The Sunday Drive - 07/14/2024 Edition [#119]
The Sunday Drive - 07/14/2024 Edition [#119]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends,
Greetings from Saratoga Springs, NY. It’s opening weekend of Race Track season here. Let the insanity ensue!
Now, let’s enjoy a leisurely Sunday Drive around the Internet.
🎶 Vibin'
No theme this week, just Saratoga Summer vibes. So, I’m vibin’ to Paul Simon’s Kodachrome from his 1973 album, There Goes Rhymin’ Simon. Enjoy.
💭 Quote of the Week
“In tennis, perfection is impossible... In the 1,526 singles matches I played in my career, I won almost 80% of those matches... Now, I have a question for all of you... what percentage of the POINTS do you think I won in those matches?
Only 54%.
In other words, even top-ranked tennis players win barely more than half of the points they play.”
— Roger Federer (commencement speech excerpt)
BONUS QUOTE
”The nature of compound interest is it behaves like a snowball of sticky snow.. The trick is to have a very long hill.”
— Warren Buffett
This week’s quotes remind me of how we should think about investing. If you win more than you lose, the wins can really compound if you are patient and stay invested.
📈 Chart of the Week
This week’s Chart highlights the dramatic, some would say violent 6% single day performance differential between the Nasdaq 100 and the Russell 2000 indices on Thursday, July 11th.
I was thinking throughout the day on Thursday that what was happening seemed significant. This week’s Chart shows that a differential of this magnitude has only happened twice in the last 25 years - July 2002 and November 2020. The first occurrence was around the post-Tech Bubble bottoming in the markets which set off a lengthy period of small cap outperformance. The second occurrence in late 2020 was in the midst of unprecedented fiscal and monetary stimulus in response to the Pandemic. Another period of small cap outperformance ensued, although for a shorter duration than the 2002 experience.
If Thursday’s market action was indeed a harbinger of some sort, where do we go from here?
Well, I see three plausible paths in the coming quarters, one of which is much preferred. Of course, there could be other paths but I’m limiting discussion to the three I see as most likely.
It could be that small caps’ poor performance relative to the mega-caps over the last year or so was a discounting of the recession that is yet to arrive, but could still be on the way. As the Federal Reserve begins to lower short-term interest rates in response to observed or foreseen economic weakness , small caps could continue to rally and outperform large stocks, which may lag or even be weak in the face of stronger small cap performance.
The second scenario - I call it the Nirvana scenario - is where we don't have a recession anytime soon, yet inflation cools to the point where the Fed can lower short-term interest rates, even while economic growth remains steady. We could see all equities continue to rise with small caps finally participating in a broader equity market rally.
The third path is obviously the least hoped for. Mega-Tech valuations are quite stretched, by historical standards at least, and expectations for continued strong earnings growth are reflected in those valuations. Should earnings growth slow, and the law of large numbers certainly makes this plausible in the coming quarters, we could see weaker markets over all, given how top heavy and concentrated the large cap indices are today. In this scenario, even though absolute returns could be negative, I expect small caps, and small cap value stocks in particular, would outperform relative to their larger, growthier brethren.
Q2 earnings season is upon us. Over the next few weeks as companies report earnings and offer their outlooks on future periods, second half earnings guidance from the biggest tech names could set the tone for which path forward we will likely follow in the coming months.
🚙 Interesting Drive-By's
🤔 Human Labor Built Our World, Now AI’s B/S Freely Swirls - from Alberto Romero [Link]
💡 The Purpose of Things Isn’t to Stop Doing Things - from Jack Raines [Link]
📈 Achieving Optionality - from Jason Fried [Link]
💰 The Emergence of AI-Powered Service Firms - from Forerunner [Link]
😡 Hackers Stole Data from ALL of AT&T’s Customers - from NBC News [Link]
👋🏼 Parting Thought
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em (X ‘em?) at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed. The views expressed in The Sunday Drive are mine alone, and are not necessarily the views of Investment Research Partners or Cache Financials.
I hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mike
If you enjoy the Sunday Drive, I'd be honored if you'd share it with others.
If this was forwarded to you, please subscribe and join the other geniuses who are reading this newsletter.