Bliss it was that dawn to be alive but to be long Nvidia was pure heaven. The ghost of William Wordsworth will forgive me for butchering his verse but he could have written an immortal homage to the AI annus mirabilis of 2023 had he lived in our era.
After all, the S&P 500 was up 24% in 2023 and is up 10.2% in the first three months of 2024, continuing the incredible rally that was triggered by the plunge in bond yields since late October. Is the market expensive or even bubbalicious in some of its frothier tech segments? The S&P 500 now trades at 20.8 times forward earnings which is meaningfully higher than its 16 median over the last decade.
The sector rotation in the markets has widened its breadth beyond just AI chips and software. It is significant that momentum has now spread to industrials, financials, healthcare and even consumer staples and some commodity stocks. I wonder how many asset allocators/investors in Dubai ever thought in January that the star sectors in the S&P 500 index would be energy, up 13% for the first three months of 2024 and financials, up 12.4% for the quarter. While these sectors do not have the magnetic appeal of a Nvidia or Microsoft, they offer some fabulous money-making opportunities in specific themes and special situations.
Ironically, the energy tracker XLE is up 375% from its 2020 pandemic lows, 150 points more than its technology tracker peer XLK as Downtown Josh helpfully never seizes to point out – and he is dead right. As the old pop song goes, are you looking for love in all the wrong places? Like getting scared after the pandemic and investing in long duration leprosy bonds?
Seasonals and the Volatility Index at 13 definitely mean that it is now imprudent not to hedge your portfolio for a pullback that seems highly probable this quarter, even in the context of a strong bull market. One hedge would be to cherry pick undervalued blue chips in the world with the STOXX Europe 600 trading at a modest 14X. Another hedge would be to buy risk insurance with cheap out-of-the-money index puts on the portfolio or even covered call strategies. A third hedge could be to tilt towards value megacaps, such as Alphabet at a 19X, where the momentum is not extreme.
Yet I hope investors realize how rare a milieu the past 5-months on Wall Street have been when the Index has risen 27% as if it has been raised to the heavens on a magic carpet, pulled by an invisible cosmic djinn. As the homeboy Aladin said in the movie, we cut off our noses to spite our face.
Gold is now $2,232 and I do not think any more parabolic moves lie ahead. The FOMC’s frankly Panglossian take on inflation risk at the March conclave has given a steroid shot to new speculative longs. Central bank buying has also lost its frenzied momentum and China deflation risk is rising in global markets. There is also an alarming disconnect between the price of Auric and the flows into GLD and GDX. This is why I expect an imminent correction in gold.
Also published on Medium.
