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All Things Are Not Equal

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group


Valuations, indicators, and history would suggest that all things are not equal in the market and in the economy.  That's the impetus for this week's musings, which just happens to be one of my favorite movies and favorite lead actors.  The 2014 surprise hit "The Equalizer" is the inspiration for this week's musings.  Here's some trivia about the movie:

  • It's well known that Denzel Washington was reluctant to make this movie due to the difficulty of the studio in finding the right director.  Denzel has admitted that he actually agreed to the part due to a contractual agreement...and, we are the beneficiaries.
  • The film was produced on a budget of $55 million, but grossed more than $192 million worldwide.
  • The initial script had very little backstory about Denzel's character, Robert McCall.  Denzel contributed much to the character's background and back story, including McCall having obsessive-compulsive disorder (OCD).
  • The film was based on the successful TV series "The Equalizer" from the mid-1980s.  Melissa Leo, who plays McCall's friend Susan, was a guest star on the original TV series The Equalizer.
  • Robert traps the corrupt Detective Masters in a Series III Jaguar XJ, the model of car that Robert McCall drove in The Equalizer (1985) TV show.

Here's what we've seen so far this week..

When You Pray For Rain...  Since the election two weeks ago, equities are higher, although, not exactly in a straight line.  Conversely, bond yields are higher, which is running counter to the Fed's current rate-cutting cycle.  A record $448 billion has flowed into US equities year-to-date, marking the highest amount in over two decades.  Sam Stovall of S&P Global (whom I had the distinct pleasure of meeting) once quipped, "When everyone has bought, who is left to buy?"  That succinctly sums up where we are in this current market cycle.  Investors, most especially retail investors, are piling into equities, and in some cases, not exactly for the right reasons.  Take for example a company called MicroStrategy, Inc. (MSTR).  Unlike some of it's AI-related brethren, the stock has traded flat for most of the year (from March 27th to October 11th).  However, since the election, the stock is up 85% as retail investors have feverishly purchased the stock.  Why the recent run-up in the stock?  The company has been purchasing bitcoin and just this week issued convertible senior notes in order to purchase another $3 billion in bitcoin.  Investors are chasing the stock as well as the digital currency, which is a recipe for trouble.  If you recall the "meme stocks" of early 2021 - AMC & GME for example - the end result was not what investors originally signed up for.  Message boards in early 2021 began promoting stocks that were involved in rumored hedge fund purchases or sells and/or retail buying sprees.  Of course the rumors fueled further buying.  If you were some of the select few who initially bought based on the rumors, you might have come out ahead.  However, if you purchased April or May of 2021 and held either AMC or GME, you likely lost 60% or more of your original investment.  What's the point, you ask?  Buying based on rumors and not on fundamentals is a good way to get caught on the wrong side of a trade (not to mention trading on rumors is generally considered illegal).  In addition, the amount of buying in equities likely represents the formation of a top that investors should be wary of.  Like our friend Robert McCall stated in film, "When you pray for rain, you gotta deal with the mud too."  In other words, be careful what you wish for - there are costs and benefits to everything.

Everybody Wants To Know.  Is the market going to make another move higher or is the top in?  Everyone wants to know.  Well, the reality is, no one knows for sure.  However, we can glean some general ideas about whether markets are closer to a top or not even close at all.  The latest data on Initial Jobless Claims as opposed to Continuing Claims is somewhat revealing.  Since reaching a bottom in 2022, Initial Claims have been relatively stable, moving only about 0.5% from July of 2022 to this week.  However, Continuing Claims (those unemployed who have claimed unemployment insurance for multiple weeks) has moved higher by 40% over that same time period.  This is common in the 6-8 months before recessions.  What it means is that while layoffs are somewhat manageable, for those who do lose their job, there are not many jobs available for rehire.  If the labor market is indeed cooling, it's not unreasonable to think that equity markets are soon to follow.  In fact, historically speaking, since 1950 the 3rd year of a bull market (which next year would be year 3 of the current bull market) is typically the weakest.  A cooling labor market might mean fewer discretionary purchases by consumers and lower earnings.  Speaking of earnings, since late August of this year, analysts have been steadily revising earnings expectations downward for 2025.  Meanwhile, as we previously noted, investors are piling into equities as if earnings are expected to continue to rise.  If we strip out the outsized earnings growth of Magnificent 7 stocks, earnings for the S&P 500 in 2024 hasn't wowed.  Yet, analysts are expecting that the majority of the decline in earnings will come from the Mag 7 names.  In fact, the gap that exists between Mag 7 and the rest of the S&P 500 earnings is expected to close considerably in 2025 and 2026.  This adds to further evidence we have already highlighted over the past few weeks that it would be appropriate for investors to diversify their equity exposure and limit concentrations in any one sector.  Who knows what the future holds exactly, but as one of my favorite characters stated in "The Equalizer" when responding to his chief nemesis as he asks "Who are you?"  At that moment, unlike other moments in the film, Mr. McCall states, "Everybody wants to know."

In this writer's humble opinion, this is perhaps one of the greatest scenes of dialogue ever put on the silver screen.
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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general. 

Past Performance does not guarantee future results.