October 2023 Market Update

Since our September update the stock market has weakened considerably. The S&P500 has now taken back all the “AI” gains since the breakout in mid-May, after reaching 4607 in July, up from 4150 in May, the S&P500 is now back below 4110.

As market participants have come to notice, many stocks look rather unhealthy except for the Magnificent 7. If we look at the performance of these Magnificent 7 vs the rest of the S&P500 stocks, we clearly see a narrow market whereas all the year-to-date gains of +6.95% for the S&P500 are attributable to just a hand full of stocks.

We believe a reasonable person would conclude this as unsustainable and that the S&P500 is currently an inappropriate vehicle for storing or growing wealth.

Interest rates are now at a seventeen-year high while the p/e ratio for the S&P 500 is still near 20x and the earnings are just off an all-time high from 2022. The market which has corrected and re-priced is the bond market. The market which has yet to re-price is the stock market.

There are many narratives about this economy and market currently going around such as, rates going higher because of deficits, rates going higher because dollar is losing its value due to fiscal irresponsibility, rates going higher because of foreign sales of treasuries, and rates going higher due to a strong economy. From our perspective, none of these are accurate.

The simple fact is rates are moving higher because the Fed’s target range is 5.25%-5.5%. Which in our view is an attractive risk-free yield relative to the stock market’s earnings yield of 4.3%. Why are investors taking earnings risk to receive less growth than what the Fed is paying risk-free? This is not a risk a reasonable person would take.

The risk of rates moving higher is dependent on the path of Fed policy. The longer it takes the labor market to rollover (job losses) the longer the Fed will remain in restrictive interest rate territory. Their aim is for below trend GDP, which is in the 2% to 3% range. Which is also where we feel the 10-year risk-free rate should be once the Fed is successful. If GDP is above the Fed’s target level, there will be pressure on rates to move higher on their own. Mortgages rates and auto loans have been experiencing this.

We believe this mechanism is crushing demand for debt financed expenditures and will turn pent-up buyer demand into pent-up seller demand in the housing/real estate market. We also believe this mechanism will likely prove the S&P500’s current 2023 and 2024 earnings estimate of $225 and $250, unreasonable, as well as interest rates too high for the economy to properly function.

Our recommendation since January 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 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.

We believe there is value in owning the U.S. treasury market with a 5% nominal yield and 2% or greater real yield in the event of U.S. recession. We remain patient.

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