2025 = Is it going to be 1997 or 2000?

Happy Holidays...

After 5 months of hibernation with no real reason than writing block, I decided to use quiet morning of Christmas day to start writing again. Lot has happened in last 5 months - in particular release of Animal Spirits with Fed starting interest rate reduction cycle and historic victory of President Trump for 2nd term. As the year turns into 2025 and stock markets at all time high, one would wonder, what's next? 

To answer this, one needs to look back at 1920s and 1990s to give us some context on where markets may be headed.

1920s saw invention of televisions, radio, wider adoption of cars, vacuums, penicillin and many other which we consider household items now. These inventions created roaring 20s with markets going up by 500% eventually leading to crash of 1929. However during mid-20s, markets keep going up due to excitement of these inventions and end of World War-1 and Spanish Flu Pandemic.

1990s also saw many inventions - the key being launch of Netscape in 1994 leading to dot.com boom which continued till end of the decade. Netscape was released on Dec 15, 1994  - post that S&P returned 34% in 1995 and 20% in 1996. At that time, Fed started its rate cutting cycle from over 5%. All of these gains led to famous Greenspan comment about "Irrational exuberance".  But despite all of these, markets continued to pivot higher returning 33% in 1997, 28% in 1998 and 21% in 1999. People who stayed invested despite two years of bumper returns in 1995/1996 reaped the benefits. This also was with 2nd term for President Clinton. The internet boom created massive cycle of investments in building the internet. Eventually after 5 years of double digits returned, markets corrected in 2000 leading to dot.com bust.

So now that we understand little bit of history, we are again at similar cross-roads as mid-20s and mid-90s. Just over 2 years back release of ChatGPT created the massive investment cycle of rebuilding the compute infrastructure led by cloud titans with over $200 billion Capex investments each year spent and planned. Similar investments are needed to rebuild private data centers to be ready for AI workloads. Fed is reducing interest rates albeit slowly than markets would like them to do. President Trump is all about de-regulation and his MAGA theme would get into over-drive of investments coming into USA (Softbank already announced intention of investing over $100 billion). Cryptos are getting major boost due to crypto friendly policies by new administration. The tax cuts which are supposed to expire in 2025 would definitely get extended (selfishly I hope they also fix SALT part of tax-cuts). All of these bode well for the economy and the stock markets. USA is best positioned in all of the world in terms of economy and markets.

So what should an investor do? This time, instead of recommending individual stocks, I would recommend sector ETFs like:

Technology: XLK, QQQ, SMH, IGV

Overall Market: SPY, IWM, MDY, VTI, FAS

Dividend/Income: JEPI, JEPQ

China: KWEB

Crypto (very small amount): BTC, XRP, HBAR

Given markets are at all time highs and it can correct in a flash of moment (like it did last week post Fed meeting), my recommendation is to do periodic (weekly) investments into these ETFs to cost-average your investments and let it ride for next few years...Eventually we will see corrections like in 1929 and 2000 but that's little further out. As Mark Zuckerberg had said... "The Biggest Risk is not taking Not Taking any Risk"...and he knows this since Meta has been one of the best performer of big stock in 2024!

Enjoy the holidays and Happy New Year.

/Shyam

Elections and Rotations!

2024 will be known as an important year in terms of elections (97 nations covering half the population) across the major countries in the world. We are only halfway thru the year and already some key nations have gone thru elections and voters have indicated their preference for change (in a way). Let's take a look at few.

• India - Modi's BJP started with lots of enthusiasm with slogans of "Modi ki Guarantee" and "400 paar" (more than 400) seats (out of 543). Indian voters (which I considered one of the most smartest) gave reality check to Modi and BJP by reducing BJP count to 240 (from 303 in previous parliament) forcing it to form coalition government. I have lot more detailed hypothesis on these results (but not here). Almost everyone (including me) got their predictions wrong and lost some friendly bets. Indians want balance between "Strong, Prosperous, Proud" India with "Inclusive, Employment and Harmony". Modi and BJP are quick learners and have already started adopting their style of governing...next test would be upcoming state elections
• South Africa - Results were similar to India. Dominant party ANC's seat count went down significantly forcing it to form coalition government
• UK - It was almost guaranteed that Tories are going to lose and Labor will form government after 14 years. It's just the scale of win was surprising.
• France - Elections in France are complicated with two rounds...In between two rounds, French left/socialist parties realized what could happen and prevented outright wins by right-wing. It was still a big setback for President Macron
• Mexico - Elections in Mexico created the history by electing Claudia Sheinbaum. She is the first woman elected for this position. She comes from scientific and academic background which is a plus (this is as historic as when Obama became president of USA)
• Pakistan and Bangladesh - India's both neighbors had elections in early part of 2024. Both used to be one country till 1971. But what a difference in the way both elections were done. Bangladesh had normal elections while there is nothing much to write about elections in Pakistan 
• Russia - The results were "known" even before first vote was cast
• And now the big one - United States of America 
• The elections are in Nov and voters are still doubtful who will be their choices on ballots - especially democrats. 
• President Biden had bad debate and subsequent gaffes in most of his public appearances. He has become the fodder for TikTok/Reels meme videos. In his decades of public service, he has served the nation very well and should be proud of his contributions and achievements. He would do a great deal of service to his nation by stepping away from the race and letting someone else take the mantle of running against Trump and possibly winning
• Both house and senate are also for grabs and if democrats don't address their presidential nominee, they run the risk of giving house, senate and president to GOP

So in summary, voters want "rotation" in the governments (or at least style of governance)

And talking about rotation, that's exactly the theme when it comes to markets. Last week the rotation from big-caps (especially Mag 7) to other 493 S&P stocks and small caps started. It was evident when Russell 2000 went up by 5% while S&P was up by less than 1%. DOW, S&P and Nasdaq indexes reached their all time highs mainly due to Mag 7.  Top 3 companies (Apple, Nvidia and Microsoft) - each one of them have similar market cap as  **ALL** companies in Russell 2000 (approx 3.2T). As Fed becoming more dovish with 2 rate cuts coming in 2024, the gap between big-cap and small-cap performance will narrow. One way to play this rotation is to keep investment as equal weight SPY (Big-cap), MDY (Mid-cap) and IWM (Small-cap). 

Earnings season is about to get into high-gear for next 4 weeks...generally it should be as expected propelling indexes to further highs towards end of year. Won't be surprised if S&P makes a dash to 6000 during holidays.

/Shyam

The "i" factors are back again!

Happy Earth Day!

In following Stotra, we remember Mother Earth every morning before touching feet to the ground.

समुद्रवसने देवि पर्वतस्तनमण्डले ।

विष्णुपत्नि नमस्तुभ्यं पादस्पर्शं क्षमस्वमे ॥

Samudra-Vasane Devi Parvata-Stana-Mannddale |

Vissnnu-Patni Namas-Tubhyam Paada-Sparsham Kssamasva-Me ||

Meaning:
1: (Oh Mother Earth) O Devi, You Who have the Ocean as Your Garments, and Mountains as Your Bosom,
2: O Consort of Lord Vishnu, Salutations to You; Please Forgive my Touch of the Feet (on Earth, which is Your Holy Body).

(source: Green Message site)

So let's make sure that we honor Earth every day and preserve her for millions of years..After all we have only ONE!

It has been six weeks since I wrote about markets. During that time, markets reached all time highs (almost touching 5300) and down by 5% from those levels. What's worrying markets?

Back in August of 2023, I wrote about three "i" influencing markets (Interest rates, inflation and A"i" momentum). 8 months later markets are up by 11% even after recent drawdown of 5%. There are two additional "i" which got added to market worries...let's look at all of these once more...

Inflation:

Last mile is always difficult..Inflation getting down to Fed's target of 2% is going to take longtime and may happen only if there is recession. So as I wrote about "3% is new 2%", Fed needs to start getting comfortable that supposedly golden 2% target may not happen in a very strong economy. Fed needs to look at 2% as average over a decade in which economy would go thru shocks like Pandemic or Wars, growth spurt after shocks and mundane growth as seen in 2010s....then only markets will not get too obsessed with every CPI, PPI and PCE reports as long as inflation does not get out of hand like in 2022. Both Fed and markets need to target range of 1-3% as average over 10 year period..

Interest Rates:

Interest rates are directly linked to inflation.. And level of rates decide everything for borrowing costs across the board (Home loans, business loans, savings rate and so on). That why when 10-year treasury start inching towards 5%, markets get very nervous. That's what is happening over last 3 weeks with 10-year going near 4.7% with predictions of it breaching 5%. Projections for Fed rate cuts have gone from six at the start of year to zero in a span of 4 months...and there is even talk about rate hike (2% probability). This was not supposed to happen in supposedly efficient markets...

(Artificial) Intelligence:

After first two factors, this is the most talked about topic...is momentum for AI slowing down? What about real outcomes or use-cases outside of ChatGPT creating itinery for summer trips or writing a thank you letter? What about monetization of tens of billions of $ spent on building AI infrastructure? After nearly quadrupling revenues, is growth for NVDA and associated AI stocks over? Earnings season is about to get into high gear...and these questions are coming to the forefront. One example - after announcing earnings date (but not pre-announcing great results), another AI darling, Supermicro (SMCI) got crushed in one day (-22%). NVDA and AMD are in bear territory. The earnings announcements from Alphabet, Microsoft and Meta would give indications on AI momentum next week...So tighten your belts (and money purses)...we are entering into interesting part of markets ride over next 4 weeks.

Israel and Iran:

These are two new "i" worrying markets. I am not going to comment on geo-political aspects of this. After nearly 4 decades of shadow war between Israel and Iran, last week, World saw first direct confrontation between these two nations. Both countries demonstrated that they can hit each other with missiles and drones. At same time, they had also shown great restraint (maybe under pressure from their "big" brothers) so that the skirmish does not lead to full fledged war...Given the impact of such war can happen to oil markets, markets are rightfully nervous till both sides finished their "tit-for-tat" show of strength for their domestic audience and World. Hopefully these two nations will go back to what they have been doing for last 4 decades and not engage in full-fledged war. And that would be one way to honor the Mother Earth!

/Shyam

Step Aside Barbenheimer - It's time for Oscarheimer!

Last summer was filled with the buzz of "Barbenheimer" with the simultaneous release of Barbie and Oppenheimer, which gave both movies tremendous box-office success. It was American and Hollywood marketing at its best. This single event revitalized the post-pandemic theatre-going experience. However, as awards season started, the Academy and other award committee members side-stepped the glitter of Barbie and heaped tons of nominations on Oppenheimer (personally, I feel that Barbie deserved nominations in at least a few categories).

Oppenheimer got 13 nominations - one of the highest-matching records of movies like Gandhi, Titanic, and Lord of the Rings. It may end up winning in 7-8 categories. As has been the tradition over the last few years, here are my predictions for the top 7 categories:

• Best Picture: Oppenheimer
• Best Director: Christopher Nolan (Oppenheimer) – This would be Nolan's first win despite giving some of the all-time best films like Inception, Interstellar, and the Batman series.
• Best Actor: Cillian Murphy (Oppenheimer)
• Best Actress: Lily Gladstone (Killers of the Flower Moon)
• Best Supporting Actor: Robert Downey Jr (Oppenheimer)
• Best Supporting Actress: Da’Vine Joy Randolph (The Holdovers) 
• Best International Picture: The Zone of Interest (UK) – Some predictions say this could be stealth surprise winner even for best picture category, but I doubt it.

In addition to these 4 wins, Oppenheimer will win in Editing, Sound, Cinematography etc. As a side-note: I am sure Taylor Swift will have her influence even at the Oscars.

For the last couple of weeks, I have been in India visiting some of the most sacred pilgrimage places for Hindus, like Kashi and Ayodhya (and a few more). India is moving fast with so much energy and self-confidence under the leadership of PM Modiji. The outcome of national elections in Apr/May 2024 seem to have already been decided, with Narendra Modi getting a historic 3rd term with an even larger margin. Given his age, this may be his last term and Modiji is working tirelessly to make sure that India comes closer to realizing her full potential by end of his third term (2029).

Now coming to markets - Exactly 15 years back on Mar 9, 2009 S&P reached its bottom (around 676) during a financial crisis. And this week S&P reached all time highs (5187). The investors who did not panic 15 years back and stayed invested will have made over 16% per annum from bottom to top. This is the best example of just staying invested and do SIP (systematic investment plan) in index funds like SPY and let markets and time do their job. Don't try to be "market savvy" and don't try to time the market of getting in and out! No one got that right.

2024 seems to be year of semiconductors led by AI champion NVDA. Even at more than a trillion $ valuation at the start of the year, it added another 80-90% just in first 2 and half months of 2024. Other semi stocks like AMD, QCOM, AVGO also joined the party (INTC being the only exception). How long will this continue? NVDA and SMCI most likely will announce stock splits in the next few weeks, which could give another bump to their stock prices. Every quarter, NVDA keeps beating loftier expectations and raises forecasts. It's already worth $100 billion per year revenue with over 40% net profit margin. The juggernaut can continue for another couple of quarters.

As predicted, the economy really got its "Goldilocks" touch with inflation cooling, growth slowing but not too much and clearly heading toward a soft landing. Fed chairman Powell has started talking about rate cuts most likely starting in June of this year. That's why markets are seeing clear signals and pulling in annual gains to the first few months of the year.

With Super Tuesday behind us, it's going to be rematch between Trump vs Biden. It's too early to predict but given the momentum Trump got during primaries, Biden has his work cut out for him. I am sure President Biden is probably wishing he had the same momentum as PM Narendra Modi!

That's all for now...see you later during March Madness season!

/Shyam

 

Niners and Nineties...

Finally the markets have reached the S&P 5000 milestone target last week, as predicted in my last blog "Are we there yet?". It was a forgone conclusion that it would happen sometime sooner than later. The question is what's next since many investors are feeling anxious to keep invested or get into the market (by some accounts trillions are on sidelines) but at the same time are getting FOMO (fear of missing out).

To answer this question, we would have to look at the Nineties... But before that, let's look at the biggest US sporting spectacle of Super Bowl on Feb 11. This year it is going to be the biggest event, with two of the best NFL teams (Niners vs Chiefs) playing. Each of these have storied quarterbacks (Mr. Irrelevant Brody and 2 times Super Bowl winner and MVP Mahomes). It's a rematch of the 2020 Super Bowl when Chiefs beat Niners. Here are some the records:

• Record estimated TV viewership of 118 million
• Record cost of $7 million for 30-second advertisements
• If the Niners win, it would be their first after 29 years and their sixth Super Bowl win, joining the Steelers and Patriots
• If the Chiefs win, it would be their 4th win but it will join Patriots as only other team to achieve that feat in the 21st century
• Since legal betting is allowed in 39 states, this would be biggest sports betting event in the world in terms of the money involved (estimate is over $23 billion) and the combination of bets one can make (including Taylor Swift appearances... )
• Yes - this Super Bowl would be special due to America's most watched couple – Taylor Swift and Chiefs TE Travis Kelce). Even non-football "Swifties" will be watching this Super Bowl just to get glimpse of these two when Kelce plays. And he is playing very well, with 1-2 touchdowns in almost every playoff game
• To top it all, this game is happening in the entertainment and gambling capital of the world – Las Vegas!

Coming back to the Niners - the last time they won the Super Bowl was in 1995...and that's where the connection of Niners and Nineties comes in.

In 1995:

• The internet craze just started after the IPO of Netscape (similar to current AI craze triggered by ChatGPT launch by OpenAI). 
• Fed rates peaked around 6% in Feb 1995 and Fed started cutting rates in July 1995 – this is exactly what the current Fed plans to do starting with rate cuts in the second half of 2024
• Inflation started coming down in 1995, the same way it started coming down in 2023/2024
• Clinton was dealing with a GOP-controlled house and looking forward to difficult re-election prospects for 1996 
• 1995 was first year of double-digit gains for S&P for the next 5 years starting with 34% in 1995 (similar to 26% in 2023) - despite famous Greenspan warning of "irrational exuberance" in 1996

If you look at market returns in subsequent 4 years of 1996-99, it's possible that even a third of those returns would take S&P over 6500-7500 by the end of the decade. It is possible – if the biggest tech companies – followed by every business in the world – make AI investments.

While it will be difficult to predict who will be next NVDA or Meta of 2023 in the future, it's safe to stay invested in quality ETFs like SPY, SMH, XLK, IGV and dividend ETFs like JEPI.

Happy New Lunar Year - Gong Xi Fa Chai!

/Shyam

Are we there yet?

NFL championships games are today and first month of new year is almost over...While first week of new year was bumpy for markets, it soon recovered its footing and reached new all time highs and itching towards breaking milestone of 5000. Almost 6 weeks back I wrote about "Goldilocks economy taking S&P to 5K"...depending on mega-cap tech earnings in next two weeks, it could happen by the time America gets glued to Super Bowl...The expectations are rematch of  2012 Super Bowl between Ravens vs Niners (Ravens won that year 34-31).  This game was also called "Harbaugh Bowl" since two Harbaugh brothers were head coaches of two playing teams. But one could never predict what could happen in today's games since all 4 teams are great teams and deserve to play Super Bowl. In the end it would come down to showing up and playing their best games...Only Lions is the team had not won Super Bowl yet (one of the 12 teams) even though it had won 2 pre-Super Bowl NFL championships in 1935 and 1957. 

Turning to economy - it seems to be doing perfectly fine with GDP growth above 3% and inflation readings below 3% and unemployment below 4%...That should give enough confidence to Fed just to stay the course of doing nothing for next 3-4 meetings and do rate cuts in second half of the year. 

When it comes to politics - the rematch between Biden vs Trump is almost certain barring health or legal issues. Given the momentum Trump is getting, Biden has to get his campaign in high gear before it's too late. 

Earnings - Most of the companies are beating earnings and giving cautionary projections (just to make sure that they beat the expectations again). The companies which are raising projections (e.g. SMCI) are getting handsomely rewarded (up almost 60% this year alone) while companies like TSLA and INTC are getting punished for giving conservative projections. While most Mag-7 companies would announce earnings in next two weeks, most important earning is further out on Feb 21 when AI darling NVDA would announce its earnings. Would it become $100 B annual run-rate company by end of 2024?  Markets are expecting that. Anything less would un-nerve the markets and remind them of 2000-2001...

That's all for now. Enjoy the games.. if you believe in connection between markets and Super Bowl, last rematch between Niners and Ravens in 2012 produced market returns of over 13%. Let's hope it repeats this year again!

/Shyam

2024: The year of.....

Wishing you a joyful New Year filled with laughter, love, and unforgettable moments, surrounded by cherished family and friends. May the 2024 bring similar gains as in 2023!

I had great 2 weeks break with travels to Turkey with family and then solo trip to Palm Springs. Both places are amazing and definitely worth a visit if you get chance.

Talking about gains in 2023 - Here is recap of 2023..

• Inflation fallen below 4% and heading towards 3%
• Unemployment firmly below 4%
• Real wages growing above 4%
• GDP growth around 3%
• Markets: S&P notching one of the best year with 24% gains while Nasdaq doing even better with 40% gains thanks to Magnificent-7 (or TAMMANNA) many of which had triple digit gains
• My personal recommendations did exceptionally well - many of which were up by high double digits (e.g. INTC) and some of them had triple digit gains (e.g. META)

All in all - 2023 was great year.

 As calendar changed to 2024, what's in store for new year? This is election year in many countries - most importantly in India and USA. So I am going to start making some macro level predictions followed by some recommendations for 2024.

Geo-political:

• India voters will give historic 3rd term to Modiji and his government. After all, he is the most popular and charismatic world leader and tirelessly working to make sure that India in on trajectory to become developed nation by 2047. The level of energy, passion, creativity he demonstrates even at age 73 is unmatched. "Modi ki Guarantee" has become a slogan by itself and will propel his party BJP to historic win. Indian voters have a clear choice and looks like they have already made their mind (looking at results from "semifinal" of state elections)
• Elections in USA is another story....no one likes the two likely choices (even their own party members). But unless there are legal or health curve-balls, we are going to have rematch between Biden and Trump. And given that Americans like status quo (especially when alternative is unpredictable), Biden will win presidential election in Nov 2024
• UK elections - most likely to happen in late 2024. Rishi Sunak is trying his best to change the fortunes of his party but UK voters may prefer change in government and bring labor party back to power
• Wars - Israel/Hamas war will have some kind of cease-fire. While there is danger of expanding middle-east war, every effort would be made to avoid this and would be contained between Israel and Hamas. Russia/Ukraine war will continue in 3rd year. This is the war of attrition with no end in sight. There is chance that some level of cease-fire negotiations may start in 2024. 

Economy:

• There won't be recession in 2024. Instead much-talked soft landing will happen. GDP growth will be between 1-3%
• Inflation will fall below 3% but Fed's target of 2% could still be evasive. 
• Fed will cut interest rates 3 times most of which would be backloaded in 2H2024
• Unemployment will remain between 3.5 to 4.5%. Real wage growth would be around 3-4%
• Corporate earnings would be positive (high single digits)

Markets:

• Indexes would reach all time highs in 1H2024 before having minor correction in spring/summer. 
• S&P would spend year between 4200-5000. It would end year closer to higher limit of the range.
• Nasdaq would end year between 16000-18000
• Rally will expand from Mag-7 to rest of S&P companies - especially into healthcare, hospitality and finance.

Sectors:

• Tech - this sector would continue to lead with AI investments moving up the stack (Semi, infrastructure, data, applications). 2023 was about semi (NVDA, AMD) and to some extent infrastructure (OpenAI, MSFT). INTC turnaround will gain momentum in 2024 and continues to be my favorite. 2024 could also be year of SAAS companies which hold data and will start providing meaningful AI outcomes. META will become trillion $ market cap company again in 2024
• Healthcare - this sector went thru post Covid pandemic hangover (MRNA and PFE took 40-50% haircuts). Health-care found its own "AI" equivalent with weight loss drugs which benefitted only two players NOVO and Eli Lily. Investors will start looking beyond these two companies. PFE and WBA (Walgreens) are two of my picks as turnaround candidates in 2024
• Finance - Markets had a scare in March 2023 due to blow-up of SVB and First republic. All regional banks took a major cut during that mini-crisis. Now that rates are coming down, regionals could start reversing their losses on book. Regional bank ETF (KRE) and XLF are good way to ride the upswing. Fin-techs would finally stop bleeding. PayPal, Square and UPST are some of the stocks to monitor
• Energy - After great 2021/2022, this sector is stuck thanks to oversupply of oil and transition to non-fossil energy. We have started seeing consolidation with major deals being announced. It's also great dividend paying sector. One can consider XLE for steady growth and low risk/reward
• Real Estate - everyone predicted gloom and doom for this sector due to high interest rates and workers not coming to office. But returns on few commercial real estate players (SLG, VNO, BXB, BDN) as well as home builders have proven them wrong. These companies would continue to recover their valuations and could reach price/book ratio between 1 to 2 (some of them are still below .75). In the meantime, they continue to pay high-dividends as required by REIT rules.
• Crypto - despite all the excitement about Bitcoin ETF, I would recommend staying away from this. It's not worth the risk.

That's all for now...2024 would be an exciting year for sure. So enjoy the ride!

/Shyam