The Market Votes for High Prices, Strong Economy or Not

“In the short-run, the stock market is a voting machine. Yet, in the long run, it is a weighing machine.”

–Benjamin Graham

The Market Votes for High Prices, Strong Economy or Not

October 10, 2024 – The S&P 500 touched new all-time highs yesterday. That’s hardly news. For this time of year, it is. But this is no ordinary year.

Markets are usually volatile in October, but they are not volatile while still making new highs. Plus, we’re less than a month out from the largely fictitious choice of presidential candidate. The betting sites continue to offer odds at around 50/50… emboldening bitterness on both sides.

Already at dizzying heights, the major indexes continue to tick higher. AI enthusiasm has waned somewhat. Institutional talk of a “market rotation” (i.e., seeking positions outside the Mag 7) is still strong.

The 493 stocks in the S&P 500 that aren’t the Magnificent Seven are starting to show a blip on the market EKG.

But is it too little, too late? How should we value markets anyway?

The data from multpl.com tells us that the S&P 500 trades at 30 times earnings. However, it’s traded as low as 5.3 times earnings and as high as 123.7 times.

Weighed against those extremes, today’s read sounds reasonable. However, with a median of 15, maybe only big money would find today’s read of 30 acceptable.

From an individual investor’s perspective, it’s wise to take another look.

The traders voting for ever-higher market valuations are betting that these valuations, at twice the historical average, can and will go higher. Companies will have to work mighty hard and increase to justify the earnings already on the books.

Nvidia, the poster child for this AI-inspired run at all-time highs, has managed to grow its earnings as fast as the stock price has already risen.

What happens when that rate of growth stalls out? We’re going to find out, right? That “Cisco moment” may arrive sometime next year, given the data they’ve shared in their latest earnings report.

Paid readers will recognize the “Cisco moment” from this month’s Grey Swan Bulletin.

For the time being, traders high on high frequency trading (HFT) programs are willing to gamble on capital gains and push the S&P 500 to 6,000. Historic valuations on trend would put the index at 3,000.

Caveat emptor.

Too much is at stake in the election and the fuzzy math we see from the Bureau of Labor Statistics to count on a sell-off just yet. Today’s CPI data will suggest whether Jerome Powell has the cojones to deliver another 50 pt rate cut.

Helping us with an alternate look at metrics outside of earnings today is my Empire of Debt co-author Bill Bonner. Enjoy ~~ Addison

Golden Flack Jacket

Bill Bonner, Bonner Private Research

We drove up to Lake Champlain yesterday for a wedding. The leaves have begun to change, but it is still early in the season; they’ll be in their full glory in a month or so.

In the last two election years, we noticed that when we got beyond the commuting range of major East Coast cities, we began to see Trump signs everywhere. This year, we saw almost none. In one Upstate New York town, a place we assumed was Trump country; we saw only a giant Harris/Walz billboard. Are people losing interest? Is this a meaningful ‘straw in the wind’?

Don’t know. So, let’s get back to business.

CBS asks:

Does gold investing make sense with the price high? Here’s what experts say.

In recent years, gold has caught investors’ eyes, especially since the start of 2024. The price of gold has been on a steady climb and even hit a new all-time high of $2,672 per ounce in September. This surge has pulled in even more investors, fueling further price increases. But now, with gold prices at record levels, many are asking: Is it still wise to buy gold? Or should investors wait for a pullback?

The investment pros had the usual answers. Given the risks of war and inflation, most see gold as a ‘haven.’ Many expect that it is an ‘investment’ that will pay off.

But gold is not an investment. Warren Buffet is right; it will never give an investment return. It has no factories or sales outlets. It doesn’t make payroll or a profit. It hasn’t been souped up with AI. It doesn’t do anything—it just sits there.

It doesn’t grow more prominent. But it doesn’t shrink, either. Its purpose is merely to avoid an investment loss… notably the Big Loss that would knock you out of the game.

In the long run, you make money by owning a piece of a profit-making business. The profit represents an actual increase in real wealth. A quintessential example of that was Philip Morris, which kept making smokes, making profits, and distributing money to shareholders. If you had invested $1,000 in Phillip Morris a hundred years ago, you’d have $250 million today.

However, Phillip Morris is not immune to the diseases, mood swings, and bad hair days of Wall Street. When the market got sick, the cigarette companies coughed, too. Stock prices can wheeze and sneeze for an entire generation before returning to their prior rude good health.

While we can never know when we might catch a cold, we can at least shut the window from time to time. That is the insight behind our Dow/Gold macro trading model. It aims to keep you in the stock market so long as there is a decent hope of returns… and to keep you out when the risk of a Big Loss increases.

The two thresholds — the places where we suggest moving in or out — are five and fifteen. When you can buy the Dow for less than five ounces of gold, the risk of a Big Loss is low; it’s time to buy stocks. When you have to pay more than fifteen ounces, on the other hand, it’s time to move out of stocks.

Where are we now?

The ratio is around 16. We’re out.

That is not, however, the whole story. Markets move in broad swings from bull to bear, from rising prices to falling prices and back over long periods. This is what we call the Primary Trend. Grosso modo, stocks are either going up or going down. If they’ve been trending down, we assume that they’ll keep going down until they reach a bottom.

If they’ve been going up, we assume the trend will continue until they reach a top. We don’t know where those bottoms and tops will eventually be found or what exactly will happen in the meantime. But tops and bottoms show up sooner or later, and they are reliably (by definition!) beyond our 5-15 fence lines.

Currently, stocks have been going down (in terms of gold) since 2000. This is at odds with what everyone believes. Although stocks have gone up a lot in nominal dollar terms, gold has gone up even more. From forty ounces of gold to buy the Dow stocks, it now takes only sixteen.

The logical place to be when you are out of stocks is in gold itself.   But gold has its moods, too. Right now, it is relatively expensive. It wouldn’t be surprising to see the price go down – shaking recent passengers off the bus – before it resumes its drive to its ultimate destination, under 5 ounces to the Dow.

Of course, gold is not the only ‘safe haven.’  You could be in cash. Or real estate. Art. Or… even a few carefully selected stocks.

The Dow/Gold model speaks for the stock market generally… for the averages… for the great mass of the stock market, not for specific companies. There are always some that resist the Primary Trend. And other companies pay such nice dividends that you don’t care if the stock price goes down.

New products, technologies, and opportunities also emerge even when the Primary Trend is down.

The Dow/Gold macro model is not a straitjacket. It’s a flak jacket. It helps protect you from the Big Loss. ~~ Bill Bonner, Bonner Private Research

So it goes,

Addison Wiggin,
Grey Swan

P.S. Gold has backed off a bit from its all-time highs, consistent with a short spike in the yield on T-bills. But yellow metal still stands to gain if the tech market wobbles.

If you’re waiting for a gold sell-off, keep this in mind. It might be during a market panic when investors are dashing for cash. Our advice: prepare for a panic now, and buy gold before the rush.

P.P.S. Heard ‘round the Grey Swan water cooler: when asked Helene and Milton why he moved to Florida from New York, one of our trusted advisors said of The Republic of Florida… “It’s the next best place” behind Puerto Rico. His reasons:

• No state income tax
• No city income taxes
• Property taxes are less than in New York
• Better roads than New York
• A lower cost of living than New York
• It is one of the highest-rated school systems (I know, but I have a hard time believing that)
• More crime than in Nicaragua but less crime than in New York
• Better weather than New York.
• A governor that isn’t “woke.”

Thank you if you have your own thoughts to contribute to the water cooler kibitz, you may do so here: addison@greyswanfraternity.com