June 2024 Market Update

At the close of the second quarter of 2024, we feel it’s a good time for investors to check in on the stock market’s fundamental valuation. Valuations help investors reach reasonable conclusions about what kind of return they expect to earn on an investment. Investors typically experience lower forward returns when valuations are high and higher forward returns when valuations are low.

Over the past thirty years the S&P500’s (ntm pe) next twelve-month price to earnings ratio has rarely exceeded 20x. The chart below shows just a handful of periods where the ntm price to earnings ratio climbed above 20x. January 1998 – October 2002, May 2020 – January 2022, and December 2023 – current.

The period between 1998-2002 reflects a large rise and decline in the ntm price to earnings ratio. The initial rise above 20x in 1998 was followed by the bursting of the tech bubble in 2000, the beginning of a recession in 2001, and a subsequent decline in the ntm price to earnings ratio from 27.75x to 14.75x by October 2002. During the same period the S&P500 declined -16.8%.

For the next eighteen years the S&P 500 fundamental ntm price to earnings ratio held below 20x, until after the U.S. Government injected 2.6 trillion dollars into the economy in response to COVID-19 in March 2020. During Q1 2020 the S&P500 declined from 3393 in February down to a low in March of 2197. A -38% price decline. The ntm next twelve-month price to earnings ratio dropped from 18.7x down to 13.7x, in that same time frame. Following the 2.6 trillion-dollar injection into the economy in March, by May 2020 the S&P500 ntm price to earnings ratio was already above 20x. The ntm price to earnings ratio climbed to 25.6x by August 2020, fell below 20x in January 2022 and rose back above 20x in December 2023. The S&P500 ntm price to earnings ratio currently sits at 21.23x.

In the past few years the sentiment in the market has shifted from buy low and sell high to buy high and sell higher. An S&P500 index investor at the current ntm price to earnings valuation will have to be extremely astute to not lose money before the ntm price to earnings ratio declines back to normalized levels.

Over the past thirty years the S&P500 median ntm price to earnings ratio is 16.75x.

Cash is an extremely attractive asset with real interest rates paying 2% across the curve. Money market funds and T-bills are paying 5% to sit tight. US treasury bond prices, depending on duration, are at 5- and 10-year lows. With the FED in restrictive rate territory and inflation (CPi and PCE metrics) in decline, bond prices could have a lot of room to run higher if economic demand substantially declines and forces the FED to cut interest rates from 5.25% down to 2% - 3%. Since December 2023 when the ntm price to earnings ratio for the S&P500 rose back above 20x, T-bills have paid an annualized rate of 5.26%.

The chart below depicts this is the first time since 2019 when inflation CPi (above) is decelerating while the 30- and 50-week moving averages for the 30-year interest rate are converging. This technical analysis suggests long-term interest rates are likely to decline in response to a deteriorating economy in the months ahead. However, there are political and geopolitical risks which could always cause outcomes to change. Instead of owning stocks at valuations which are historically unsustainable, with inflation (CPi) at 3.3%, the FED remaining restrictive at 5.25% and bonds paying 4.25% - 5.25%, we would like to benefit from the FED being forced to cut interest rates down from a seventeen year high, instead of lose while stocks struggle with deteriorating earnings.

For the reasons mentioned above, our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re steepening and select low duration U.S. equities. Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy.

We remain patient and focused on managing risk through 2024.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice