Chart of the Week: The Effect of Interest Rate Changes 

Most Americans, including college-educated Americans, know little about economics and next to nothing about how the decisions made by the US Treasury and Federal Reserve affect the US economy. 

I was as ignorant as the next person until I went to work for a publishing company that specialized in following, interpreting, and predicting the investing markets. That was forty years ago. Since then, I’ve read reams of book chapters and essays on economic history and theory, as well as dozens of ideas about how to invest in the financial markets according to the actions of the Treasury and the Federal Reserve.

My level of understanding on this subject is still very basic. But I can say that I have come to a place where it is clear to see that fiscal and monetary policies do have big and undeniable effects on the financial markets, including not just stocks and bonds, but also every other asset class.

I have also learned that this is only a part of what one needs to know to make wise investment decisions. And that’s because the US economy, as large as it is, is nevertheless just a part of the considerably larger economy of the world.

This week, Sean presents us with several charts that track Japan’s fiscal and monetary policies and demonstrates, quite convincingly in my mind, why astute investors must understand what is going on there. – MF 

The media has been hanging on every word Jerome Powell utters. Investors want to know when interest rates will decrease.

But while this has been happening, there’s been a major development in global monetary policy that hasn’t generated enough attention.

Most developed nations increased rates to curb inflation, but the Bank of Japan was the last holdout.

On March 19, that changed.

In the wake of higher inflation and a weakening yen, the Bank of Japan raised their interest rates for the first time in 17 years.

Japan is usually late to the party when it comes to hiking interest rates.

Just as US central bankers are terrified of repeating the monetary policy mishaps of the 1970s that triggered a decade of stagflation…

Japanese central bankers do not want to repeat the monetary policy mistakes that cast a frost on their economy in recent decades.

This policy change is going to have a series of complex ripple effects through the global economy.

For one, the yen carry trade that has been generating huge amounts of money for US institutional investors will become less lucrative.

In a carry trade, investors borrow in a currency with a low interest rate and invests in a higher-yielding currency. A 3-month dollar-yen carry trade can earn as much as 5% annualized.

Secondly, because Japan tends to be late to hike rates, their monetary policy decisions are a bit of a “canary in a coal mine.”

For the past 30 years, their interest rate hikes have inevitably preceded global economic recessions.

Is this a clear sign that global economic catastrophe lurks around the corner?

I doubt it. It could be months or years before we feel the chilling effects of monetary policy changes.

But it is a sign that we should continue to be incrementally more cautious.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: The Effect of Money Supply on Inflation 

I’m not a stock market analyst. I’m not even interested in stocks. But I have a sizable percentage of my wealth (about 20% to 25%) in stocks because the stock market is a historically strong developer of wealth, averaging about 10% over the last 200 years. 

About 12 years ago, working with several of the best stock analysts I know, I developed a system that I call Legacy Investing. It’s basically like investing in an index fund, but with some adjustments I made that I hoped would boost my return by 3% to 5% – in other words, give me the hope of being able to get a 13% to 15% ROI on my stocks over the long term.

So far, it’s worked out well. So I know the sensible thing to do is to is leave my portfolio alone, since trying to time the market’s ups and downs usually results in getting an ROI from it that is considerably lower than the 10% historical average. (Most individual investors trying to play that game earn about 2.5%.)

Notwithstanding this investing philosophy, I do keep my eye on about a half-dozen economic and market analysts who I know personally and whose thinking I know (from experience) is very good. And once in a while, when most of them are worried about the same dangers or excited about the same opportunities – and when their doubts and fears match my gut – I do make adjustments.

In the last year or so, I’ve become increasingly concerned about a significant drop in the value of my stock portfolio, and I’ve been thinking about what I can do about it. After reading Sean’s piece today, I decided to start taking some profits from my growth stocks and move that money into dividend-paying stocks and even some high-yielding but relatively safe bonds. – MF 

This week’s chart of interest comes from the folks at EPB Research.

To understand the pressure that money supply has on inflation, they compared the broadest measure of money supply (called “M4”) to the pre-pandemic trendline:

M4 measures how much money is in the US economy, including demand deposits, time deposits, and Treasury bills.

The quantitative easing during the 2020 pandemic flooded the economy with money through both monetary policy and fiscal stimulus.

Even with efforts to remove money from the economy, called quantitative tightening, we are still about 2.6% higher than where we would expect to be had trends continued from last decade.

According to the analyst Lyn Alden, “per-capita money supply growth is one of the most closely correlated variables to consumer price inflation.”

Naturally, with this above-trend supply of money, we see from the latest data that inflation remains stubbornly high as well – up 0.4% in February 2024, for a total CPI increase of 3.2% over the previous 12 months.

That’s far higher than the Fed’s 2% target, meaning that we should not be expecting a rate cut anytime soon.

But at the same time, if the Fed keeps tightening and reducing the money supply, there will be little money for economic growth. That means fewer jobs.

And even with Fed tightening, the big culprits in our sticky inflation problem are transportation services, shelter, and food away from home.

The Fed can print money. The Fed cannot print cheaper houses, cheaper cars, and cheaper food.

So even if the Fed does successfully tighten money supply back to “normal,” that still probably will not be enough to fix the inflation problem in the US.

At least, not anytime soon.

As we get closer to the end of the year, bonds and dividend-paying stocks are going to appear more attractive as growth projections appear more unrealistic due to all this sticky inflation.

Over time, this will likely cause stock market prices to drag – especially since growth stocks now make up an outsized portion of the overall market.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: Is the Market Overbought? 

This week, Sean asks a question that many stock investors and most stock traders have been worried about recently: For nearly 90 days, the market has been outpacing expectations. Is it “due” for a drop. And if so, how deep and when?

His approach to the answer is technical: comparing this most recent three-month streak to streaks in the past, going all the way back to 1950. I don’t use historic patterns to determine what stocks I buy and sell, how much I’m willing to pay for them, and when to get into or out of them. But I do like to read technical analysis because so many things in the universe seem to happen in patterns. And when technical data supports the fundamental analysis I use, it does make me a bit more confident about my buying and selling decisions. – MF

There’s no denying that the market has been on a hot streak over the last 3 months.

But how much longer of a hot streak should we expect to see?

To find out, I looked at all the S&P 500’s 3-month returns since 1950. Then I found out what return in this timespan is way higher than normal (9.5%).

We can set that 9.5% line as our “overbought” level. Any higher? The market tends to slow down or decline afterward, as you can see from the spikes on the chart above.

By this measure, the market has been overbought since late December 2023.

At the time of writing, we’ve had 31 consecutive days that the S&P 500 has delivered an unusually large gain over the previous 3 months.

When the gain is this high for more than a month (about 20 trading days), we only see this streak continue to day 37 on average.

But if we only look at days when the market’s 3-month return has been positive overall, we’re at day 74.

When these positive gain streaks last longer than a month, the streak of positive returns lasts about 99 days on average.

That means, more or less, we should not expect the market to keep carrying on like this for much longer.

We should expect, very soon, the market to go sideways or down, even if just a little bit.

And this is okay.

The market, and money, are like the tide.

Water rolls in. Water rolls out.

Sometimes the market needs to go down before it can go back up again.

Just do not panic when we see the inevitable pullback.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Chart of the Week: From Your First $100,000 to $1 Million

Einstein once called compound interest the Eighth Wonder of the World. And when it comes to wealth building, it deserves that title, because its ability to grow your net worth over time usually amazes people the first time they come to understand it. In my book Automatic Wealth, I devoted more than a chapter to its power, including a number of examples that did a good job of demonstrating its potential. 

This week, Sean has found other graphic ways of demonstrating an aspect of this power that, although I understood it intuitively, I’d never thought about articulating in that book or others. If you are not a huge fan of compound interest, this will make you one. – MF 

Did you know that $100,000 is actually 25% of $1,000,000?

It’s true.

The reason this feels illogical is because most people think linearly. 1 becomes 2 becomes 3 becomes 4.

But with compounding, the logic is exponential in nature. 1 becomes 2 becomes 4 becomes 8.

And once we start thinking exponentially, we see just how powerful of a tool this concept is for building wealth.

The blog “Four Pillar Freedom” has an excellent example of how compounding works.

If you invest $10,000 every year and earn a 7% annual interest rate, your portfolio will grow to $100,000 in 7.84 years:

And if you continue to do this, you’ll get the next $100,000 in 5.1 years.

Do you see where this is going?

With the power of compounding, the amount of money you have invested over a long enough time determines how fast your money can grow.

But what few people realize is that it also shrinks the amount of time you need to generate the same amount of money.

By investing $10,000 per year at 7% interest, it would take 22 years to get to $500,000.

But to go from $500,000 to $1 million? It only takes 8.5 years.

All in all, if you can save $10,000 per month and generate 7% returns…

Which, by the way, you can beat pretty easily if you invest in a basket of large cap stocks that have a history of growth and rewarding shareholders over time…

It will take you a little less than 31 years to earn that first $1 million.

It took you 7.84 years to get your first $100,000. That’s a little more than 25% of 31 years.

You get that first $100,000? You’re already a quarter of the way there.

But as the late Charlie Munger said, “That first $100,000 is a b*tch.”

– Sean MacIntyre

Click here to watch Sean’s recent video about the most valuable mental trick he learned from Charlie Munger about building wealth. 

Chart of the Week: The Cluster of Woe

I’ve been in the economic and investment prediction business for more than 40 years, and many of my favorite colleagues have been occasional or perma-bears. I was once persuaded by one of them to buy a bunch of gold when it was priced at $400 an ounce. I’ll be forever grateful to him for that. But for the most part, I’d classify my thinking as pragmatically optimistic. I’ve always believed that if you managed your portfolio smartly, you could get richer every day and every month and every year.

About two years ago, I began to lose my optimism about the potential to grow richer. Especially if most of your assets were tied up in stocks. That gloomier outlook was based partly on fundamental and technical analysis of the markets (which Sean is very good at) but also on what I consider the rapidly moving decline of Western civilization and its values.

Today, Sean gives us his perspective. Reading it, I am more convinced than I have been in recent years that now is the time for caution and for rebalancing assets to be as anti-fragile as possible. – MF

There is now mainstream consensus that the US has moved beyond the risk of recession.

The stock market has soared to new highs with all the carefree hubris of Icarus.

But in the wings, there seem to be a few voices left to shout out sensible warnings.

Dr. John Hussman, who I discovered by way of Bill Bonner, suggests we’re in fact entering a “Cluster of Woe”…

A confluence of economic and market indicators that collectively screamed alarm in in 1972, 1987, 1998, 2000, 2018, 2020, and 2022 – moments that preceded pretty sizable stock market losses averaging about -12.5%.

He provides this chart that shows the relationship between subsequent market returns and valuations:

We are currently sitting at the bottom right – the point where valuations look most insane, and the returns we should expect from the stock market over the next 10 years are not very good.

And we know the culprit.

The biggest cause of market overvaluations right now is tech and AI stocks.

Tech has pulled away so massively from the rest of the market that the market – weighted as it is by the perceived value of the stocks in it – has become an index of tech stocks.

Tech stocks now account for 29.5% of the overall market’s value.

One stock, Nvidia, has a larger market capitalization than every energy stock in the S&P 500 combined…

Despite generating only 14.4% of the net income of those companies.

Reader, we’ve seen this movie before. We know how it ends. And it isn’t “everyone got rich from tech stocks and lived happily ever after.”

Simply put, there’s probably a very good reason why Warren Buffett just sold some or all of Berkshire’s stake in tech-adjacent companies like Apple, HP, and StoneCo…

But bought more energy companies.

A cluster of woe is upon us. It is only a matter of time before investors finally realize it.

– Sean MacIntyre

Subscribe to Sean’s YouTube channel here. 

Last week, Sean demonstrated something that everyone that wants to understand the true state of our economy needs to understand: Many of the numbers we get from government agencies, numbers that are repeated uncritically by the press, are either misleading or downright deceptive because (1) the government wants taxpayers to be ignorant about economic issues, and (2) the kids that are hired to work as journalists are dumber than dental floss.

This week, Sean takes his mission to another level by talking about why all the misinformation put out by the government and published in major news outlets (including the NYT and the WSJ) is wrong, and what that should mean to you. – MF

Last week, I explained why job growth numbers published by the White House appeared to be misleading at best…

And covering up a serious problem at worst.

Today, I want to talk about unemployment numbers specifically, and why the headline unemployment figure is more than just overly simplified. It distorts the economic hardship people are facing.

We have been consistently hearing that the US unemployment rate is currently 3.7%.

But that does not mean that 96.3% of people in the US are employed.

This unemployment percentage does not include workers who have given up actively seeking a job or freelancers or gig workers who recently lost clients. It also doesn’t specify whether workers are employed part time or full time.

Once we factor in the total number of unemployed people, plus “marginally attached” and part time workers, that unemployment number surges to 8%.

Even when we do this, the figure doesn’t factor in the fact that, since 2020, the number of people who have “opted out” of the U.S. labor force has stayed stubbornly high.

And none of these numbers yet factor in how companies around America, in every industry, have been laying people off in droves.

There’s rot beneath the veneer of the US’s “surprisingly strong economic growth” in recent months.

Unless something changes, it will be spreading to the surface sooner rather than later.

– Sean MacIntyre

Sean is working on a video about this topic. You can be notified when it’s complete by subscribing to his YouTube channel here.

Chart of the Week: Misleading Job Growth Numbers

This week, Sean investigates reports of US job growth in recent months – reports that the Biden administration is touting as evidence of the success of “Bidenomics,”and a surprising number of economic commentators and market analysts are quoting as fact.

Of course, this runs contrary to the experience most Americans are having every time it comes to paying a bill or checking their bank balance. I’m grateful to Sean for helping me understand the reality that belies the headlines. – MF

The White House has entered full campaign mode. Central to its messaging has been the state of the economy.

Just look at the steady job growth in recent months, the White House says.

This “growth” has naturally caused the unemployment rate to stay steady below 4%.

But a little bit of sanding removes some of the gilding around these claims.

Really there are two problems with the data: These job growth numbers are misleading, and the unemployment numbers are misleading.

I will talk about how misleading the unemployment numbers are next week.

In the meantime, here’s what the recent job numbers are hiding…

The US is actually hemorrhaging full-time jobs. Over 1.6 million have been lost in the last 3 months.

At the same time, part-time work has been climbing steadily.

And who’s been hiring people?

The sectors adding the most employees are health care, government, and leisure & hospitality.

Take away jobs that are either in government or dominated by the government (health care), and year-over-year job growth is actually negative.

It’s pretty easy to unfold the ramifications of all this data:

* Many of the jobs being created are the product of unsustainable deficit spending.

* At the same time, the part-time jobs being added offer folks fewer hours.

* Fewer hours means less pay.

* Less pay means there’s less wealth circulating among the biggest group of buyers and consumers in the economy.

* Less consumption means less economic activity.

* Less economic activity leads to slower growth or negative growth.

If these trends continue, we are absolutely moving toward a recession.

So I see nothing very little worth celebrating in the Biden administration’s recent press releases about the strength of the US job market.

– Sean MacIntyre

Sean is currently working on a longer video, diving into the details of the current employment situation in the US. Click here and subscribe to his YouTube channel so you don’t miss it.

Yes, Restaurant Prices Are Higher – Considerably Higher!

K and I spent a long weekend in LA at the end of last month visiting Numbers One and Two Sons and their families. Dado (yours truly) was happy to grab the checks when we dined together. There were ten of us – six adults, four children. And we had four meals together – one breakfast, one lunch, and two dinners.

Perhaps it’s a function of my forgetfulness, but each check’s bottom line was higher than I expected. With tip, the breakfast came to $400. The lunch came in a $600. And the dinners were more than $1,000 each.

And we are not talking about Michelin Star restaurants. I’d judge the quality as slightly above middling – i.e., two steps above Applebee’s to four steps below Torrisi.

It seems like just 20 years ago, I was paying $10 to $15 a person for breakfast, $15 to $20 a person for lunch, and $25 to $30 a person for dinner. Am I wrong?

Look, I’m not complaining. I can comfortably afford to spend that kind of money at a restaurant. But what about the 200 million working- and middle-class Americans whose combined median income is less than $80,000 a year?

The Biden administration keeps telling us that the economy is strong and inflation has been whipped. It hasn’t dropped to the much eulogized 2%, but it’s in the 3%s – and that’s something to feel good about.

But polls show that most Americans don’t believe it. And for good reason. The cost of dining out has been rising steadily over the last 10 years – at a rate that exceeds both the CPI (Cost Price Index) and the PCE (Personal Consumption Expenditures Price Index), the two official measurements of inflation.

There are two reasons for that.

First, the CPI and the PCE are fake news. They were rigged years ago when creatures at the swamp decided to no longer include the cost of energy and the cost of food in their calculations. And for working- and middle-class Americans, food and energy comprise a much higher percentage of household spending than it does for wealthier Americans.

A second reason is that two-thirds of the cost of running a restaurant is the cost of labor, which has also accelerated greatly since the multi-trillion-dollar COVID giveaway bribe. And that represents two-thirds of the cost of eating in a restaurant, as opposed to eating grocery-store food at home.

For your further amusement, check out this piece by Michael Snyder, the internet’s most prolific producer of End-of-Times predictions, on the inflation history of the Egg McMuffin.

Chart of the Week: What Effect Do Presidents Have Over the US Economy While They Are in Office? 

Sean took the time here to reinforce something I’ve been saying for years: You can’t fairly judge a president’s economic policies by what happens with the economy during his term. And the reason for that should be obvious. First, many economic policies (and especially those with the potential to have the largest impact) do not result in change overnight. Most take years – often four to six years – to produce a measurable effect. Second, a president’s ability to create or affect economic policies is limited. Its impact is considerably more narrow and weaker than the power of the Federal Reserve. And even that is smaller than the impact of the billions of independent decisions made by businesses, entrepreneurs, and consumers on a daily basis. 

If you understand economics on at least a basic level, you recognize the speciousness of judging a president’s economic policies by the state of the economy during his term. But, as Sean proves below, judging a president’s economic policies by the trajectory of the stock market during his term might be even loonier. Because the stock market responds not just to all the economic, business, and monetary decisions discussed above, but also to the algorithms of computer programs and the psychology of individual investors.

I think there is only one thing a president can do during his term that can have an immediate and substantial effect on the economy and the stock market: Declare war. And that is almost always destructive to both. – MF

I recently made the case that historical data, on multiple fronts, suggest that 2024 will be an “up” year for the stock market.

Probably not great. But also probably not terrible.

In response to this point, I received this reply: “Depends if we still have a dementia patient in the oval office or not.”

Now, I have zero love for Biden. But I would be irresponsibly partisan if I believed anything besides the truth:

The market does not care who the president is. 

To prove this point, I found the inflation-adjusted stock returns for each president since 1974.

Over the last 50 years, here are presidential returns from best to worst:

* Clinton: 150.6%
* Obama: 127%
* Trump: 72.9%
* Reagan: 50.1%
* GHW Bush: 30.3%
* Ford: 18.3% (short term)
* Biden: 5.1% (term not yet concluded)
* Carter: -12.8%
* GW Bush: -45.3%

(Again, these are adjusted for inflation so that we get closer to an apples-to-apples comparison, factoring in economic environments.)

But we have to compare their returns to what we should statistically expect.

Here’s what I found: There’s only one person who presided over unusual, outlier returns.

Bill Clinton.

Everyone else? Including George W. Bush? They all land within 1.5 standard deviations from the mean. They’re all “normal returns” that we should reasonably expect if we’re going to invest over four- or eight-year periods.

That means two things:

First off, the president could be good or bad. The president could have amazing economic policies or terrible ones. The president could be demented or not.

I reiterate: The market does not care who the president is.

Secondly, markets only care about three things when it comes to politics: global stability, legislative gridlock, and fiscal stimulus.

“Slick Willie” had those three things in spades.

The economy (and, by extension, the stock market) responds to fiscal policies put in place by Congress, which the president only has marginal control over, and it responds to global economic conditions.

Would we have had such a crazy bull market in the 1990s if the Soviet Bloc hadn’t fallen, opening dozens of new markets at the same time the technology that catalyzes globalization went mainstream? I highly, highly doubt it.

And that’s why Clinton is the only outlier on that list.

The only presidents who come even remotely close to being unusual in terms of inflation-adjusted stock returns – Obama and Trump – also presided over an era of insanely atypical monetary policy. Which proves Mark’s point above in his introduction that the Fed has more power than the president to shape our economic reality.

– Sean MacIntyre

If you want to know how the market tends to perform in an election year in general, click here to check out the one-minute video Sean did on the subject.

Newsom’s Magnificently Stupid Plan to Fill His State’s $68 Billion Budget Hole 

Governor Newsom and California Democrats are once again “pioneering” an economic idea that is bound to fail.

I don’t know what Orwellian name they’ve coined for the bill, but it’s basically a wealth tax. A wealth tax is an annual excise tax on the worldwide wealth of taxpayers whose net worth exceeds a stated amount.

As is customary with taxing authorities, the wealth tax will be introduced in a way that won’t get great pushback, and then will become more severe after it’s established. In California, during stage one, it would apply only to billionaires, who would be taxed at 1.5% of their worldwide net worth. Few taxpayers will gripe about that, since there are fewer than 200 billionaires that live in California – a number that keeps getting smaller (there were 178 at the beginning of 2023, according to Forbes) because of wealthy Californians fleeing the state’s high taxes. (Not to mention its deteriorating government services, surging homelessness, a flood of illegal immigrants, and rising crime.)

If the bill passes, I’m willing to bet good money that we’ll see the population of California billionaires drop below 100 in the next few years solely because of the tax. And that’s not good. Not only will California lose the tax revenues of these emigres, it will lose thousands of jobs when some of them take their companies with them.

But that’s just the first stage. Come Jan. 1, 2026, the state would begin to impose a 1% wealth tax on all Californians, full- and part-time, whose net worth exceeds $50 million.

The bill, introduced last winter, is being discussed this week in the State Assembly. Its stated purpose is to raise billions in tax revenues to pay for a projected $68 billion budget deficit. If fully enacted, the wealth tax would raise an estimated $21.6 billion in revenue annually. A considerable sum, to be sure. But only about a third as big as the yearly deficit.

And that’s assuming no wealth exodus from the state. But the bill has a partial remedy for that. It includes a clause that would require Californians that leave the state to continue to pay the wealth tax years after they have established residency elsewhere.

To add teeth to the bill and get the support of lawyers, the bill would apply the state’s False Claims Act to wealth-tax records and statements. Which would mean that private attorneys could sue affluent individuals on behalf of the state for allegedly under-reporting assets – for which such attorneys would be entitled to a share of the state’s recovery.

In the meantime, California’s top effective marginal tax rate on wage income this year is increasing to 14.4% from 13.3%, owing to a new law that removes the $145,600 wage ceiling on a 1.1% state employee payroll tax to fund expanded paid family leave.

And the projected budget deficit of $68 billion will increase significantly as the state incorporates Newsom’s promise to give all of the state’s undocumented aliens free healthcare, education, and more.

They’ve tried wealth taxes in Europe in recent years, but it had the same effect there that I’m predicting it will have in California: a dramatic flight of the state’s highest taxpayers, including its largest employers.

And While We Are on the Topic of Fleeing Taxpayers… 

Writing in the Albany Times Union, Chris Churchill reported that the US Census Bureau released end-of-year data on population swings and found that New York suffered another major decline. During the one-year period ending July 1, the state’s estimated population dropped by 101,000, making it the largest in the country in both total and percentage.

The good news, Churchill says, is that population outflow is expected to slow and perhaps even stop. The reason? “Higher mortgage rates are making Americans far less willing and able to move, even when they might otherwise want to.”

“So, there’s a little good news for you,” he says. “More New Yorkers will stay but not because they are happier with their state and lives. They’ll stay because they’re stuck.”

A Fun Example of the Willingness of Political Actors to “Spin” Facts in Their Favor

In mid-January, acting Secretary of Labor Julie Su told the press:

“The Bureau of Labor Statistics reported an increase in union membership, with 139,000 more union members in 2023 than in 2022, meaning this country has 400,000 more union workers than we had in 2021. The gains under the Biden-Harris administration underscore President Biden’s commitment to being the most pro-worker, pro-union president in history.”

But a glance at the full data reveals that the growth in nonunion jobs was considerably greater than the growth in unionized jobs – a fact that is contrary to the point Su was trying to make. To wit:

“The US Bureau of Labor Statistics said 10% of hourly and salaried workers were members of unions in 2023, or around 14.4 million people. That is an all-time low, down from 10.1% of workers in 2022.”

Chart of the Week 

Today, Sean explains why, statistically speaking, 2024 is likely to be an up year for stocks. But that doesn’t mean he’s going to be adding to his stock portfolio. He tells you what he’s going to do below… 

With interest rate cuts on the horizon, experts have made fairly positive forecasts for both stocks and bonds in 2024.

Economic data are presenting a number of warning signs. But historical trends in the stock market suggest something pretty straightforward:

The year will probably end with stocks having gone up.

Since 1928, there have been 34 calendar years where the S&P 500 has finished up 20% or more against 26 total down years.

That means there are more “really good” years than “bad” years.

But what happens the year after a “really good” year?

Here’s a summary from A Wealth of Common Sense:

* The stock market was up 22 out of the 34 years following a 20% gain (65% of the time).

* The stock market was down 12 out of the 34 years following a 20% gain (35% of the time).

* The average return following a 20% up year was +8.9%.

* The average gain was +18.8% in up years.

* The average loss was -9.1% in down years.

* There were just two double-digit down years following a +20% year (1936 and 2022).

Simply put: The historical odds are in our favor to see the market rise in 2024.

Now, will that be a steady rise? Will stocks crash and recover, as they’ve done in the past? Will returns be exceptional or humdrum?

The uncertainty around these questions has led me to prefer bonds over stocks in 2024.

– Sean MacIntyre

Click here to see a brief explanation of Sean’s reasoning.

2023 Was a Pretty Good Year for the Global Economy, but… 

Despite widespread global inflation, geopolitical problems, and the economic after-effects of COVID and the lockdowns, the global economy in 2023 did a bit better than most economists expected.

However, in 2024, many of these same economists are saying that the US (and most of the rest of the world) will experience a global economy that is less sanguine.

In its semiannual “Global Economic Report,” the World Bank predicted that the growth of the world’s economy would slow to 2.4%.

That’s not good, because despite the improvement experienced in 2023, a 2.4% growth would still be the third consecutive year of economic deceleration. The report cited “continued higher interest rates, anemic global trade, reduced global investing, and rising geopolitical tensions” as the reasons.

If that turns out to be true, this first quarter of 2024 is the time for business leaders and individual investors to make changes. (I will write more about this in future issues.)

The Problem with Minimum Wage Laws 

Do minimum wage laws work? Are they helpful in improving the lives of our least-skilled workers? The evidence from a hundred studies over the last 20 years is clear. They do not.

And why would that be?

As I’ve mentioned before, by the time a minimum wage is agreed upon, the market demand for minimum-skilled workers is usually as high as the proposed wage or greater.

As I write this, 22 states are lifting pay floors, but many fast-food cooks and housekeepers are already earning more than minimum wage. And that’s because of free-market competition. The COVID shutdown and the move towards working remotely, have made it increasingly difficult for business owners to attract low-wage workers.

As noted in the WSJ:

“Robust raises in recent years have rendered pay floors largely irrelevant, even in states that aggressively lifted them.”

For example: “To start 2024, Washington State will raise the nation’s highest minimum to $16.28 an hour, from $15.74 in 2023. Washington ties its minimum wage to the consumer-price index, a measure of inflation. Hawaii has the largest planned increase, with its minimum wage rising $2, to $14 an hour, in 2024. That is part of a law that will increase the lowest hourly wages in the Aloha State to $18 by 2028. California, New York, and Illinois are also among the states raising the pay floor.

“Most low-wage workers are making well above those minimums. Through September, the lowest 10% of workers by income in each state earned hourly wages that were on average nearly 50% higher than their state’s minimum wages in 2023, according to a WSJ analysis that compared state minimum wages to income estimates from MIT Sloan School of Management professor Nathan Wilmers.

“That is the largest gap between actual pay and minimum pay in a decade.”

Read more here.

Chart of the Week 

This week, Sean MacIntyre talks about the expectation of some economists that we are quickly nearing a worldwide stock market crash. He’s not so sure. And he has another graph with solid analysis and thoughtful explanations to support his thinking. 

Some new stock market forecasts claim that the S&P 500 could dive as much as -86% in 2024.

The reason given for such a crash is usually overvaluation: Index prices have drifted away from what company profits can reasonably support.

But I question this assumption.

Let’s compare the price of the S&P 500 against the most predictive valuation metric – the Shiller CAPE Ratio.

We’ll compare current prices to both the CAPE’s long-term average and its 10-year average.

As I write, the S&P 500 is trading around 4300.

If it fell until its CAPE valuation returned to long-term averages, the S&P 500 would have to drop to about 2900. That’s a -32% drop from current levels. Cataclysmic, especially for retirees.

But what if the S&P 500 fell to its 10-year average CAPE?

The S&P 500 would drop to about 4030 – a -6% drop.

Not nearly as scary.

Many doom-and-gloomers balk at the market’s nosebleed-high valuations. But there are many reasons why this should be the norm.

Since the early 1990s, more Americans own stocks than ever before.

And one of the most popular investment strategies is simply to buy and hold the S&P 500.

It stands to reason that if tens of millions of people keep throwing money at one thing, the value of that thing will go up.

Also, retirement accounts and 401(k)s do not offer many alternatives besides stocks and mutual funds that own stocks. Workers have their money shunted automatically into stocks every month, regardless of valuation.

Finally, since the late 1980s, algorithms have accounted for up to 75% of all stock trading volume. Robots routinely scoop up stocks during downturns and drive prices back up. (They cause crashes sometimes, too.)

Simply put: The fundamental calculus of the market has changed. Investor behavior has changed. The world has changed.

So if there’s a cataclysmic crash coming in stocks… it won’t be because the market is “overvalued.”

– Sean MacIntyre

By the way, Sean is working on a free video that teaches stock valuation on his YouTube channel. Click here and subscribe to be notified when it goes live.