November 2024 Market Update

We want to wish everyone a Happy Thanksgiving. We look forward to navigating the changes coming to economic policy in 2025.

Under the current administration there has been much skepticism around the functions of the U.S. Treasury’s reverse repo operation supplying liquidity to the market and offsetting the effects of interest rate hikes from the Federal Reserve. These reverse repo funds are set to run out soon. Market liquidity will be interesting to watch in the weeks ahead.

Sustainable stock price returns are correlated to sustainable earnings growth. But this past cycle has been very different due to the rise in liquidity because of reserve repo usage. As shown below the S&P 500 index is up +67.6% since October 2022, while GAAP earnings and non-GAAP earnings have grown -0.98% and +5.25% on a trailing twelve-month basis, during the same period. As new Treasury Secretary, Scott Bessent has stated, “under Harris-Biden it was a bifurcated economy, only the rich and big did well, we had this mag seven, the seven big tech stocks in the stock market.” The magnificent seven has accounted for almost all the earnings growth from the S&P 500 since October 2022.

Charts above: Zacks Investment Research

The fact is, over the past two years participants in the market have paid way up for stocks with little to no earnings growth while also paying way up for digital assets such as bitcoin with no cash flow. This rally since October 2022 has not truly been earnings based, but more so liquidity based, and liquidity is running out. See below the total monetary base (blue line), a key liquidity measure which began rising in October 2022 along with risk assets such as the S&P 500 and Bitcoin.

The Trump administration would like to re-shore American manufacturing through tariffs, deregulation and taxes, all while keeping consumption going. But for the Trump Administration to keep consumption going its going to need to make housing affordable. Housing is the banks primary product. We don't see how housing continues to grow with the current home price to income ratio at 10.2%, the highest in recorded U.S. history.

Without liquidity running out, leverage in the system and prices throughout the economy won't come down. President Trump was elected because for now, the American Dream has died. The only way to get it back is through rising purchasing power via declining prices, interest rates and a stable or rising US Dollar.

Currently, the S&P 500 is almost two standard deviations above its long-term median Shiller PE ratio. The Shiller PE ratio is a cyclically adjusted price to earnings ratio, the ratio is calculated by dividing the companies stock price by the average of the companies’ earnings over the last ten years, adjusted for inflation. This metric helps analysts measure how expensive a stock is relative to its historical earnings, allowing analysts to compare its current valuation against a long-term valuation to asses potential future returns. A high Shiller PE generally indicates a potentially overvalued market.

The last time the S&P500 Shiller PE was this high in 2000, investors were up +30% from March 1998 through March 2000. If S&P 500 investors did not sell at such a high Shiller PE in 2000, by March 2003, investors holding the S&P 500 had given up the +30% gains and now owned a -20% return, since March 1998, a 5-year holding period.

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, 10-year minus 3-month yield curve re-steepening added September 2024, Short USDJPY from 153, 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