July ends in two trading days. The S&P 500 is currently up 2.61% and the Nasdaq 100 is up 2.11%, annualized that’s still 31.32% and 25.32% respectively. The market returns have remained strong.
I’ve had three conversations this week. Somewhat important conversations that will dictate how I invest over the next twelve months.
The first was with a former hedge fund manager and current global strategist at JPMorgan, one with a regional director of Davis Advisors, and the last with a director from Alliance Bernstein.
What sparked my conversation with Josh was actually based upon my conclusions in “The Stock Market in 2025”, written a few weeks back.
I had emailed my client advisor looking for previous versions Guide to the Markets, outlining some of my thesis around valuation and earnings, and what their analyst targets actually meant for the stock market.
This sparked her to remember an internal meeting with Josh about his thesis around valuations and earnings.
Here’s what I learned and what he shared:
Here are my thoughts and takeaways from this conversation.
I don’t like when research teams use 25 year averages on valuations. Twenty five years ago GE, IBM, GM, XOM and the likes were at the top of the S&P 500. Those companies are simply valued much differently than an Apple, Google, Microsoft, and Amazon. The companies living at the top today have much higher free cash flows, moats, and margins. They also have grown much faster and the adoption of the internet has a long way to go to reach maturity, in my opinion.
But with that in mind I respect the commitment to the process and the strategy involved, and the numbers do hold some weight, but I feel like they will drag down some of the market’s forward optimism.
I really thought his take on unemployment and positioning around a recession was interesting. He mentioned that all it would take is for unemployment to reach 4% for this recession to be on. Using unemployment as a guide on when to position down markets and internationally was an interesting perspective.
Technology being a “safe haven”, don’t get him or I wrong you can and could still lose money, was an interesting take on positioning coming out of recession as well. He described it as selective growth. Not every company and industry experiences a recession simultaneously, with the exception of extraneous shocks like in 2008 and 2020.
This was hands down was of the most interesting conversations I held this week.
We had Dan come in and join us for our monthly FRIENDS event put on as a community building exercise with our clients.
Davis Advisors is a fascinating boutique asset management firm. Chris Davis, the current Chairman and CEO, is on the board of Berkshire Hathaway and Coca-Cola.
The most interesting piece of my/our conversations with Dan was around Meta Platforms and AI.
Davis’s thesis on Meta differs a bit from mine, but both are somewhat optimistic. Davis’s research team believes Meta’s business success over Twitter will come in the form of better monetization. Not because of ads on Threads, but on Facebook and Instagram capturing more market share as a result of better targeting. With Threads, Meta doesn’t need to place ads. Meta can mine information from the Threads platform that can be used to better inform the ad placement algorithm on Facebook and Instagram to drive higher ROI on ad campaigns leading to more investment, and revenue for Meta.
The Davis suite of mutual funds and ETFs collectively have a large position in Meta.
Davis’s research team on AI says that there will be winners but more importantly there will be losers. Their approach towards investing in the space is very much a “picks and shovels” type of approach, and Davis is a value strategy firm, so they are looking at making sure they are buying companies below their intrinsic value. While there may only be 5 AI super winners, and potentially hundreds of losers, every loser will also have to buy AI chips, tools, and cloud storage.
I think it is really important to keep in mind though that “picks and shovels” companies can experience bubbles too. In the dot com bubble, picks and shovels supplying dot com companies experienced unprecedented earnings and revenues growth that eventually came back down to Earth with the dot com companies.
Every other conversation I held this week was directed towards more equity investing. Jason and I usually fall down the rabbit hole of fixed income, bonds, but we of course hit some equity topics as well.
Here’s the key things we talked about:
My thoughts and takeaways from my conversation with Jason.
I also believe we may achieve a soft landing, but enough people are calling for a mild recession (and with what JPMorgan said it maybe is the real case), betting the farm on either is probably a bad idea. Whichever it is though either of the second two bullets remain the similar.
High quality intermediate bonds are the bread and butter of the bond market. It’s where people flock to when trouble brews and it’s where people sit when the good times are rolling. The Fed is really unlikely to continue raging forward with rate hikes, and even if they do intermediate bond investors are now fairly sheltered from an interest rate risk standpoint than they were last year. Cash yields are attractive but don’t let that distract you from putting money to work for your future.
And the other point. I hadn’t ever seen this statistic in my life. Market breadth, I’ve talked about a few times, is kind of hard to position around. But this was super interesting and I wish you could all see it but basically when the market is at peak narrowness equal weight tends to outperform on the widening trend, which logically makes sense.
You can’t really take all of these guys’ word and bet the farm on everything they say. But you can take bits and pieces and construct a weather proof strategy around all of the ideas.
Jason’s and Josh’s idea on outperformance on equal weight and small caps are very similar. When you equal weight the S&P 500 you dip down and get a greater exposure to the smaller companies in the S&P 500, which ranges from $3 trillion to $1 billion at the high and low end. Market breadth seems to get the narrowest in and before a recession as a “flight to quality” happens, and widens when the reacceleration happens (two ways to play it, but you don’t have to bet the farm on both).
Davis’s and Josh’s thoughts around tech are very similar. AI is going to be a huge disruptor, but there will be many losers. Betting the farm won’t get you far if you don’t play it right.
Jason’s and Josh’s ideas around a recession are somewhat opposite to each other. Betting everything on either side of that is probably the wrong thing to do, because the answer is not clear. However each one of them talked about the potential of core and core plus intermediate bonds.
If you ever are curious about what a week in the life of Jacob is, it’s 25%-50% this.
Reads worth reading 📖
Chris Davis on the Compound and Friends - Davis Advisors
Have U.S. equities rallied too much? - JPMorgan Asset Management
Three themes for multi-asset investors - Alliance Bernstein
Michael Cembalest on the Compound and Friends - JPMorgan Asset Management