Just A Bit Outside

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

We've outlined how there are still doubters that the current market environment can be sustained. There will come a day when the market will pull back, but we're obviously not there yet. While Mag 7, more specifically Nvidia, came to the rescue this week, other sectors participated as well. The inspiration for this week's musings, and in honor of the start of the baseball season, is the 1989 movie, "Major League." By 1980s standards, the movie was hit. However, it has definitely become more beloved over time, especially by sports fans. Here's some trivia about the film:

The film was produced on a meager $11 million budget, but grossed more than $75 million at the box office. It also spawned two sequels - neither of which did as well as the original.
Character Ricky Vaughn begins the movie as a "wild" relief pitcher who can't seem to keep his pitches under control. By the end of the film, he's learned to hit the strike zone and when asked to come into the game enters the field to his own intro song, "Wild Thing," modeled after the The Troggs 1966 his song. This inspired real life relief pitchers to start coming into MLB games to their own intro songs.
Director David Ward utilized former major leaguer Steve Yeager as an on-set technical advisor. When Ward asked Bob Uecker, former major leaguer to play Harry Doyle in the film, he had no idea that Uecker had actually been the play-by-play announcer for the Milwaukee Brewers for the last 20 years.
Charlie Sheen, who plays "Wild Thing" in the film, was actually a high school pitcher and was offered a baseball scholarship to the University of Kansas, until he was expelled from high school for poor grades and attendance - shocker.

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

Just A Bit Outside. Markets were in the doldrums early this week as uncertainty over future rate cuts and worries over inflation pushed markets lower. Then came Nvidia's earnings release on Wednesday, which blew out expectations for both earnings and revenue. In addition, the company issued stronger guidance on AI chip demand, helping fuel other AI-related names. Like "Wild Thing" when he first started pitching, Harry Doyle would have probably made the same comment about Nvidia's report, "Just a bit outside." The report by Nvidia and the subsequent rally has permabears shouting even louder about bubbles. However, if we look at the performance of Mag 7 stocks, their returns since the beginning of 2022 seem to be justified by their equally strong earnings growth. In fact, one could argue that Apple, Google, Amazon, & Tesla are under-valued relative to their earnings growth over the past two years. This should drive home the important concept that context matters. Yes those stocks have skyrocketed, but we did have nearly 10 months of a bear market in 2022. The number one driver of stocks over time is earnings - companies can't be profitable if they don't earn money. But the story isn't just about AI. Certainly, AI stocks have caused some to question current equity valuations. The report from Nvidia helped the market realize that valuations aren't so out-of-whack, at least not yet. As of this morning, 76% (376 of 500) of the stocks in the S&P 500 Index are trading above their respective 200-day Moving Average. That indicates strong breadth in this recent rally. If we look at the heat map from yesterday's trading, we also get a clear picture that it wasn't just AI stocks lifting the index higher. While Real Estate, Energy and Utilities were struggling a little yesterday, all other sectors were higher. In fact, of the 11 sectors in the S&P 500 Index, 7 were higher yesterday by more than 1%. Five of those 7 sectors are almost entirely unrelated to AI, meaning broad equity participation was the case in yesterday's rally.

Is Anyone Listening? As we continuously stress on this blog, we focus more on the data than we do on opinion or the market pundits. Data allows us to form a clearer picture of the situation regardless of personal bias or agenda. One of the great exchanges in Major League optimizes how we feel sometimes when the data is ignored.

Harry Doyle: "One hit, that's all we got, one @$#%! hit?"
Assistant: "You can't say @$#%! on the air."
Harry Doyle: "Don't worry, nobody's listening anyway."

Few seem to be listening to the data at this point, because the lack of volatility and the rise in earnings indicates we could be far away from a bubble popping in the markets. In previous market peaks, according to research from Bank of America, most historical bubbles see volatility rise substantially prior to a bubble peaking. We actually addressed this in our blog post from two weeks prior and the week prior to that. Not only is the volatility low historically, but much lower than the volatility seen in 2000 & 2007. I stated earlier that companies don't grow if they don't earn money. Companies earn money when consumers spend money on their goods/services. It has been argued that consumers, especially on the lower end of the income curve are struggling. Well, according to the Conference Board's measure of Consumer Confidence for income earners between $15k and $25k, lower income earners are feeling just fine. One reason consumers still feel good is because they have a job. This week's Initial Jobless Claims number came in a 201,000, which was lower than the previous week and much lower than anticipated. It's the lowest number in the last 5 weeks. Much is being made of recent headlines of companies laying off workers. However, there is a vast difference between a few headlines and the labor market as a whole. Remember, as of the end of December, there were still more than 9 million job openings available. Until we see jobless claims get into the 300k range (something we touched on a few weeks ago), there isn't reason for concern with regard to the labor market. In our view, consumers will remain happy in the short-term and input costs remain low and inflationary pressures remain stable. According to S&P, cost pressures in the U.S. eased in February as input prices saw the weakest increase since October 2020. In fact, the overall rate of increase was softer than the historical average of the PMI. If consumers continue spending and are a job, we're likely to see more support for the current market environment.

Oh my God, the Indians win it...
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