Macro Analysis by James

  • Performance through 2/17/2023

    The adjusted close for the SP 500 on January 3, 2023 was 3,824.14. The adjusted close on February 17, 2023 was 4,079.09, representing a gain of approximately 6.67%. What accounts for this? In my opinion, mainly FOMO. Noticeable realities that mark a recession are already being seen, including layoffs across multiple sectors. The news will get worse before it gets better. I continue to think the SP 500 ends flat to up to 2% in 2023. If so, it will end somewhere around 3,825 to 3,901. If it ends in a number starting with a 4, my prediction is that it ends 2023 below 4,100.

    The main issue for an individual investor is whether to put (or keep) money in equities or short term, or ultra short term, bond fund products which are yielding 4.5% to 5% as of this writing. The news from the Fed does not suggest that rates are returning to where they were pre-COVID. Perhaps they are also not returning to where they were in the early 80s (let’s hope). But it certainly does seem that the Federal Funds rate will not be dropping precipitously anytime soon. If the Funds rate remains between 3.5 and 5% for the foreseeable future, it makes holding relatively risk free ultra short term fixed income products attractive.

    This is not a reason to jettison any exposure to the U.S. equities market either through the SP 500 or the total market. It may be a reason to lower exposure to the 50% range, however. And to the extent growth opportunities are one’s primary objective, to explore quality, low cost actively managed funds which have long-tenured managers and historically strong returns for at least 50 years.

  • Information: the sharpest arrow

    NOTE: This article is for informational purposes only, you should not construe any part of this article as legal, tax, investment, financial, or other advice. Always do your own research.

    During WWII the U.S. built a great number of tanks, airplanes, artillery weapons, and the corresponding munitions which made those instruments of war deadly. Today, the U.S. continues to have a massive military arsenal which is composed, among other things, of tanks, ships, planes, and artillery.

    The most critical warfighting tool, however, is information; “actionable intelligence.” All human activity happens in a geographic location or over airwaves. Technology which enables the U.S. defense and intelligence apparatus to have high quality information about what is happening anywhere at any time, or over any communications method, is useful.

    There is a burgeoning sector in the defense and intelligence sectors which is built around geospatial and AI. Geospatial is raw data; AI is making the data useful. There is a boom in small companies engaged in this area. Some of these companies are recently public. Many of them are WAY off their immediate highs upon going public whether through traditional IPO or via a SPAC. But these are not do-nothing companies.

    Look for companies that are: (1) run by scientists/engineers (2) which have DOD contracts and revenue flow; and (3) which operate in an area of use to agencies like NGA and/or NRO. There’s money to be made here.

    Happy hunting.

  • Thoughts on the Market in 2023

    NOTE: This article is for informational purposes only, you should not construe any part of this article as legal, tax, investment, financial, or other advice. Always do your own research.

    The S&P 500 lost 18.11% in 2022. A $10,000 investment in SPY on January 1, 2022 would have yielded a final balance of $8,183, assuming no additional contributions and reinvesting dividends.

    Will it be up, down or flat in 2023? Who knows. But these are my thoughts today:

    Between 1992 and 2022, annual returns were down in 2000, 2001, and 2002. Other than 2000-2002, there wasn’t a period where the market was down two years in a row (between 1992-2022).

    No one can predict the future. However, my belief is that the S&P 500 will end 2023 between flat and plus 2%. In between there will be a lot of volatility.

    For someone looking to be in the index, I think the equal weighted index is a better choice than the traditional market cap weighted index funds. The reason is that I believe Process Industries will do better than tech, and better than FANG in particular. Time will tell.

    The biggest story in the next five years is the increase in both domestic and North American manufacturing capacity, relative to China; and the aggressive position being taken by the U.S. against China in relation to trade. See semiconductor drama for a vivid example. More on this in another post.

    Happy trading.