CWS Market Review – November 5, 2024

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Don’t Let Politics Interfere with Your Investing

It’s Election Day in America, and I’ll give you my biannual warning not to let politics cloud your investing judgement. I see this far too often.

Just because we may watch the market closely and debate what happens, and just because we follow politics closely and debate what happens doesn’t mean the market cares one wit about politics. It doesn’t. Thinking it does misunderstands how the market works and how the government works.

A simple lesson is to look at long-term stock charts and see if you can pinpoint election dates. You probably can’t. Or even better, try it on a country whose politics you may not be familiar with. See if you can spot when their elections were. It’s not so easy.

Yet too often, investors ignore the fundamentals of investing (have patience, don’t panic, exercise discipline), and they let their political beliefs interfere where they don’t belong.

I’ll give you two examples, and I’ll be bipartisan. In the wake of the 2016 election, Paul Krugman wrote, “If the question is when markets will recover, a first-pass answer is never.”

You may want to try a second pass, Paul. Boy, was he wrong. The markets did very well during the Trump years. Before Covid came along, the S&P 500 gained 60%, and Krugman is a Nobel Prize winner! He’s way smarter than me, and even he fell prey to the temptation of confusing his ballot with his portfolio.

Michael Boskin is another smart guy. He was chairman of George Bush’s Council of Economic Advisors. In March 2009, he penned an article in the Wall Street Journal titled “Obama’s Radicalism Is Killing the Dow.” The piece was published on almost the exact low. The market soared for years afterward. Boskin wasn’t just wrong – it’s hard to be wronger.

I don’t mean to poke fun at Krugman and Boskin. Quite the opposite. The question is, why do such intelligent people come to hold such poor investment opinions? The answer is that they let their emotions cloud their judgment. With investing, it’s always important to be unemotional and to focus on the important things.

The Economy Created 12,000 Jobs Last Month

Just before Election Day, we got some lousy jobs news. On Friday, the government said that only 12,000 net new jobs were created last month. That was far below Wall Street’s consensus estimate of 100,000. That’s the smallest monthly jobs gain in four years.

What happened? The hurricanes certainly played a role, as did the Boeing strike. The BLS estimates that the Boeing strike caused the loss of 44,000 jobs. Last month was a very unusual month. The BLS said that the response rate to its survey was the lowest in 30 years.

The details of the report are not encouraging. For example, the jobs numbers for August and September were revised lower by 112,000, and the manufacturing sector lost 46,000 jobs last month. It’s even more worrisome when you consider that most of the new jobs are in the government sector.

The unemployment rate held at 4.1% which matched expectations. The broader U-6 rate was 7.7%. There were some bright spots. Average hourly earnings rose by 0.4% which was above estimates. That’s good to see.

Here are some more details:

Health care and government again led job creation, respectively adding 52,000 and 40,000 positions. Several sectors, though, saw job losses.

In addition to the expected pullback in manufacturing, temporary help services saw a drop of 49,000. The category is sometimes seen as a proxy for underlying job strength and has seen a decline of 577,000 since March 2022, the BLS said.

Another leading sector, leisure and hospitality, saw a drop of 4,000, while retail trade and transportation and warehousing also reported modest declines.

Friday’s report probably didn’t shake the Fed off its policy path. The central bank meets again this week, and it’s almost certain that they’ll lower rates by 0.25% again. In fact, we can expect another rate cut next month. After that, things are a little cloudy. For 2025, traders see the Fed cutting rates another three times.

The next big test for Wall Street comes next Wednesday, November 13 when the government will release the October CPI report. The headline inflation rate has improved but I want to see a better number for the “core rate.” It’s too early to declare victory against inflation.

Nvidia Replaces Intel in the DJIA

There was another interesting market news item from last week. On Friday, the folks at Dow Jones said they’re kicking Intel (INTC) out of the Dow Jones Industrial Average, and Nvidia (NVDA) will be taking its place. The switch will take place on November 8.

This is the kind of news item that isn’t so important in itself, but it confirms a long-term trend already in place. Shares of Nvidia are up 130% this year while Intel has been cut in half. The AI Revolution has finally come to the Dow.

The DJIA used to have a lot of heavy-industry stocks, but it has become more tech-focused in recent years. In February, they added Amazon to the DJIA. Apple, Microsoft and Cisco are already members. Being invited to join the Dow is Wall Street’s version of being a “made man.” It says you’ve arrived. Nvidia probably helped itself earlier this year when it announced a 10-for-1 split. The company just passed Apple to become the most valuable company in the world.

There’s an important distinction between the S&P 500 and the DJIA. The S&P 500 is weighted by market value, but the DJIA is price-weighted. To calculate the Dow, you simply add up all the share prices and adjust it by a divisor. Roughly speaking, every $1 in share price of a Dow stock works out to about 6.5 Dow points. Size doesn’t matter.

Why do people even pay attention to the Dow? I’m not sure. I guess that it’s been around since 1896. The S&P 500 is by far the better index, but it only goes back to 1957 when it was expanded to 500 stocks.

As Intel headed lower, it became a very minor portion of the DJIA. Intel is currently worth 130 points in an index near 42,000. What makes Intel interesting is that it was added to the Dow 25 years to the day earlier than the day its deletion was announced. In 1999, Intel was as hot as a stock could be. Not long before, CEO Andrew Grove made the cover of Time magazine.

Shortly after it was added, Intel strongly outperformed the DJIA, but that didn’t last long. In the last few years in particular, Intel (in black) badly lagged the index (in blue).

The index-keepers have made some bad calls in the past. In 1939, IBM was taken out of the index, and it wasn’t added back until 1979. Over those 40 years, IBM was a huge winner. The index would be much higher today if it weren’t for those missing four decades.

Changes to the index have become more common. Between 1939 and 1976, the Dow only made two rounds of changes to the index. In 1956, one stock was added, and one was deleted. In 1956, four were added and four deleted in 1959. That’s just five stocks in 37 years.

There were two changes to the Dow this time. Dow Inc. (DOW), the chemical company, will be replaced by Sherwin Williams (SHW), which was on our Buy List for many years. Apple’s market value is about 100 times that of Dow Inc. There are no more basic materials stocks left in the Dow. As the economy changes, so does the DJIA.

Buffett’s $325 Billion Cash Mountain

Warren Buffett just released the details of Berkshire Hathaway’s (BRK-A) financial position. At the end of September, Berkshire was sitting on a cash position of $325 billion.

That’s staggering. It’s up nearly $50 billion over Q2. That’s enough money to buy every single team in the NFL.

The reason Berkshire has so much cash is that Buffett has been selling recently. In particular, Buffett has been dumping shares of Apple (AAPL) and Bank of America (BAC).

Buffett has been gradually paring back his holdings of Apple. This was the fourth quarter in a row that he trimmed his stake. All told, Berkshire sold $36 billion of stock last quarter.

Interestingly, Buffett didn’t buy back any Berkshire shares last quarter. These moves could be a signal that Buffett thinks that market is too pricey, or perhaps just Berkshire. Buffett had been buying back lots of shares, and he said he’ll continue to if the price is below Berkshire’s intrinsic value.

Analyzing Berkshire’s business is difficult because it has businesses that it fully owns along with several minority holdings. According to the earnings report, earnings at Berkshire’s fully-owned businesses were down 6% from last year. That was less than what analysts had been expecting.

This could be a sign that the Oracle of Omaha thinks the market is simply too high.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on November 5th, 2024 at 6:10 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.