CWS Market Review – June 18, 2024

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The stock market closed at another all-time high today. This is the S&P 500’s 31st new high this year. The Nasdaq rose for its seventh day in a row.

The stock market also reached another milestone. Nvidia passed Microsoft to become the world’s most valuable public company. The chipmaker now has a valuation of $3.3 trillion. It’s larger than every company in the Russell 2000 combined.

Ten years ago, Nvidia was worth $10 billion. CEO Jensen Huang’s first job was as a busboy at Denny’s. Now he’s worth $117 billion. Not bad.

As I’ve mentioned many times before, this market has been heavily tilted toward growth stocks. In fact, today snapped an 11-day winning streak of the S&P 500 Growth ETF (SPYG) outpacing the S&P 500 ETF (SPY).

As strong as this market has been, it’s been very narrow. Despite being at a new high, only 50 stocks in the index touched 52-week highs today.

Soaring markets can be surprisingly tricky for investors. Watching share prices march steadily higher can induce intense fear in some investors. They tend to think that we must be getting near a cliff and that it would therefore be best to cash out now.

That’s a mistake. A rising market doesn’t necessarily mean we’re in a bubble. It only means that share prices are higher than where they were. Rallies can go on for longer than you think. Peter Lynch said, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

A few years ago, I looked into the data and found that the stock market does very well when it’s at an all-time high. Not only that, but the market is significantly less volatile when it’s at a new high. It’s pretty rare that the market rallies by more than 1% in a day following an all-time high.

Where do we go from here? That’s hard to say but I’ll note that July has been up for the last nine years in a row.

Let’s look at the market’s current valuation.

The S&P 500 closed Monday at 5,473.23. Wall Street currently expects the S&P 500 to earn $240.78 per share this year. That gives the market a forward price/earnings ratio of 22.7.

That works out to an earnings yield of 4.40% (i.e., the inverse of the p/e ratio, it’s the e/p ratio). To get an idea of how expensive that is, we want to compare the S&P 500’s earnings yield with the current yield on the long-term Treasury bonds. The 10-year Treasury currently yields 4.22%.

In other words, investors are getting a very mild safety cushion of 20 basis points by being in Treasury bonds. That’s not much. The risk/reward balance still leans towards stocks.

There are some important caveats. The market’s forecast for earnings this year is just that, a forecast. Wall Street analysts have often been wrong, and sometimes by a lot. Wall Street has already lowered its earnings forecast for this year, and it can do it some more.

We also don’t know where interest rates will go. If inflation comes back, that would send yields soaring. It was only eight months ago that the 10-year Treasury was yielding close to 5%. Right now, the bigger fear is that the economy will turn south.

Retail Sales Were Weak Last Month

Americans haven’t been shopping as briskly as expected, which is odd since you might think that shopping was our national pastime.

To be fair, this morning’s retail sales report was only a little weaker than expected. Last month, retail sales rose by 0.1% which was 0.1% below expectations. Over the last year, retail sales are up by 2.3%. That’s not adjusted for inflation. The number for April was revised to a decline of 0.2%.

Here’s the year-over-year growth in retail sales:

If we don’t exclude autos, then retail sales for May fell by 0.1% whereas Wall Street had been expecting an increase of 0.2%. So what caused the sluggish shopping numbers?

Moderating gas prices helped hurt receipts at gas stations, which reported a 2.2% monthly decline. That was offset somewhat by a 2.8% increase at sports goods, music and book stores.

Online outlets reported a 0.8% increase, while bars and restaurants saw a 0.4% decline. Furniture and home furnishing stores also reported a 1.1% drop.

The retail sales report is important because consumer spending makes up about 70% of the economy. The good inflation news has come at the same time that consumer spending has apparently weakened.

Following the report, the odds of a September rate cut edged up from 61.5% yesterday to 67% today. Futures traders think there’s a 66% chance that the Fed will cut rates twice this year.

The most troubling news today came from the Congressional Budget Office. The CBO increased its estimate for the U.S. budget deficit by 27% to nearly $2 trillion. The new estimate is $400 billion higher than the previous estimate in March. Last year, the deficit was $1.69 trillion. For this year, the CBO sees it reaching $1.92 trillion.

As a percent of GDP, the CBO sees the deficit getting to 6.7%. That’s up from the prior estimates of 5.3%. Last year’s deficit was 6.3% of GDP.

According to Bloomberg, “Over the coming decade, the CBO sees US deficits totalling $22.1 trillion, up more than $2 trillion from February’s report.”

The CBO listed four major reasons for the budget revisions: President Biden’s student loan forgiveness plans, aid to Ukraine, Israel and Taiwan, FDIC payments for bank failures and heightened Medicaid spending. What’s frustrating is that the CBO sees higher revenues incoming but not enough to offset the higher spending.

If world markets become convinced that the U.S. is too much of a risk to invest in, that would hit the dollar and our ability to borrow money. So far, the market doesn’t seem too concerned. I don’t know how long that can last.

Stock Focus: Nathan’s Famous

With July 4th coming up, I wanted to highlight one of my favorite unfollowed stocks which is Nathan’s Famous (NATH), the hotdog stand.

Not many people realize that the Coney Island mainstay is publicly traded, but it is. Not only is Nathan’s listed on the exchange, but it’s been a great stock for decades.

Nathan’s is currently priced at $67.65 per share. That’s not a bad valuation. Nathan’s Enterprise Value/EBITDA is currently 9.73 which isn’t bad.

The company has a market value of $282 million. Last week, Nathan’s reported earnings for fiscal 2024 of $4.81 per share. That was up by one penny per share from one year before. Sales growth is low but positive.

Currently not a single analyst follows Nathan’s. Since December 31, 1999, Nathan’s is up 3,846% while the S&P 500 is up 493%.

That’s all for now. The stock market is closed tomorrow for Juneteenth. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on June 18th, 2024 at 6:25 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.