Flagship Pod 88: Will The Stock Market Survive 2023?

08/28/2023

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Now let's get into what we reviewed.

Here are the 4 key things we went over:

What will happen if rates are held higher for longer
Where Nvidia's latest earnings call will take AI stocks next
Why crypto and small caps are getting punished
How to invest for the next 12 months

And if you're too busy to listen to the entire recording, below we included a compact summary of what went down.

To get all the juicy details, just listen to the entire recording. And now, onto the summary👇

Overview:

With markets on an upward swing the morning, let's take a look back at last week and see what finally broke our August losing streak.

First up, Nvidia finally brought the market's appetite for growth stocks back thanks to another incredible earnings beat -- keeping the AI momentum alive.

And then, Jerome Powell managed to calm fears that he would overtighten rates at his Jackson Hole presentation last Friday.

In essence, we're recovering from a losing streak in August, but there are still some long-term concerns about where rates are headed.

So, in our podcast this week, we tried to untangle all the competition pressures affecting the market for the rest of 2023 and 2024.

Let’s explore how all this will shake out. 👇

Growth is Back on The Menu:

Traditionally, August just isn't a good month for stocks -- especially growth names.

But the dog days of summer abruptly turned bullish after, once again, Nvidia completely defied expectations and managed to increase operations enough to keep up with the near-infinite demand the market has for their new AI chips.

This sets a new standard for the AI revolution. it also makes life even more difficult for other chip companies as Nvidia can seemingly keep up with demand at a truly ludicrous pace without impacting their margins too badly. We'll have an updated price target later this week, but the headline here is that Nvidia in 2023 is basically Tesla in 2017. Their margins are right where they need to be and they are finding better and better ways to keep up with impossibly high levels of demand.

This sent the entire Nasdaq up briefly, but this is honestly a bad sign for growth companies, as all that demand basically gives Nvidia a license to print money and pass off expenses to their customers. Meanwhile, other growth names now have a much higher standard to meet and investors are increasingly getting pulled to the real yields coming out of 10-year treasury bonds.

But what is happening to make the market assume rates will stay high enough to justify high bond yields?

How Long Will High Rates Last?

In the past few weeks, 10-year treasury yields have hit a breakeven point where their value is 'enough' to beat equity investments. The 10-year in particular has enough real yield to really take the wind out of the sails of the Nasdaq and even crypto.

But why is this happening and why does it matter? Investors don't really care about where their gains come from, we just want to ensure our money outpaces inflation and compounds over time. Ten-year yields are firmly in the 4% range, which is currently beating inflation and what a lot of savings accounts were offering just last year. If a good chunk of your money can get you close enough to compounding returns, why wouldn't you keep a bigger and bigger chunk of change in treasury bonds?
The 10-year keeps rising because investors genuinely assume that interest rates will be higher for years at this point. And Jerome Powell really didn't say anything to assuage those concerns.

Basically, Jerome Powell's comments at Jackson Hole focused on labor as a key issue. Sure, the Fed has done a brilliant job getting inflation down to 3.3% and expenses like rent will continue to drive inflation down. But, the Fed's dual mandate is focused on inflation and labor, and higher wages will also keep inflation rising.

That's the tough spot Jerome Powell is in, especially considering that we've seen massive waves of labor action all across the economy. Real wages are finally making a comeback and workers have enough leverage to push wages even higher.

So, as the Fed continues to affect a monetary policy that gets inflation under control, workers in this country will continue pushing wages higher, which will boost inflationary pressure.

It is probably important to start rethinking what a 'soft landing' will be for this economy. As investors, we got used to bottom-barrel interest rates for an entire decade in the 2010s. A lot of what made those interest rates possible was a weird mismatch between productivity and wages, where wage growth stagnated across the economy.

Now we're past a breaking point and may not be able to get interest rates down anytime soon. That's not a failure though.

Higher interest rates simply mean businesses have to be leaner and more profitable. As long as we maintain growth, our system can handle an extended period of 3-6% interest rates as we adapt to the new normal we're building in the post-COVID world.

Of course, there's still a solid window where we can lower rates a lot once the price pressures of supply-side inflation stop reverberating throughout our economic system. But it's important as investors to prepare for every eventuality, and that's something we thought deeply about in this week's podcast.

Wrapping This Up:

The good news is, we're in a situation where there's a lot of great productivity and profitability to go around so long as businesses can polish their operations to perfection.

We're potentially looking at a period where a lot of consolidation will happen. The winners will win even harder while the next tier of businesses really start to struggle.

Our goal is to keep refining how we analyze the market moving forward so we can help you build the most incremental value in your efforts. We'll keep you updated as things develop.