The Fed Finally Lets Up! Jarvis® Update: December 15, 2023

The Fed appears to be done raiding on investors' parades. This week we share why we are optimistic moving into 2024. We cover that and much more in this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer and chief optimistic investor, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian, and happy holidays to everybody.

First of all, we'd like to ask you to like and share the video if you find these useful, and subscribe and hit the bell for notifications. That way you find out each time we're out with a video, and we're out every other week with these. We'd love to interact with our listeners, and we ask you to comment below with your answer to the question, are you traveling for the holiday season, and is it to someplace warm? We'd also like to ask you to comment any investing comments you have, and we'd be happy to interact with those. But first, a quick preview. The Santa Claus rally is in full effect halfway through December. We've got two topics for you as we usually do. The first is putting the macro behind us for good and what makes us optimistic for 2024. Couple of quick announcements before we jump into the meat of the program. First of all, we'd like to ask you to sign up for the Jarvis newsletter. Next week we're going to have our final newsletter out for 2023. We're going to have a little year in review and looking forward to 2024. Also, we talk stocks here, but just as a way to help our clients and prospects and listeners build their portfolios to achieve both their financial and personal goals. Whether or not you currently work with an advisor, we'd love to be a resource for you to help you achieve your objectives through investments in public securities. Call us at the number below, that's 630-547-3316, if you're looking for a second opinion on how you're positioned for the coming recovery. We've also got something for institutional investors. That's our totally revamped Investment Ideas service. We offer our 5 model portfolios that have dozens of actionable securities ideas on them, and that's updated quarterly. And also plenty of research reports if you like that sort of thing as well. With that all being said, let's jump right into the market recap. All the 3 major averages that we follow were up this week. The S&P and the Nasdaq were both up around 3% for the week. Really impressively, the Russell 2000, that covers the small-cap index, that was up around 7% this week. So a huge divergence there, and that's all driven by interest rates. Interest rates were lower again this week. We've been seeing them move nothing but lower since they topped out at 5% on the 10-year US Treasury. We started the week around 4.25% or 4.25% there, now well below 4%. And that's all driven by a hugely important Fed meeting that just happened this past week. We're going to cover that more in topic 1. But Nolan, with that all in the background, what was your view on this week's price action in both the stock and bond markets?

Wow. That's all I have to say.

Wow.

You didn't even mention Powell and the Federal Reserve Board and the comments coming out from the Federal Reserve Committee. I think that really was the match that stoked this whole thing and got it going. It's not only the prospect that rates are no longer going up or even that inflation is coming down. I think that was kind of built somewhat into pricing prior to the comments. But I think really what got this whole kindle going and got everything all bulled up is the prospect of rate cuts. So you finally starting to hear them talk formally, outwardly about cutting rates in 2024, where before it was just a myth. Now it's a fact. And I think they got everybody bolded up.

Yeah, it's always funny, Nolan. There's always that crowd that says it's all priced in and we all kind of knew what was going on over the last few weeks in terms of interest rates and inflation. But when we got the actual news, it really did extend. So that was interesting. Score one against the "it's priced in" crowd.

Let's jump on the other thing I was going to say, Brian, is the other thing that struck me when I said, wow, it's just how volatile everything has been. I mean, the prospect— if you and I were sitting here a year ago and we said, hey, Brian, there's going to be an upcoming month in the next year where the Treasury yield is going to go down a whole 1%, a whole 100 basis points from 5% to 4%, like, it's just not imaginable. That is just such a huge move. From a Treasury bond, it seems science fiction.

Yeah, it just gives you a great perspective of kind of have to stay in the market because these moves can be really strong and really quick. And if you're out, you can miss a lot of that. Let's jump right into our topics. Topic 1, we're calling Putting the Macro Behind Us for Good. Nolan, we banged the drum all year. We were close to the peak in interest rates. We didn't know exactly when or exactly where. They would peak, but we knew when it happened there would be a violent reaction positively in stocks and bonds. High and rising rates have held back both bonds and stocks for about 3 years now. You know, it felt like 10, but it was 3. In this week's Fed meeting, as you mentioned, Chair Powell acknowledged that inflation has moderated, explicitly stated that the Fed is done raising rates and may cut next year. And also the inflation data was really good. We had the CPI and PPI this week forecasting that we're going to have a lot lower inflation data going forward. Nolan, what impact are we going to see from what the Fed said on both growth stocks and in fixed income?

So this is a picture of me ringing the bell. Bing, bing! The bell is finally ringing. I think that's what the green light the market has been looking for in order to actually start buying. I think those that are waiting— I'm not really sure what they're waiting for. We've been talking for way too long about inflation needing to peak. Actually, we see it coming into this year. Inflation had already peaked. We had the bout of resurgence that happened in that August-September timeframe. So that's what we've been waiting for. That's what the Fed was waiting for. Now we know that rates are no longer headed up. We can kind of price investments accordingly, both stocks and bonds. And that's what the market's doing. And I think that sets us up well for not only the end of this year, I think that sets up strongly for actually for the next couple of years.

Absolutely. And it brings to mind that old adage, Nolan, don't fight the Fed. If the Fed is done raising and it's going to start easing, that's certainly something you need to take on board as an investor. Well, let's leave macro behind. We're going to move on to topic 2, something we find a little more interesting, and that's what makes us optimistic for 2024. So, Nolan, valuations are pretty depressed in certain growth stocks. We've talked over the past year, really, that we've got a lot of stocks that we follow that are really quality businesses down 50, 60, 70, 80-plus percent. A couple of those that come to mind: Block, SQ. We're going to throw the chart up for you over the last few years. And another one is Shopify, SHOP. These are both really quality businesses that have really had a hard time over the last couple of years in terms of their stock price. But all the while, they continued from their business point of view. We also alluded to this earlier. Small-cap stocks have been lagging massively since 2021. We're going to throw the chart up here so you can see the big differential between— you know, the S&P had a hard time, but the Russell really had a hard time. That's changing over the last month. Over the last month, we've seen the Russell outpacing the S&P 500 by more than 10% in just a month. So that's really starting to unwind that— that pairs trade Earnings are also improving based on what we saw in the third quarter results over the last couple of months. Nolan, just a simple question for you. What has you optimistic about 2024?

Yeah, I would say now that the macro— so interest rates, inflation, what the Fed's doing, all of that— is no longer in our, our windshield, we can put those in the, in the rearview mirror, we can look clearly out of the windshield and we can see the fundamentals, the business sort of micro. And that's what has me excited. You know, we're still finding companies where revenues are growing 20% plus per year, where there's very little debt or debt is shrinking, where free cash flows are going up, and where margins are increasing. And you mentioned it, in a lot of cases we've been following these companies 3, 4, 5 years. And if you just rewind the clock to 2019 or 2020 and you take a look at— you know, I looked at one this morning, revenue has doubled over the last 3 years, but the valuation is down 80%. So you're finding a stock now with really good fundamentals. We would say it's most attractive that it's ever been. And the one thing I think that a lot of people miss— a lot of these shares, especially growth stocks, the ones in the Russell 2000, anything out of the Magnificent Seven or this mega-cap tier, you're sub-$100 billion in a lot of cases for a market cap. You have suffered valuation compression. You're not in any index, so people just kind of ignore you. You're a little bit harder to find. And so you've seen valuations really collapse, but the businesses themselves have improved. I think over the next couple of years, you know, a lot of people don't— you know, they miss is if you look at earnings expectations, a lot of these businesses had a tougher go the last year or so. So they printed not great earnings and the expectations for next year are still moderate. But if they're expecting $1 next year and they report $1.20 or $1.25, you're going to see some rerating in these shares. And so those are the things that we're cataloging for our bounceback list for 2024.

And then with that being said, Nolan, how can investors take advantage of this improving landscape that we see coming down the pike over the next 2 or 3 years?

So in my case, I would just say stay the course. You know, at least we do these videos. Clearly we're trying to attract people to the left brain view and the way of thinking and looking at the world through our eyes, and hopefully that results in more viewership and more business. But primarily, we do these videos for our current clients, the people that have entrusted their life savings to us, and we try to explain our thought rationale so they have an understanding of the way that we view the world and how their money is being managed. So in a lot of cases, if it's clients that we're managing money for, all they have to do is stay the course, and we have a really good group of clients They tend not to get panicked when things aren't going well. So for a good group of people, it's just staying the course. But for another group of people and even our current clients, we don't sense just a whole lot of full stop bullishness. And so one of the things that people can do to take advantage is start acting in a more bullish way. We still know a lot of people are holding on a lot of cash they've been putting under the mattress. And then when you can get Treasury bonds at a living rate, 4 or 5%, people rushed out to jump up and down to buy Treasury bonds at 4 to 5. But what they need to realize, in a bull market with stocks, you can make 15 or 20. And so we need to see that same sort of enthusiasm. I think the other thing that people can do to take advantage of it is move money from where it's just been sitting and move it to where it can work. You know, if you're at a job and you had a prior 401(k) 4 or 5 jobs ago, or you left or retired, the money's still sitting there and you've seen the statement go up this year, so you're really excited. You need to remember that's on an index level, that's a mutual fund. You'll get good results, but you'll never get great results. And in this next market uptrend, the next 2 to 3 years, there will be some millionaire-maker businesses out there. Not every one of them will, but you'll see a lot of businesses over the next 3 years that triple. We've seen some this year in the last 12 months. So, right, Those are things that people can do to participate and become more bullish. And finally, we've been pounding the table on the Roth IRA for a long time. It's an IRA you contribute to on an after-tax basis, but your gains are tax-free. If you buy some of these winners in a Roth IRA, you can put yourself in a really good position down the line to be bullish today.

Excellent, Nolan. We're going to talk a little bit more here now in the practical. Do hear from people sometimes things have already had a big move higher in the last few weeks. Both growth stocks and bonds. What advice do you have for people who are wondering if they are too late to the party here?

It's not too late. The party's just gotten started. And in some areas of the market, it's not only that the party hasn't started, it really hasn't been planned yet. You take a look at artificial intelligence, even the data centers. For the most part, they're getting a redo. There's a lot of areas in the market that really haven't gotten going. We talked about small and mid-caps. For the viewers, this is every business that's less than about $10 billion in size. En masse, they've pretty much all been left behind the rally. So they've had a good week this week, but they need about 100 more good weeks to really catch up, in my opinion. So a long way to go still.

That's right. Nolan, any, any particular names or companies that you're looking at?

Yeah, one of them, it is the holiday, so people will be traveling, gathering with friends. And I really want to highlight the cruise business. You talked about companies that were left behind that are starting to reaccelerate. And one of the names that's made our turnaround list for next year is Carnival Cruise Line. Our investors will know we were optimistic on the bonds and we bought them over a year ago. That story turned out well. But we have more people cruising now than in 2019. Industry grows about 4 to 6% per year. It's kind of an oligopoly. There's really only 2 or 3 big carriers. It's a wonderful vacation experience as well. So they were hurt during COVID when the cruises didn't, didn't cruise for couple of years, but now they're back, but the share prices are not. So Carnival controls 45% of the cruise market, was over $70 at its high several years ago, it's now trading at about $19. It's up 100% this year, but we think it could go up another 100% and still be cheap.

All right, you heard Nolan take a look at Carnival Cruise. Plenty of other businesses out there that have a lot of potential for upside in the next few years, so we'll be taking a look at those for our clients. And if you have interest, let us know. Nolan, any final thoughts as we bid adieu to the viewers for 2023 before we see them again in 2024?

Yeah, I want to bid everybody a peaceful and joyous holiday season. We've been through a lot this year, both economically and with all the wars and things and crazy people we have in the world. So it's nice to have some downtime. We can disconnect from work, spend quality time with family and friends. And it's nice when we can look at our statements and see some green. So be optimistic, be positive, turn off the 6 o'clock news and look forward to a prosperous 2024.

Thank you, Nolan. We want to thank all the viewers for being with us here in 2023. We want to ask humbly for you to tell a friend so that they can be with us in 2024. And we bid you a wonderful holiday season and we'll see you again next time.