Markets at All-Time Highs: What is the Smart Money Doing?

Welcome to "The Money Runner" with your host David Nelson, where we dive deep into the current state of financial markets. In today's episode, we explore the recent surge to all-time highs by the S&P 500 and Nasdaq, and discuss the implications for investors, advisors, and portfolio managers. We'll examine the market's quick recovery from April's lows and offer strategies for those looking to re-enter the market. We also dissect the latest economic data releases, including PPI and CPI, and assess their impact on future Fed rate decisions. David provides valuable insights into how elevated interest rates affect various sectors, from AI in utilities to opportunities in financial stocks. Join us as we navigate the risks and opportunities in a volatile market environment, analyze geopolitical influences, and predict potential market movements as we approach a pivotal U.S. election. Tune in for expert financial advice and actionable investment strategies.

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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Right now, the S&P 500 and Nasdaq have broken to all time highs. This is where it can get dangerous for investors, advisors and even portfolio managers. It makes sense that many trend following systems would reduce exposure as the decline worsened in April. But it took just two weeks to march back to the highs, leaving a lot of investors behind. So what do you do right now? And if you do pull the trigger to get back in, where do you go? Let's find out. Welcome to the Money Runner. I'm David Nelson. Before we can chart a path forward, we have to establish where we are. Clearly, we're in a higher for longer framework with rates likely to stay elevated for some time. The charts don't lie. If you believe the Fed is going to cut rates anytime soon, look at the data that hit this week. The PPI on Tuesday was worse than expected and the only thing that supported markets was the revisions for the previous month, which made inflation look just a bit better. I can't remember a time where government data was this bad. Every week we get data dumps that are completely revised a month later. Don't release the data if it's this unreliable. Wait a month. Factor in the revisions and then give us something we can use. Wednesday’s CPI came in softer than expected. Stocks jumped on the news. But again, look at the charts hardly anything to get excited about. Inflation may not be getting worse, but those charts are at best sideways and certainly not enough to get Jay Powell to convince the other members of the FOMC to move up the timetable for rate cuts. Price is truth and the final arbiter. The upward momentum in stocks underscores that valuation as a timing tool is flawed at best. More critical is the risk free rate, which is the alternative asset class. Current rates are elevated compared to recent history but are quite normal when viewed in the context of pre financial crisis investment cycles. We've pounded this point home for several months. Tell me where rates are going and I'll tell you if stocks are going up or down. Markets have proven they can withstand higher for longer. It's when rates are in motion. We get the biggest price swings. Look at the last six weeks. You couldn't sell stocks fast enough in April because ten year yields were on I-95 north. In fact, by the middle of the month, some talking heads, including former Secretary of Treasury Larry Summers, were saying the Fed's next move might be to hike rates. Ten year yields rose more than 50 basis points last month. The rally in stocks this month was a gift from bond traders buying the sell off in bonds, forcing yields to retrace. Much of that move. So what do we do with this information? The current market environment presents several opportunities and more than a few risks. The recent inflation data reduced fears of runaway inflation, but it is still lurking in the shadows. And until the Fed is confident inflation will hit the 2% target. Don't count on any cuts. Interest rate probability charts give September a 5050 chance of a cut. Like I said, I'm not seeing it. Position your portfolios like it isn't going to happen because it likely won't. Look at ai investment themes beyond the technology sector. Increasingly, the industrial complex is embracing these tools. Over the last week on several shows, I pointed out the utility sector as another way to play ai related themes. Here's what I said. The one thing we're learning about the rollout of A.I. is that we need power and lots of it. Goldman put out a research note saying they expect demand for electricity to increase at a two and a half percent annual pace for the next decade. By definition, utilities will be increasing revenue, and those with good business models will increase their bottom line as well. I'm looking at a sector that is 2.5% of the S&P 500 on its way to five. Look at some of these charts. Vistra Corp.. This is a utility and up more than NVidia in the last year. Who said utilities are. boring? Very quietly, This week, utilities became the top performing sector year to date. With rates currently elevated, financials are another good place to look for returns. Buffett just took a large position in Chubb. Probably not a surprise given Mr. Buffett's love affair with insurance companies. Over time, the yield curve should steepen, which will help financial margins. When the Fed does cut rates. Expect financials to take a clear leadership role. You can't have a financial podcast without talking about Nvidia, especially since it reports this week. Am I nervous? You bet. Whenever one of my larger positions reports, I'm on pins and needles, especially since analysts have jacked up the price target and estimates. As we approach the earnings release. In the last 12 weeks. Analysts have moved up the consensus target from 730 to over a thousand. Remember, an earnings report isn't just a look at the health of a company. It is also a report card on how good or bad a job analysts did in getting the numbers right. Now, I've turned my position at least three times in the last year, and now have a modest underweight in the name. That makes me nervous, too. This is not just another chip company. It is a platform company that also provides tools and software that air engineers can't easily replace risks. There are always risks, and this market is no different. The higher for longer framework has its costs, especially on the economy. If you're wealthy or upper middle class, you're probably doing just fine. But if you're at the bottom of the income ladder, you are being forced to make tough decisions on discretionary purchases. Your wages are climbing, but likely slower than prices. Geopolitical risks also pose a significant threat. The wars in Gaza and Ukraine are still front and center and could easily escalate beyond current boundaries. We're approaching an election here in the United States that will be one of the most divisive in a generation. Expect increased volatility as polls come out, especially at the sector and industry level as investors try to navigate any changes in the regulatory and legislative environment. Political operatives tell me the election is very close and could easily extend the time it takes to determine the outcome. It could be days before we have an official winner. Perhaps the biggest risk is the new acronym put out by Goldman Sachs this week. Remember, Tina, there is no alternative. Well, now it's Tara. There are reasonable alternatives. The risk free rate is competitive and each stair step higher will pull capital out of the market. Look beyond the broad indices for the first time in years. Active management is working across a wide range of styles and asset classes. Okay, that's it. I'm out of charts, ideas, and most important, I'm out of time. Thanks so much for joining and don't forget to visit my substack site DCNelson123@Substack.com. I'm David Nelson and this is the money runner.