adminIt’s not being talked about enough. This market move off the November lows and the Fed pivot — signaling an end to the central bank’s rate-hiking cycle — is one of the most astonishing and satisfying I have seen in 43 years of investing. In nine weeks, we blew through price targets on so many groups, we crashed barriers that I thought would be impossible to do for many years. And we did it at a pace that I can only think of one word to describe: unsustainable. Yes, that’s a damning word. I have danced around it in our meetings and have certainly questioned the trajectory of many a stock since the November liftoff. But the move is like a full-on jailbreak for so many different companies — and you can’t expect them to break out of jail again. They are already out. For as long as I have been in the business, I’ve heard that most of the big moves occur all at once in a very short period of time. That’s been only partially true. If you look at the great gains of the Magnificent Seven, only Nvidia put on hundreds of billions in market value pretty much over night. But that is what happens when you report $4 billion more in revenues in a single quarter than anyone expected. Nvidia CEO Jensen Huang likes to joke that it’s the biggest analyst “miss” in history, a reminder the Street has overshot forecasts, too. But Nvidia is, to draw on a couple of words from law school, “sui generis,” and I doubt we will this kind of move again anytime soon. But the overall market action recently does underscore that point — and is breathtaking. I have used the word parabolic to describe some of the charts I have been watching, a word that is meant to be a curse because a parabolic move is inherently unsustainable. It’s meant to be a signal or a message that says: “Take some profits because you can’t expect the move to continue.” And yet, with the exception of companies that have had truly bad news — Nike or Fedex or some of the oils, say — you would have left a lot on the table if you sold during that nine-week rally. Just look at the performance of the equal-weighted S & P 500 index from Oct. 23 — the day long-term interest rates peaked — to the end of 2023: Up a whopping 15%. Even the much-maligned Magnificent Seven put on 11%. So much for the paltry performance of the mega-cap tech stocks. We began 2024 by trimming our biggest winners — a decision based on discipline, which must trump conviction for long-term success. Bulls make money, bears make money, and hogs get slaughtered. We didn’t want to be greedy hogs after the great year these stocks had. A lot of that extends from the parabolic proposition. Look at many of the stock charts: where we are now versus the end of October is almost nonsensical. You are very far from terra firma. Lots of my trepidation actually comes from the calendar of earnings versus the Fed calendar of meetings. Going into the first week of November, we had seen a huge number of quarterly reports and we found them wanting. These companies would most certainly miss their fourth-quarter expectations if the Fed maintained its higher-for-longer status. Most stocks were being priced like we would have a recession. Soaring sectors since the pivot I could go over tons of groups that were like that. But let’s focus on the ones that have really ripped here: financials, healthcare, homebuilders, foods and retail. These really took off, not the industrials or techs or the entertainment and travel and leisure, unless they were related to credit card companies like American Express . We knew how badly the financials and the retailers were going to be going into the Fed pivot. We would have huge credit losses for banks and the retailers were going to run into a weakened consumer who was tapped out. Of course, once the Fed scrapped keeping interest rates higher for longer, market participants mostly adopted a view that we would have a procession of rate cuts. After all, the Fed would not have ditched higher for longer if something was wrong. Here’s where it gets interesting and complicated, even murky, going into earnings next week. Buyers bid up pretty much everything — but especially these sectors — without having any understanding of whether the companies are actually doing better. We had made up our minds how tough this market was going to be Just when the Fed said it had accomplished what it wanted to. Now cuts, not hikes, were next. That means we are heading into an earnings period where stocks have gone up pretty much unnaturally and in lockstep. When you consider the moves in the financials, whether it’s JPMorgan , Capital One , Allstate or Travelers , they all took place during this contained period and yet we have no idea how they are actually doing. Look at American Express, a company I like very much. The company’s last public comment going into this nine-week rocket ship was that October was a little weaker than planned. And then it puts on twenty points in a straight, yes parabolic, line and it happens so fast that the analysts don’t even get to be positive or adjust their price targets. Or Morgan Stanley , a long-time Club name. It reported a quarter that we stood by but few others did because the bank did put on a rather tepid display of wealth accumulation. The stock goes down to $70, yielding more than 4%. Then you look up nine weeks later and — based on those same quarterly results with no new data or information — it’s at $94. We have to ask ourselves: Did it deserve to go to $70? The answer is obvious: no. But does it deserve to be at $94? On a yield basis: yes. But if it didn’t get wealth management back on track, we will regret that we didn’t sell some. Believe me, it is tempting. But I actually think the last quarter was a fluke and I don’t want to trim our already small position. I feel the same way about Wells Fargo . Like so many of the other banks, you got the equivalent of a year’s worth of a move in nine weeks that’s being justified only by the Fed pivot. The moves are based on rubber. They are about to hit the road at the end of this week and I regard that as worrisome. Oddly, the stronger employment number on Friday actually helped these stocks because the real risk is a big spike in unemployment. That’s something you could logically infer from the Fed’s now radical switch, and it would make this whole move in national banks, credit cards, regional banks and insurers totally hazardous. Fortunately, even after this run the price-to-earnings multiples are low and have been low. Unfortunately analysts have to deal with models and the models are not going to justify the run from October. That’s why I am so concerned. Can American Express say things that justify the move after saying not long ago that things are sluggish? Or has the stock been so chronically undervalued because people thought rates were headed to six and now they aren’t? The pivot from going up to 6% to back down to 4% is of such a magnitude that it makes sense for stocks to have a U-turn. However, that U-turn was propelled into overdrive by the entire financial group moving together. All I can say is that these numbers better be spectacular or you can expect a sharp rollback. Yet, I don’t see how bountiful the numbers really can be? Worrisome. You want parabolic? Have you seen the move in the forgotten retailers like Gap , Abercrombie & Fitch , Ross Stores , Williams-Sonoma , Dick’s — or our own Foot Locker ? They are just incredible and based on … well, I am not sure. Gap did have a nice end to a streak of total oblivion and maybe it can keep up. But most of these retailers and others that are doing well simply told us that the weeks around Thanksgiving were pretty good. Same with Ralph Lauren and PVH . Yet, have you seen those moves? They are “you can take that to the banks moves,” once-in-a-lifetime events based on Black Friday and a pivot. Sorry, I want more before I want to add to positions. The question is hold or trim, not buy. The only company we really have a bead on in the sector is Costco because of its monthly reports, but I don’t think others will measure up to Costco’s humongous dimensions. Homebuilders, I get. They were heavily shorted because the playbook says you are supposed to short them when we have a Fed-mandated recession, or at least a doubling in mortgage rates. But the homebuilders stopped marching to the beat of that drummer in the middle of the tightening cycle. They were smart, they throttled back production and they kept prices sane while raw costs came down. The result? A buyer with plenty of cash, either because of raises or because of money saved during the pandemic. You can’t even see much of a ripple of a sales decline in the run up to 8% mortgages. Now that they are back to 6% and change you can only bet that things are going to be better. This move, parabolic as it is, can at least be justified. When you have strong employment, declining mortgage rates and stable costs, you are going to put up huge numbers, which is what I think we will see this week from KB Home . The group is being re-rated before our eyes. I wish it was happening more slowly, but I would rather be a buyer of Toll Brothers than a seller, especially when the company is going to continue to buy back shares at an astounding clip. For this group a pullback would be a gift to investors. The turn in the food stocks is simply a recognition that when Walmart made its statement that new GLP-1 weight-loss drugs were having an impact on sales, we got a real overreaction to what might have been a mistake. These drugs are way too new and the uproar they caused when it comes to food and alcohol stocks was unwarranted. That doesn’t mean it won’t be warranted in the future, but it is way too early to toss these aside as if they are selling poison. The parabola just got these back to where they were before the Walmart-related scare. That said, they are hard to trust because with or without GLP-1, do they really have any growth? Consider that Constellation Brands is putting up double-digit volumes with very little price increases. That’s why it’s my favorite. Most of these companies lifted prices too much, as the Carrefour situation has told us, and sales are now hurting, as Conagra demonstrated this week.The group is just too hard and positions, again, need to be trimmed and certainly not added to. Which brings me to healthcare. First, I have to tell you that I am thrilled I am coming out to San Francisco to study healthcare, because this move in this group is simply uncanny. Yes, there was some multiple compression in the group, mostly because of so many missed quarters. Now, what I missed at the time, perhaps because we were basking in the success of Eli Lilly and not searching for Merck , is that a pivot means many things to many people. Healthcare buyers seem to be mesmerized by the end of high inflation which had been crushing the group. But does that justify the run in McKesson ? Teva ? Medtronic ? Abbott ? Is this when we want to come in off the sidelines and buy Amgen ? Here? Can you tell me that you aren’t late if you now buy Regeneron ? I feel like the healthcare conference will be more like a history lesson than a prognostication session. How did these stocks get up here much more than where are they going? We all have to recognize that the best thing that could happen to this market, and to these winning stocks in particular, is simple: nothing. They have to bide their time. Not go up or at least go down gently. We have spent way too much time talking about the demise of the Magnificent Seven (Alphabet, Amazon , Apple, Meta , Microsoft , Nvidia , Tesla ) and not enough time talking about the plunge in expensive enterprise software companies and not nearly enough focus on these huge winners. As people reach the logical conclusion that the financials, homebuilders, foods, healthcares and retailers are the ones that are more precarious than most realize, they will sell or hold —not add — and that will produce a drift down for the parabolic. That would be ideal. Unfortunately, that’s not how parabolas have historically ended. Maybe some of these companies have already seen results that are better than we thought because of the pivot and lower rates. Maybe there is something going on in healthcare that we don’t know about. Maybe the retailers had a spectacular Christmas. Maybe the banks are seeing great loan growth and terrific net interest margins. Or maybe they aren’t. The latter is probably more the reality. Which is why, in the end, I reach the conclusion that the move is unsustainable and if you are simply hoping for a gentle decline in stocks, and not a steep one, you don’t want to buy anything here. And if you haven’t raised a hearty amount of cash as we have — it has been quite a while since we bought anything — then you are out of sync with us. You would be well served to trim before the reality of the earnings parade, starting in just five days, hits. 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It’s not being talked about enough. This market move off the November lows and the Fed pivot — signaling an end to the central bank’s rate-hiking cycle — is one of the most astonishing and satisfying I have seen in 43 years of investing. In nine weeks, we blew through price targets on so many groups, we crashed barriers that I thought would be impossible to do for many years.
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