The Market Bull is Roaring -- Are You Taking Advantage? Jarvis® Update June 21, 2024

The market bull appears to be roaring. Are you taking advantage of the strongest market trends? We address that question and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. I am smarting a little bit today. No more sports till August, man. Kind of stinks.

There is Canadian football, but that aside, it's been about 6 weeks since we've been with you for one of these topical timely videos. We wanted to get back and do a little bit of a market update. A quick preview for you. Major market indices have been making a strong move since they bottomed in mid-April. And we've got 2 topics for you, as we usually do. The first is the narrowing of the market rally. The second is going to be the impacts of the rates and inflation discussion. With that being said, let's jump right into the market recap. The S&P is up about 10% since the market bottomed on April 19th, and the Nasdaq's up 15%. So some pretty strong moves out of those two major indices. Earnings season's mostly complete. It's been mixed results. We saw some great ones. We saw some not so great ones. Nolan, any opening thoughts about the fact that markets do seem to be buoyant over the last couple of months?

I think that's good. It's been fairly predictable. You know, we've had so much consternation last couple years with the head— head fakes with inflation readings, interest rates. Now things seem to be settling down. Interest rate readings seem to be more cool as far as the inflation readings are more cool, which I think investors are extrapolating to mean that gives cover for the Federal Reserve to start cutting rates. I think with that as a backdrop, it's kind of what the market's been waiting for the last couple of years. And we haven't had any nasty surprises. Remember last year we had the banking crisis flare up in March? We haven't had any of that happen. So that's been good for the market. With the background that we've had, it's pretty benign. I'm not really surprised that prices have, have done well this year.

Excellent, Nolan. And today we're going to look a little bit deeper underneath the surface. Of course, we've got these indices doing quite well, but it's not all peaches and cream for every stock. A number of stocks are doing well, and a bigger number aren't doing so well. We're going to talk a little bit more about that in topic 1. So topic 1, the bull is roaring, but rally— the rally is narrowing. Nolan, we wanted to make mention of this. The small-cap Russell 2000 is up just 4% over the same time frame that we mentioned of the S&P being up about 10%. And then the Dow Jones Industrial Average, so some of the more smokestack type of companies, that's doing even worse during that period, up just 2%. So a huge divergence going on there. We've got small caps, value, energy, materials, industrials that all seem to be struggling as well as software, which was doing great last year. So the major question, Nolan, what do you read into the deviation of all these sectors from what's happening in the broad market? And we'd love to hear you speak a little bit more about how we're seeing a relatively small number of stocks really driving everything in the market these days.

You hit it. The rally is getting more and more narrow. Exactly right. It means fewer, fewer companies are participating. So if you look at the 52-week high versus 52-week lows or advanced decline line, you'll see that all companies aren't doing equally well. And, you know, in our meeting last week, we noted a lot of high-profile companies that we follow, popular companies, are down double digits so far this year. So really it's been a big, uh, a mixed market. I think one of the themes that run through the winners is AI. I know we're going to talk about that a little bit later. I think it's good news, bad news. You know, the market having lower interest rates is, is good news, but I think investors also see through the economy and say, well, in order for rates to go down, it must be because the economy's weaker. And that's exactly what we've seen in the data, whether it's consumer spending, retail sales, no matter what economic reading They're all getting weaker, which is why the Fed is cutting. So we're happy to get lower rates. We're not necessarily happier to see the economy cool down. And so I think these companies or these industries that are struggling, a lot of them are being tied to if the economy's cooler and people have less money to spend, will they be spending it with your organization or your industry? And so That's a little bit to do with the winners versus the losers. As far as the size thing, you know, these small caps have been struggling for a while. It's very concerning. I know we plugged it in Nolan's Notes and you're probably going to talk about it in the upcoming letter. This is concerning. You know, if I'm a politician or Congress, I mean, this is what I would be asking my congressmen and politicians. You know, small business people are the backbone of this country. And if you look at a couple of things, one, it's regulation. I think one of the reasons that they're struggling is they're kind of choking on regulation. If you look at the number of filings or accountants that they have to— especially the publicly traded ones— have to employ, it's not different than a company that's 100 times larger. And so you get these effects where from a cost and expense standpoint, if the economy is softening and weakening, and my top line comes down a little bit, that really hurts my margins quite a bit. And so that's generally why you see in, in softer economic times, smaller companies do worse than larger companies. That's one. The other is just borrowing costs. You know, if I need to expand and grow my business, I need capital. And when the economy gets weaker, banks are less likely to lend and everybody else is less likely to lend. And when they do lend, it's going to be at exceedingly high rates. So that's another thing that holds small caps back. And we wonder if investors are really punishing them, maybe unfairly. At some point you'll see small caps really start to lead, and that's when we know we've turned the corner and the bull is definitely roaring at that point.

Thank you for all that, Nolan. You covered quite a bit, and we're going to touch on a little bit more of the themes you just brought up. The first one is AI. So we've mentioned this a number of times on this, on this show. AI does continue to be a driving theme and it's retained strength throughout this period, meaning the last year or so. We've covered that for a while. We've seen a huge move in AI. Now Nvidia, on the day we're taping here, this is the 17th of June, is now the number one market cap company. So definitely a theme playing out there. Do you expect to see more positive action in the long term on AI? And in other words, is it too late to get involved? Or there— is there more upside there for AI companies?

We haven't heard really any firms chant AI to the moon yet. I think it's just getting started. It started with NVIDIA, which is quote unquote the AI company. You know, they're in a hardware space, they just do chips, and that's the first building block you need for AI. But you need other things. You need lots and lots of data, you need a lot of computing power. And that's again, just the first level. And then you have layer 2, you got the software stack, and then you have the applications that you'll do on top of it. Those things are far down the road. Most companies don't have an AI strategy yet, and there's going to be a lot of money to be made. We don't know how much, but companies can't afford to wait and see. I expect there to be a ton of AI winners. It's our job to kind of roll up our sleeves and find out who they are. There will be some winners. There will be some big losers. The creative destruction part of capitalism. I'm looking forward to it. Should be fun.

Definitely agree, Nolan. AI, we're just getting started. Let's move on to topic 2. So topic 2, interest rates, inflation, and the consumer remain on the front page. So we've talked about inflation ad nauseam for a number of years. It's been a huge problem in the economy for the consumer and for businesses. But it seems to be getting better. The Consumer Price Index, the CPI, read at 3.3% this month. That's the lowest reading we've seen in a while. Nolan, what's your view on where we stand on inflation? And is Fed watching still a major factor in what's going on in the market?

You know, this is a tough one. You have the national readings that everybody looked at, you know, inflation. I mean, we're happy inflation's down from 8. It's 3. Remember, Brian, it's still a 3 or 4 year stack. So if you go back 3 or 4 years, most prices are up. 20-plus percent over a 4-year stack, and they may only go up 3% this year, but that's on top of the prior 20. Yeah, and the consumer is hurting. I mean, it's tough out here. New car prices, if you take a look at rents, you go to the grocery store, not as many sales anymore. Gas prices, you know, depending on the part of the country you're in and the grade you're using, it could be almost $4 a gallon. This is an issue in the job market. Is okay, not weak, it's strong. I don't think people are feeling necessarily wonderful. So I think no matter what the readings say, I do think government has a job on their hands to really thread the needle here. And I really feel for the consumer, and that's part of one of the reasons, Brian, we've noticed weakness in some consumer parts of the, of the stock market. So we hope this is the end of inflation, but we could use some good old-fashioned deflation for a year or two to bring these prices back. I don't think we're going to get it.

Couldn't agree more on that. So we have talked about this and what you just mentioned, a lot of consumer challenges right now. Another one of those is the housing market, which remains relatively strong despite high interest rates. And like you said, we've seen significant inflation over the years that's compounded over a 4-year stack. What did we learn about the consumer as we looked at the last earnings season, some of the releases coming out of the companies? Do you have concern that consumer weakness could challenge what we see in this market strength that we have right now?

I am. It does concern me. You know, the consumer is 70% of GDP. Once the consumer rolls over, you'll see a lot of these readings start to roll over. So that's, that's not a great sign. I am concerned, not overly so, but yes, I do have some concern.

Okay. So it's definitely something we're going to keep an eye on, what happens with the consumer over the next few months. And if we do get an interest rate cut, could have some impact on, on the consumer as well. We do want to preview next week's quarterly newsletter, the Q2 newsletter for the Jarvis newsletter, going to be coming out next week. One of the recurring themes we've had in there is the income security of the month. I did want to talk about a security that's connected to housing, as we just mentioned, and that's Rhythm Capital, RITM. Nolan, can you just give us a quick preview of what we're going to be writing about next week in the newsletter?

I'll tease it a little bit, but really we want the viewers to go to the letter to get the full scoop. I'll give you the Cliff Notes. Rhythm is actually a diversified financial company, actually started in the mortgage business. Their primary business was these mortgage servicing rights. When you go get a loan, you're going to make your payments for the next 30 years where some financial institution collects those payments and receives a fee for them. Business was not good when rates were low because a lot of people refinance out of high loans. And so these mortgage servicing rights don't have as much value. But now that most of America is stuck in a loan under 5% when rates are approaching 7%, this is a really, really good time for this business. They also do traditional mortgage lending and there's an asset management side as well. But the business is built to pay income, not income later, but income now. We like that the yield is 9%. We like that. We think it's going to be growing over time, and we think this is a, a healthy enterprise, and it's in the financial space, which is one of our favorites now that interest rates are coming down.

So that's 9% dividend yield on Rhythm Capital, RITM. We are going to talk a little bit more in depth about that next week in the Jarvis newsletter, so make sure you check that out. We're going to close out today's video. We would appreciate if you've made it this far to like and share the video. It does help others find the video and subscribe and hit the bell for notifications. That way, you know, every time we're out with these, we looked at our video analytics. We found out that 80% of you viewers of the videos aren't subscribed. So make sure you do hit that subscribe button. We'd love to get the numbers up. We'd love for you to comment with your thoughts below just to get the conversation going. Well, how are you investing in the AI theme? Certainly something that we all should be looking at. If we're into growth. Nolan, any final thoughts as we close out this week's video?

It's the summer. Enjoy the summer. We're interested in hearing all these wonderful summer plans. You know, it goes very, very quickly. Uh, in the market, things seem to be really calm right now. We hope that continues through the summer. Volumes tend to be a little bit lower. Pretty soon we're going to start to get the, uh, presidential candidates campaign, uh, campaigning, and we'll have some industry targets that'll probably be very volatile if they find they're on the stump with the wrath of the presidential candidate. So that'll be fun this summer, but it's June, go to the beach and enjoy it.

Thank you for that sentiment, Nolan. It's the beginning of the summer, so that means it's almost the end of the summer. Let's enjoy it. And, uh, well, we appreciate all the viewers for being with us, and we'll catch you again next time.