Valuentum Exclusive Analysis for the Discerning Investor

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By Brian Nelson, CFA

1. The Fed has signaled that rate cuts could start with inflation at a 2 handle (2 point something) and not at exactly 2.0%. That means that the Fed may become anticipatory to prevent overshooting to the downside with inflation. We see this as positive for long-duration equities, particularly those whose free cash flow generation is robust in the out-years, inclusive of big cap tech and the stylistic area of large cap growth.

2. Unemployment is at structural lows of 3.7%. Employers are working hard to keep talent on board, and with each paycheck, employees are pumping more and more money into the stock market via retirement accounts. This tailwind remains a stiff one and will likely continue to be a strong foundation for the markets.

3. Employee wage gains have been phenomenal in recent years. Not only are employers starving for more help, but they are paying their workers considerably more. Wage hikes achieved through annual raises, worker strikes and ongoing hourly increases at the low end of the market should continue to propel consumer spending. Many have been talking about a soft landing in the U.S. economy, but there may be no landing at all as nominal GDP growth remains robust.

4. Short investors have been squeezed, and many have now closed shop. Famed short investor Jim Chanos recently closed his hedge funds, as the strong bull markets in 2021 and 2023 have put many a short investor’s back against the wall. We suspect short investing will continue to fall by the wayside as market tailwinds continue to propel the market ever higher this decade. A buy-the-dip mentality may define much of the next few years in the stock market.

5. Price agnostic trading is creating upside volatility. With only about 10% of trades these days coming from discretionary investors that are paying attention to fundamentals, we live in a market environment where investors are plowing money into broad indices just to capture the market return, not necessarily alpha. This should continue to benefit the largest companies in the largest indices, with big cap tech and large cap growth two categories primed to benefit.

6. The market is making a lot of sense again. With the 10-year Treasury yield meaningfully higher than that of the average S&P 500 company's dividend yield, broad-based dividend growth strategies have suffered, and risky high yield dividend stocks have fallen out of favor. Even after the huge gains in the Nasdaq and the stylistic area of large cap growth in 2023, we think the market continues to price stocks reasonably, offering a rational backdrop to stay aggressive with idea generation.

7. Our favorite stocks are back in vogue. 2022 was a difficult year for many strategies, but 2023 helped to rectify what we think was a year that didn’t make much sense across the marketplace. From 2022 through our latest measurement, both the simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio have generated alpha against their benchmarks. The outperformance gives us confidence that 2022 was a blip in the longer-term trends that we like in big cap tech and the stylistic area of large cap growth.

8. We’ve yet to see capitulation in some of the weakest areas. Many REIT investors, for example, continue to be happy with their performance, where REIT equities have hardly delivered much of anything the past 5 years. One of the most popular REITs, Realty Income (O) is down on a price-only basis the past 5 years, while the broader REIT index continues to trail the market by a large margin on a total return basis. Positive sentiment continues in underperforming areas, helping to hold up some of the weakest areas of the market, more generally.

9. The huge step change in inflation will likely lead to a huge step change in market prices. If you’ve gone to a restaurant lately, you’ve probably noticed that menu prices are up significantly the past few years. Many households that have experienced huge wage gains are not balking at the higher prices, however, and we think higher prices are sticky across most areas of the economy, save for food-at-home goods, which may start to experience deflation. As the rising tide of prices flows across the economy, we expect a benign multiplier effect to continue to broaden out, paving the way for what could be a similar increase in nominal equity prices. Stocks doubling in the next few years would not surprise us.

10. Consumers are house rich and have fantastic balance sheets. More than half of households don’t have a mortgage and are benefiting from the massive wealth effect that has taken hold not only in equities the past decade but also with respect to housing prices the past few years. The average household today is now a millionaire, with a net worth over a $1 million (the median is much less, however) and we expect households to continue to spend lavishly in the wake of the massive wealth that has accumulated the past few years. Household balance sheets remain in great shape, and this is positive for both the U.S. economy and broader equity markets.

11. Artificial intelligence [AI] remains a huge source of upside potential. The release of ChatGPT turned our heads in a big way when it was launched, and we expect continued advancements in AI in the coming years. Microsoft (MSFT) has already started to monetize AI in Copilot, and while Nvidia (NVDA) and AMD (AMD) will benefit by providing the computing power behind the AI revolution, we're expecting many more companies to announce how they will tangibly monetize AI in 2024 and beyond, both with respect to expense management and revenue upside potential. We like the promise that AI holds.

12. Alternatives to stocks still aren't great. Even though certificates of deposit at the local bank are offering rates of 5% or more, 2023 showed that stocks could still deliver in a big way on a relative basis, with the S&P 500 up 24% in 2023 so far on a year-to-date basis. Some dividend-oriented investors may rotate into higher-yielding fixed income, pressuring dividend-paying stocks in 2024, but even a high-single-digit income yield may end up being less than what the market may deliver in the coming years. We would not be surprised if the broader S&P 500 generates double-digit annual returns over the next few years.

Concluding Thoughts 

From outperforming simulated newsletter portfolios to fantastic success rates in the Exclusive publication to option ideas and great income-oriented ideas and beyond, we continue to deliver across our simulated newsletter suite as our latest video outlines. It’s hard to know exactly what 2024 will bring in terms of a market return, but the internals of the stock market and the U.S. economy look great to us. The new bull market we’re in could last for years, and as a result, we are staying aggressive with many of our new ideas as we look to benefit from these favorable trends.

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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, and VOO. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.  

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