Monday Takeaways: Big Game… Big Spenders

Shah Gilani Feb 12, 2024

Whether you followed the big game last night or not… a clear message was sent about our economy.

From paying $7 million for a 30-second ad… to hiring immense star power to sell their wares… companies are still flush with cash.

But now that the S&P is above 5,000… are we getting too “bubblicious”?

Are investors blindly chasing the highs?

I break down what’s going on… and what you need to watch this week… in my Monday Takeaways video.

Click on the image below to watch it.



Transcript

Hey everybody, Shah Gilani here with your Monday Takeaways.

The first takeaway is what I got from yesterday’s Super Bowl. My San Francisco 49ers fell short. Too bad. Congratulations to the Chiefs… on their way perhaps to a dynasty. Nonetheless, a very exciting game.

I don’t know about you guys, but my takeaway is there’s a lot of money out there. Did you see those Super Bowl commercials? The star power in most of those commercials? Unprecedented, crazy stuff. I can’t believe how they got everybody there, and I want to know how much they paid everyone.

Nothing wrong with this economy, people. Nothing wrong with the entertainment business because they are raking it in.

Speaking of raking it in, Fed fund futures traders are pushing back against the enthusiasm they had earlier this year when they expected seven rate cuts. Now, we’re down to four, maybe five. That goes against the Fed’s dot plot, against the Fed’s expected, according to the Fed, three cuts in 2024. So, bonds have backed up.

The 10-year now is at 4.15%. It was at 3.87% a little more than a week ago. So, a big backup.

The takeaway is there’s going to be cuts at some point. Bond traders are probably right to think there are going to be fewer than five, probably right to think there’d be maybe four, but I think they probably will be right if they think there’s going to be three.

The takeaway there is we got room to go higher, as far as stocks go, because rates are going to get cut at some point.

What’s the takeaway from rates getting cut, which is really the big story here?

It’s either going to be good or really good if rates get cut because the economy is doing well and inflation gets batted down to below 2%.

So, we average below 2% on core somewhere before the summer, let’s say, then the Fed likely will cut because the job is going to be done and a lot of economists are pushing back on that. If that’s the case, that’s going to be a really good setup for the market.

The other side of that is if the Fed cuts because things aren’t going good, we’re falling into a recession, at least according to the two consecutive quarters of negative GDP growth. I say good luck seeing that over the horizon because it sure doesn’t look like with the economy as strong as it is, then markets will like that too, because if the economy’s slowing down, doesn’t mean that earnings are going to slow down that much.

Investors will say, “Rate cuts are coming. That’s going to help us. If they cut sooner than later, then we’ll have a soft landing, mild recession, and that bodes well.”

So far so good on rising rates. The economy certainly seems to be handling them.

Next up, I want to talk about the S&P 500. Yes, the 5,000 mark, another record day on Wall Street. The only problem with that is the P/E now on the S&P 500 is 20X, 20 times forward earnings.

Now, there’s only been two times in the last 25 years when the S&P has been at or more than 20X on an earnings basis. One time was 1999 and we know what happened then, and the next time was during the COVID boom. Well, we know what happened then. We had trillions of dollars flooding the economy and we had people rushing to the markets. We had traders trading from home, rushing into the markets, and we had an explosion in tech. We got to 24.4 times forward earnings back then in ’21.

We’re at 20 now. So, that’s perhaps going to create some caution, but here’s my takeaway.

That says that investors are confident. Yes, most of it has been born from the fruit of big tech, and I don’t have a problem with that because if that’s where the growth and earnings are going to be, that’s where the cash is going to be built up. If that’s where the addressable audiences are so gigantic that they can continue to go, if that’s where AI is going to manifest itself into top line and bottom line growth, then I don’t have a problem with tech earnings looking a little “bubblicious.”

So, my takeaway on that is it looks pretty good and I’m not going to fault that.

Last but not least, CPI. We got CPI coming out tomorrow at 8:30 Tuesday morning. Again, with bonds backing up here, if we get a bad number, in other words like, “Oh my gosh, inflation just popped higher and oh, nobody expected that,” and the market sell off, that’ll be interesting.

The takeaway from that will be for all of us to see what the market does, how the market reacts to a really bad CPI number. If the CPI number is good, similarly, the takeaway is going to be, how good does the market see it? What happens? Do we get another new high? Does the rally broaden out? It probably will. That will be a positive.

So, there’s a lot of positives. My Monday takeaway for you guys is a lot of positives out there.

The only thing I don’t like about that, the only takeaway from all the positives out there is it’s scary. It’s scary because stuff is just looking a little bit head-scratchy, like, “Whoa, markets is our price for everything good, maybe perfection.” That should give us all pause.

Thanks for being with me. Catch you guys next week. Cheers, have a great week.

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