CAPITAL SHIFT: Investors move from stocks to hard assets

Market Overview & Investment Strategy - February 29, 2024

Key Concepts:

• Risk-Off Environment: A market condition where investors prefer investments with lower risk, typically moving away from stocks and towards safer assets.
• Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield (1 basis point = 0.01%).
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• Hard Assets: Tangible assets like precious metals (gold, silver, platinum, palladium), oil, and commodities.
• Stagflation: An economic condition characterized by slow economic growth and relatively high unemployment (economic stagnation) accompanied by rising prices (inflation).
• PCE Index (Personal Consumption Expenditures Price Index): A measure of the price changes of personal goods and services. It's a key inflation gauge for the Federal Reserve.
• Project Vault: A Trump-era initiative aimed at stockpiling critical minerals for national security purposes.
• Drawdown: A peak-to-trough decline during a specific period for an investment, fund, or market index.

1. Market Performance & Initial Conditions

The market opened lower on February 29, 2024, with the Dow Jones Industrial Average down 170 points, the S&P 500 down 25 points, and the NASDAQ Composite down 136 points. This represents a risk-off sentiment, despite a year-to-date range of 270 basis points. A significant $1 trillion in market capitalization has been lost due to stock declines, with over 7% intraday declines in numerous stocks.

2. Walmart Earnings & Outlook

Walmart reported holiday quarter earnings that exceeded estimates, with sales up nearly 6%. American e-commerce sales surged 27%. However, the retail giant issued a cautious full-year outlook, prompting a 2% decline in its stock price, contributing to the downward pressure on the Dow. Walmart also announced a $30 billion stock buyback.

3. Broadening Market Participation & Hard Assets

Larry McDonald, founder of Bear Traps Report, highlighted a broadening of market participation beyond traditional growth stocks. This broadening is evident in rising prices of metals (gold, silver, platinum, palladium), oil (specifically Occidental Petroleum), and commodities generally (tracked by the DBA ETF – an oil and gas to agriculture ETF). He noted a “great migration of capital” from financial assets (stocks, bonds) to hard assets, a trend he identified over two years ago. The focus is shifting from the commodity itself (e.g., gold bullion) to companies involved in the commodity business. Occidental Petroleum was specifically mentioned as a potentially attractive investment, trading below Warren Buffett’s average purchase price.

4. Economic Data Releases

Cheryl reported on key economic data:

• Weekly Jobless Claims: Came in lighter than expected at 225,000, an improvement from the previous week’s 227,000. Continuing claims were 1.869 million, roughly on target.
• December Trade Balance: Significantly worse than expected, reporting a negative $70.3 billion deficit, compared to an expected $55.5 billion.
• Philly Fed Index: Registered 16.3, indicating expansion in the manufacturing sector in the Philadelphia, Pennsylvania, New Jersey, and Delaware region, an improvement from the previous month.

5. Interest Rates & Federal Reserve Policy

The 10-year Treasury yield rose 3 basis points to 4.10% following the release of Federal Reserve meeting minutes from January. The minutes revealed a split opinion on interest rates, with some officials considering further rate increases while others favor rate cuts. The market currently anticipates two to three rate cuts. Tomorrow’s economic calendar includes the release of the PCE index (expected to show a 3% annualized growth and a 2.8% year-over-year increase).

6. Impact of Artificial Intelligence & Stagflationary Outlook

Larry McDonald predicted a potential for 200,000 job losses in April, May, and June due to the disruptive impact of Artificial Intelligence (AI). He cited examples like Robbins, Expedia, and Nice Moats being impacted by AI agents. He advocates for a “stagflationary portfolio” – investing in industrials, which are currently outperforming the NASDAQ by a significant margin (potentially 25-30 years). He attributes this to continued industrial growth despite potential job losses.

7. Portfolio Strategy & Midterm Election Year Dynamics

McDonald suggested a strategy of maintaining core long positions in the portfolio through May/June, then raising cash. He referenced Warren Buffett’s substantial cash holdings as a model. He also noted that drawdowns are common in the early part of a midterm election year, as presidents tend to push for more controversial policies further away from the election cycle.

8. Notable Quotes

• Larry McDonald: “Tremendous, tremendous pressure under surface amount of stocks over 1 [dollar]… 1 trillion dollars loss… markets kind of crashing a little bit.”
• Larry McDonald: “You want to be in a stagflationary portfolio… that is why the industrials are outperforming the NASDAQ by most probably in 25, 30 years.”
• Larry McDonald: “This is an incredible time to be alive what is happening, in the markets, if you look at copper, oil to, some extent oil up tens in Middle East rates consumer the sameels everything seeing is the shock from AI.”

Conclusion:

The market is currently exhibiting risk-off behavior, influenced by economic data, Federal Reserve policy uncertainty, and the emerging impact of AI. A broadening of market participation into hard assets and commodity-related companies is underway. The prevailing investment strategy, as suggested by Larry McDonald, leans towards a stagflationary portfolio with a focus on industrials and a cautious approach to cash management, particularly in the context of an upcoming midterm election year. The PCE index release tomorrow will be a crucial data point to watch.