yoy in 2023, with the official Xinhua agency challenging the “Peak China” narrative.
China contributed about one-third of global growth. In 2023, 82.5% of that growth came from consumption. Despite all the media focus on deflation and property slump in China, one bright spot is car export, with China exporting 5.22 million vehicles (1/3 was new energy vehicles, up 67% yoy) in 2023. China’s BYD quarterly sales already exceeded that of Tesla in the last quarter.
Many analysts cited the need for a broader stimulus package (especially fiscal easing) and reforms in 2024 to prevent the country from getting into a debt-deflationary spiral.
This coming week, we will monitor US Q4 GDP on Thursday and December Personal Spending and Core PCE price on Friday, the Eurozone Composite PMI on Wednesday, the ECB monetary meeting and press conference on Thursday, and the Bank of Japan monetary policy meeting on Tuesday.
Economy and Investments (Links):
Something for Everyone (Liz Ann Sonders, Charles Schwab Chief Economist | VettaFI)
How Corporate Belt-tightening Helped the Soft Landing Cause (Axios Macro)
Takeaways from Davos: Business Leaders See No Recession in 2024, and Few Want to Talk about Israel (CNBC)
+ Global Risks Report 2024 (World Economic Forum) with Key Findings and Interactive Data
While extreme weather events top the long-term risk and rank high in short-term risk, the number one short-term risk is misinformation and disinformation - the risks will be magnified with elections happening in over 60 countries plus the EU covering 49% of the population in 2024.
This threat was ranked first out of 34 in India, 6th in the U.S. and 11th in Mexico - all countries which hold national elections in 2024 (Statista).
Emerging as the most severe global risk anticipated over the next two years, foreign and domestic actors alike will leverage Misinformation and disinformation to further widen societal and political divides (Chapter 1.3: False information). As close to three billion people are expected to head to the electoral polls across several economies – including Bangladesh, India, Indonesia, Mexico, Pakistan, the United Kingdom and the United States – over the next two years, the widespread use of misinformation and disinformation, and tools to disseminate it, may undermine the legitimacy of newly elected governments. Resulting unrest could range from violent protests and hate crimes to civil confrontation and terrorism. (WEF, Global Risks Report 2024)
Finance/Wealth (Link):
Rate Your Financial Well-being: Part One and Part Two (Rick Kahler, VettaFI/Advisor Perspectives)
Kahler examines the 5Ps and 5Cs of financial well-being based on his training on internal family systems therapy with the healthy internal system led by one’s authentic self.
Wellness/Idea (Link):
Information That Would Get Your Attention (Morgan Housel)
+ 4 Steps To Creating Fun + Easy Lettering Compositions (Archer and Olive)
One Chart You Should Not Miss: Long-Term Asset Class Returns
Institutional investors like to base their strategic asset allocation for long-term portfolio planning on capital market assumptions (CMA), which are estimates for long-term asset class returns. Financial advisors also create portfolios for their clients using CMA to attain their long-term goals. Asset allocation is key to a long-term investment strategy; at the crux is the belief that diversification across asset classes can enhance returns and mitigate risks over the long term.
From the chart below compiled by Morningstar, forecasters now see almost equal 10-20-year returns from US Equities and US bonds (slightly above 5%), with developed markets and emerging markets returns at 8 to 9%. US stocks have lower returns relative to history due to lower growth potential and starting valuations while bond returns have risen compared to previous years due to higher starting bond yields. One surprising factor that can add to higher bond and stock returns is productivity growth.
One Term To Know: Thematic Investing
Investing can be based on asset classes such as bonds, equities, and alternatives (such as real estate and private equity/credit), regions, and market-cap sizes. There is sector investing which includes technology, health care, consumer staples or discretionary, materials, etc.
Thematic investing has risen in popularity in the past few years. They target ideas, personal values, or long-term trends that allow investors to capture potential investment opportunities due to macroeconomic, technological, and social changes. One brokerage house offers 40+ themes for investing.
Thematic investing is investing in a portfolio with a collection of companies representing a certain theme. These themes can include transformative technologies (e.g. Robotics and AI), environment and resources (clean energy), health and healthcare (genomic innovation), society and lifestyle (smart cities), macro themes (inflation), etc. (source: MSCI). A company can represent several themes, and a theme is not limited to a particular industry classification.
One example is Nvidia, which cuts across themes including autonomous tech, digital economy, disruptive technology, future mobility, Millennials, rising consumers, robotics, blockchain, internet innovation, and smart cities.
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