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The Week in Charts (10/29/24)

View the video of this post here.


The US CPI Inflation Rate has moved down to 2.4% and the Fed is expecting it to remain near their target of 2% over the next few years.

Historically, which asset classes have performed best when inflation is “in range?”

Get the latest research from YCharts on this topic HERE.


The most important charts and themes in markets and investing

1) The Last 10 Years and the Next 10

Over the last 10 years, we’ve seen US Large Cap Growth stocks outperform everything else by a wide margin, with an annualized return of 16.5%.

The huge returns from the Enormous Eight have been the primary contributor to this trend.

What will the next 10 years bring?

According to Vanguard’s latest forecast: a big reversion to the mean.

Vanguard is projecting only a 1.1% annualized return for Large Cap Growth stocks, the lowest of any major category. They are also anticipating outperformance from Large Cap Value stocks (+5.7%), Small Cap stocks (+6.0%), and International stocks (+7.9%).

2) Great AI Expectations

Over the long run, earnings are the biggest driver of stock returns. But in the short run, changes in investor sentiment (how much investors are willing to pay for a given level of earnings) can be an equally important factor.

Over the past 10 years, we’ve seen solid fundamental growth in the US with S&P 500 earnings increasing by 92%. But the S&P 500 Index is up over 200% in the past 10 years, more than tripling in price.

How is that possible?

Multiple expansion.

Investors are now paying 25.8 times peak S&P 500 earnings, the highest valuation we’ve seen since 2000 and 50% above the historical median. A decade ago this same ratio was at 17.2, right at the historical median.

What’s driving valuations higher?

Great expectations from investors.

The consensus view is that gains from AI are going to lead to a 25% increase in S&P 500 earnings by the end of 2025.

Thus far, its been a zero-sum game with Nvidia taking the lion’s share of profits from the AI-infrastructure build-out.

But if investors are correct, the huge capex spending undertaken by big tech in recent years will soon pay off with widespread growth to the bottom line.

What if they’re incorrect and reality doesn’t meet these lofty expectations? Then you have a potential reckoning with a revaluation of the market.

3) Reaching for Yield Like It’s 2007

US High Yield credit spreads are now at their tightest levels since June 2007 and in the lowest quintile of historical data points. Investors are reaching for yield and behaving as if there will never be another default cycle again.

Is this a good thing to see? Not exactly. In the past, very tight spreads have been followed by below-average equity and credit market returns over the next five years.

4) Rise of the Bond Vigilantes

Long-term bond yields continue to march higher with 10-year now at 4.33% and the 30-year at 4.57%. These are the highest yields since the start of the summer and substantially above the September lows when the Fed cut interest rates by 50 bps.

Bond market investors seem to be going on strike, protesting the profligate fiscal policies in place with the expectation of higher inflation to come.

The US National Debt continues to explode to the upside, increasing by $840 billion in just the last 3 months. Over the past five years, we’ve seen a 56% increase with National Debt moving from $22.9 trillion up to $35.8 trillion.

5) Stock Picking Is Hard, Netflix Edition

In April 2022, Bill Ackman told his Pershing Square investors that he had sold his Netflix shares which were purchased just a few months earlier, taking a $400 million loss in the process.

At the time, Netflix was in the midst of a major growth slowdown and a drawdown in its share price over over 70%.

What happened next?

A 180 degree turnaround.

Netflix shares hit another all-time high last week after reporting earnings, rising 251% from the date of the Ackman sale. For comparison, the S&P 500 was up 38% over the same time period.

After stumbling in 2022, Netflix found new growth engines and their revenues and profits resumed their upward trajectory. In their latest quarterly release, Netflix reported record revenues ($9.83 billion, +15% YoY), record net income ($2.36 billion, +41% YoY), and record net profit margins (20.7%, up from 13.8% a year ago).

Netflix now has a record 283 million paid subscribers, a 14% increase from a year ago.

The lesson: stock picking is hard, even for the greatest investors.

6) 5 Ways to Punch Above Your Weight as an Investor

1 – Start Saving/Investing as Early as Possible.

What would $5k invested each year grow to by the age of 65 (assuming 8% annual return)? Beginning at…

  • Age 25: $1.30 million
  • Age 30: $862k
  • Age 35: $566k
  • Age 40: $366k
  • Age 45: $229k
  • Age 50: $136k

2 – Generate Tax Alpha.

The maximum annual contribution to a Roth IRA is currently $7,000.

If you invested that amount each year starting at age 25, what would that grow to by age 65 (assuming an 8% annual return)?

Over $1.8 million. That’s $730k higher than what it would grow to in a taxable account (assuming a 25% tax rate).

3 – Be an Owner

In the long run, you are paid more as an owner than as a lender.

The US stock market has returned close to 10% per year since 1928 versus 4.6% for bonds and 3.3% for cash.

What’s the tradeoff?

Higher volatility and bigger drawdowns. There’s no free lunch in investing. If you want more upside, you have to be willing to stomach more downside along the way.

4 – Don’t Chase

Many investors buy into funds after exceptional performance only to abandon those same funds after the inevitable decline. Result: investor returns tend to trail fund returns by a sizable margin, known as the “behavior gap.”

5 – Extend Your Time Horizon

Time is your biggest asset as an investor. To achieve the biggest gains, extend your time horizon whenever possible. Median growth of $100k invested in the S&P 500 over…

  • 1 Month: $101k
  • 1 Year: $113k
  • 3 Years: $138k
  • 5 Years: $173k
  • 10 Years: $270k
  • 20 Years: $820k
  • 30 Years: $2.27 million

Every week I do a video breaking down the most important charts and themes in markets and investing. Subscribe to our YouTube channel HERE for the latest content.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

The post The Week in Charts (10/29/24) appeared first on Charlie Bilello’s Blog.





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