Have We Hit The Top?

[UK]

3 hours ago, Spekulatius said:

Europe government deficits are restraint  (Germany is at 2.1% of GDP, USA is in excess of 6% and that with economy booming). 

 

Just look at Italy or even France then:). I think this problem will emerge sooner or later and it will be much larger than with Greece. Perhaps Japan will hit the limits first though.

[mattee2264]

I think there are a few reasons why US deficits have yet to be inflationary:

 

-There's been a very beneficial supply side impact from cheap immigrant labour which has helped to avoid a wage-price spiral

-Despite that massive stimulus the US economy isn't running hot by any means 

-Commodity prices have dropped off significantly because of China weakness and sluggish global economy ex USA generally 

-A lot of the spending has been very unproductive e.g. adding to government payroll, paying interest, various vanity projects so hasn't really been filtering into the real economy in the same way the stimulus checks (which contributed to the first wave of inflation) did

-Full employment is a bit of a misleading concept because it ignores individuals who have dropped out of the labour force

[Spekulatius]

 

Has government employment increased that much? Looking at this chart, it looks like government employment  has dropped in the epidemic quite a bit and then caught up the trendline.

https://fred.stlouisfed.org/series/USGOVT

 

Wages got a huge boost for lower paying jobs from ~$8 to ~$20+ for grocery jobs ( I have seen this with my sons summer jobs) but recently the gains have normalized.

 

Edited October 25 by Spekulatius

[Dinar]

4 hours ago, Spekulatius said:

 

Has government employment increased that much? Looking at this chart, it looks like government employment  has dropped in the epidemic quite a bit and then caught up the trendline.

https://fred.stlouisfed.org/series/USGOVT

 

Wages got a huge boost for lower paying jobs from ~$8 to ~$20+ for grocery jobs ( I have seen this with my sons summer jobs) but recently the gains have normalized.

 

Look at the number of home health aids in NY for instance, not government per se, but paid by the government.  It exploded in the last few years.  Or gov't spending on homeless in NY and other areas - it is going through the roof in NYC but none of the jobs are technically gov't.

Edited October 25 by Dinar

[Malmqky]

https://www.businesswire.com/news/home/20241025235193/en/The-New-York-Stock-Exchange-Plans-to-Extend-Weekday-Trading-on-its-NYSE-Arca-Equities-Exchange-to-22-Hours-a-Day
 

Sign of the top imo.

Edited October 25 by Malmqky

[Blake Hampton]

Found this article written by an economist at the FED, I thought it was really good:

 

End of an era: The coming long-run slowdown in corporate profit growth and stock returns

[mattee2264]

Good article and Jeremy Grantham and colleagues have produced similar analysis in the past. 

 

Of course the main driver of stock returns second half of this cycle has been Mag7. They hardly pay any tax and even if interest rates stay around 4-5% cash and bonds aren't going to provide much competition so long as they can continue to grow at double digit rates and there is a lot more room for multiple expansion. 

 

Of course eventually their growth will slow down and that will hit their valuations and the rest of the market may struggle to pick up the slack with the headwinds of higher interest rates and tax rates the article mentioned. 

 

But in the short term that seems unlikely as public cloud spending is still growing at about 20% a year and AI will give another kicker to their returns and their market positions in the short term at least are unassailable and they have incredible pricing power. 

[TwoCitiesCapital]

10 hours ago, mattee2264 said:

Of course the main driver of stock returns second half of this cycle has been Mag7. They hardly pay any tax and even if interest rates stay around 4-5% cash and bonds aren't going to provide much competition so long as they can continue to grow at double digit rates and there is a lot more room for multiple expansion. 

 

Yup. I did the analysis a week ago. I looked at the 3-year returns for top 100 stocks in the S&P 500 today (so should bias to the top performers because it was a different list 3-years). Even after this year's 20+% rally at the index level, 30+ had negative real returns and another ~7 or so we're basically at flat to sub-1% real returns from October 2021. 

 

I can't speak for the other 400, but I'd assume it's a similar story if this is the story of the companies that retained/obtained the top 100 spots over that time. Would have also been much worse at the beginning of the year. 

 

Having 30-40% of the index still having flat- to -negative real returns over 3-years is crazy to me - especially  when looking at what the index as a whole has done. We really did have a bad inflationary shock that killed most equities - one that many still haven't recovered from - and it was all papered over by the performance of FAANGM and then MAG7. And not even all of them - AMZN and Tesla have sucked air over that period on an inflation adjusted basis as well. 

 

10 hours ago, mattee2264 said:

 

Of course eventually their growth will slow down and that will hit their valuations and the rest of the market may struggle to pick up the slack with the headwinds of higher interest rates and tax rates the article mentioned. 

 

I think it may be the opposite. Similar to the tech bust - the MAG7 may struggle with regulatory scrutiny, higher embedded labor costs from inflation, and huge CapEx requirements for a later date pay off while the rest of the economy starts to gain momentum and recover from 2021/2022 inflation shock. I'm more comfortable buying stocks here, than I was in 2021, despite indices being far higher - and that's because many stocks are still quite a bit lower (some in nominal terms, most in real terms) despite 3 additional years of retained earnings and revenue growth. 

 

10 hours ago, mattee2264 said:

 

 

[mattee2264]

Probably looking at 5 year performance (to include pre-pandemic) is a better guide as most stocks overshot in the COVID recovery because of the excessive policy response (ZIRP and fiscal handouts) and October 2021 was quite close to the peak of the last cycle. 

 

Agree with your point that they aren't as expensive as they were then because of build-up of retained earnings and the decrease in inflation-adjusted stock prices. But that isn't the same as saying they are bargains. And I think a lot of stocks are already pricing in quite a bit of optimism in relation to interest rate cuts and a soft landing and for this reason have recovered most if not all of their bear market losses. And there are also potential issues in the future to do with refinancing at higher interest rates and in the case of the banks commercial real estate problems. 

 

But yes if the economy can start improving and some of the AI productivity benefits start coming through then you'd expect from fairly average valuations that the rest of the market can produce healthy returns as a result of dividends + growth and there is room for valuations to go higher. 

 

The difference with Mag7 is the pandemic had lasting benefits as it accelerated the shift to cloud which has been a huge growth driver and the bear market also encouraged them to streamline their operations and improve their efficiency and they are also benefiting because the assumption is that Big Tech will also end up being Big AI.