There’s an enormous pile of cash not yet in the market … consumer sentiment is improving … are U.S. shoppers healthier than we thought? … an important AI event with Eric Fry tomorrow night
There are reasons to be bullish about the market in 2024.
Now, regular Digest readers might suddenly be raising an eyebrow. After all, our usual analysis tends to lean more bearish.
While that’s true – and we’re cautious about a handful of market overhangs in 2024 – an objective analysis of today’s market reveals some very bullish tailwinds that deserve attention.
There’s one in particular from last week that’s caught my eye.
From The Wall Street Journal:
Rising interest rates drew trillions of dollars into money-market funds and other cash-like investments in the past two years, with more than $8.8 trillion parked in money funds and CDs as of the third quarter of 2023…
Wall Street is pinning its hopes on cash moving from money-market funds to provide the next big boost.
Rates above 5% were flashy after years of safe investments offering little interest. Their fall could drive investors to U.S. stocks, which have historically provided the highest returns in the long run.
To get a better sense of the enormity of this “cash on the sidelines,” below, we look at the total value of money market funds since 2000.
As you can see, we’re at record highs that have been accelerating.
The implications are exciting, but let’s be even-tempered about our expectations
Before we get too optimistic, two points…
First, as my colleague and fellow-Digest-writer Luis Hernandez pointed out, we don’t know if this money will enter the market as a giant wave over a short period of weeks, or a slow but steady trickle over many months and/or quarters.
The first flow would have a far greater visible impact on stock prices than the second flow.
Second, this $8.8 trillion cash hoard isn’t likely to move back into stocks in a material way until interest rates fall, making savings accounts and bonds far less attractive relative to equities.
And the reality is that rates need to fall considerably for that to happen because by one popular metric, stocks are quite unattractive today.
The “equity risk premium (ERP)” compares the estimated earnings yield from stocks to the estimated return on risk-free government bonds. The difference between these two numbers gives us the ERP, which quantifies how much extra return investors are accepting to take on stock market risk. The greater the excess return that stocks offer above bonds, the more attractive stocks are.
The long-term median ERP is roughly 3%. And the global equity risk premium historical average is 4.6%.
Compare that to today’s ERP of just 0.38%.
Translation – relative to safe bonds, stocks aren’t very attractive at current valuations.
To be clear, the ERP is not a market-timing tool. And just because it’s low today doesn’t mean stocks can’t charge higher from here.
But from a long-term perspective, the odds of making great stock return are far better when you’re investing with ERP tailwinds at your back, not your face.
But there’s another bullish tailwind that could help the market overcome this valuation headwind
Growing optimism from the U.S. consumer.
Last Friday, we learned that consumer sentiment in January leapt to its highest level since summer 2021.
From CNBC:
The preliminary reading of the sentiment survey shot up to 78.8 from 69.7 in December, the University of Michigan said Friday…reflecting fresh optimism about the economy as inflation slows and incomes rise.
The consumer-sentiment survey reveals how Americans feel about their own finances as well as the broader economy. While sentiment has improved lately, it’s still well below pre-pandemic levels of around 100.
Americans think inflation will average 2.9% in the next 12 months, marking the lowest level in four years. The current rate of inflation is 3.4%, but it’s decelerated substantially since the middle of 2022.
This is big.
As we’ve noted here in the Digest, the U.S. consumer drives nearly 70% of the U.S. economy. So, if shoppers feel financially comfortable and are spending, it will support corporate earnings growth that will help take pressure off that low ERP.
And even though we remain cautious about the health of the U.S. consumer, let’s be evenhanded in our analysis and look at one chart suggesting they’re not on the verge of rolling over.
Below, we look at data from the Federal Reserve showing us household debt payments as a percentage of disposable income.
If the U.S. consumer was on the verge of being tapped-out, we would see this ratio soaring. But that’s not what we find.
As you can see, while we’re ticking higher today, the absolute value of this ratio is on the lower end of readings dating back to 2020.
This is encouraging.
Of course, the biggest influence on the market, and that $8.8 trillion pile of cash, is the Fed’s 2024 interest rate policy
So, what are they watching to determine their policy decisions?
Let’s jump to Federal Reserve Bank of Chicago president Austan Goolsbee, speaking on CNBC last Friday. When asked about the Fed’s interest rate decisions for 2024, Goolsbee replied:
(Inflation) is the thing that everybody should be watching to determine what the Fed’s rate path will end up being.
It’s not about secret meetings or decisions, it’s fundamentally about the data. What will enable us to become less restrictive is if we have clear evidence that we’re on the path to get to 2%.
When pressed by the interviewer about “how soon” cuts will come and by “how much,” Goolsbee’s answer might have accidentally revealed his inner timeline:
I don’t like tying my hands when we still have weeks of data… We go meeting-by-meeting, so let’s not pre-commit ourselves on the hypotheticals of what we would do in three meetings if we saw XYZ in the data.
Because the Fed doesn’t meet in February, “three meetings” puts us into May. As I write, the CME Group’s FedWatch Tool shows traders putting 82% odds we’ll have gotten at least one quarter-point rate (if not two) cut by then. Meanwhile, the odds of a quarter-point cut in March have dropped from 75% a month ago to just 40% today. These data feel more realistic, which I find encouraging.
Bottom line: Yes, we remain cautious as we peer out over 2024 because it’s always wise to approach the markets with utmost respect. But that doesn’t mean we don’t see reasons to be optimistic and are looking for ways to make a lot of money this year.
On that note, clear your schedule for tomorrow night at 7 PM ET when Eric Fry will be highlighting the next wave of market winners thanks to “AI Wars”
Here’s Eric describing what these “wars” are:
What I’m calling the “AI Wars of 2024” marks a new era of technological competition among leading nations.
And this war focuses on developing advanced AI capabilities to achieve technological superiority. I believe those who harness its power will lead the world for the foreseeable future.
It’s a race – or a war – for world power.
A study of history shows that during such “wars,” global governments pour enormous sums of money into the respective races, hoping to win technological dominance. Eric points toward the space race of the 1950s and 60s as one example.
Back to Eric:
The same sort of race is happening with artificial intelligence, right before our eyes.
And I believe it will kick off on Feb. 1. That’s when the new Federal Law 117-167 has a critical deadline. Which is why I’m holding the 2024 AI Wars Summit on Tuesday, Jan. 23, at 7:00 p.m. ET.
During this event, I’ll explain the impact of this date, why I believe it could make or break investors’ financial success this year, and what you can do to position yourself accordingly.
Eric will also detail why deep-pocketed investors including Bill Ackman, Warren Buffett, and Elon Musk have already invested billions in preparation for the new Federal Law mentioned above. He’ll also answer questions from attendees during the broadcast.
Better still, he’ll be giving away the name and ticker symbol of one AI stock to buy right now – and one you must avoid, no matter how much hype it receives.
To reserve your seat for tomorrow night’s event, just click here. We’re expecting a big turnout.
Circling back to the top of today’s Digest , even as we maintain a cautious outlook in 2024, there are reasons to be excited and put ourselves in position to make a lot of money. And getting ahead of these AI Wars could be the most lucrative way to do this.
We’ll keep you updated.
Have a good evening,
Jeff Remsburg
