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Welcome to this recap of the year gone by, outlook for the year ahead and a portfolio update.
The S&P500 is up +22% this year, after a negative return of -19.4% in 2022.
US Equities continue to outperform global markets.
S&P 500 companies' earnings are expected to be flat this year compared to 2022.
Retail interest, hedge funds and corporate buybacks led by stocks in the Information Technology, Communication, Financial and Energy sectors continue to keep U.S. equities as a ‘buy on dip’ since 2020.
The wide gap between the CPI, Fed rates and the 10Y yield has reduced in 2023.
The Fed seem a lot more in control of the rates this year than in 2022.
Inflation in PCE, a measure that is followed by the Fed, has fallen to 3% YoY in October 2023 from a peak of 7% in June 2022.
Inflation in energy prices (Goods & Services) which was the largest contributor to inflation last year, is pulling it lower this year.
U.S GDP has risen from US$19 Trillion in 2017 to US$ 27 Trillion currently.
A large component of the GDP is the Personal Consumption Expenditure (PCE)
PCE continues to rise, despite increases in interest rates, raising expectations of a soft landing of the economy by the Fed.
Savings rate rose to record highs of 15.4% of Disposable Income in 2020, far above the long-term average of 5.2%
Post U.S. reopening, these high savings rates depleted into consumer spending (PCE) and kept the consumption growth rates above its long-term average of 4% in 2021 (12.9%), 2022 (9.2%) and 2023 (5.7%).
While disposable income did not grow in 2022 and fears of recession made headlines, these above average consumption rates kept a U.S. recession away in 2022 and 2023.
In current dollars, PCE is growing at 5.7% in 2023 compared to 2022.
Spending in durable and nondurable goods continued through the pandemic and the re-opening.
Spending in services stalled in 2020 and is catching up post the U.S. reopening.
Expectations for 2024
According to the forecast published at the FOMC meeting on 14th December 2023, participants project the appropriate US Fed Fund rate to be at 4.6 at the end of 2024 and 3.5 at the end of 2025.
This implies a potential rate cut in the range of 75bps to 100 bps in 2024.
The Fed Chair also stated that it was too early to discuss rate cuts, these decisions will be assessed at every meeting and are data dependent on inflation, employment rate and GDP.
According to various analysts, the S&P500 index is expected to end 2024 anywhere between +8% to -8% from its current level.
According to a recent report by Statista, the U.S. GDP is expected to grow to US$ 39 Trillion in the next 10 years.
This is an expected GDP growth of 3.4% per annum for the next 10 years.
According to industry analyst estimates, the earnings per share of the S&P500 is expected to grow by 11% in 2024 and 12% in 2025.
The index is currently trading at a 21 PE Ratio (Trailing 4 quarters) and a 19.4 PE ratio (Forward 4 quarters)
Apart from Amazon, which is currently at a market cap of 2.7x its annual revenue, the remaining six stocks are between 5.5x to 26x their annual revenues.
Despite being perceived as overvalued compared to its peers, these stocks have beaten the index performance in the last 5 years (seen in the 5-year Beta)
Analyst continue to raise their upside targets on these stocks.
Key Risks
Fall in consumption. With savings rates in the US back to its long term levels, rise in PCE will require increase in real wages.
Interest Rates remain elevated. If real wages and PCE continue to support consumption, this may add to inflationary pressures, keeping interest rates higher for longer.
Can the Fed manage a soft landing of the economy with "below average growth in GDP"?
We continue to track and assess economic data from the U.S. and actively manage the investment portfolio.
Data sources: Refinitiv, S&P, investing.com, Bureau of Economic Analysis, Yahoo Finance.
Portfolio Update:
We began this series with a portfolio framework and construction based on fundamental research. You can read all about it in the previous posts.
In terms of portfolio allocation:
Long holdings have 29% in Equities, 23% in Fixed Income and 48% in cash.
Short holdings has just one equity position.
Geographical allocation:
53% in the US, 39% Europe and Underweight China with a 6% exposure.
Portfolio Performance:
The long portfolio has generated a return of 7.6% this year and a dividend + coupon yield of GBP 23,287 (or 1.79%).
The Top gainers in the portfolio are: Tesla (+57%), United States Steel (52%), Alphabet (+37%), Emerson (+10%) and Glencore (+9%). Derivative trades (Calls and Puts) with Nvidia as the underlying generated GBP 15K in gains.
Adding to Deutsche Bank, Reducing exposure to AP Moeller, Exits from ICBC and Swire Properties worked well in favor of the portfolio. The exit from 9618 HK (JD) could have waited until the bounce up from October. Also, profit booking in Tesla was early.
The short portfolio has fallen -32% since the trade has gone against us with Nvidia rallying despite its overvaluation. Overall the portfolio is down -26% this year and possibly requires a new strategy to recover the losses and get back into the green. More of this in January 2024.
If you or someone you know is interested in receiving a free remote consultation on their investment portfolio, regardless of location, please don't hesitate to contact us.
This series is for information purposes only without regard to any particular investment objective, financial situation, suitability or means. It is not be construed as a recommendation, or any other type of encouragement to act, invest or divest in a particular manner (whether explicit or implicit). We recommend that you are familiar with the terms of use.
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