This was an interesting week. Markets continued to drift higher on the back of enthusiasm over artificial intelligence, and good tech earnings reports. They continued to hope that the Federal Reserve would cut interest rates in the next few months. But is it sustainable? I’m sure some of you are wondering the same thing. The answer is I don’t know. It certainly appears that consumer spending will never slow, and the jobs outlook has never looked better. But if I’ve learned one thing over all the decades I’ve been at this, it is that the market cannot be predicted with any certainty. And while things appear unsustainable, no one can know for sure when the party will end. We don’t expect that to happen anytime soon but know that even a well-constructed portfolio is buoyed by the ocean it floats in. Extreme exuberance in markets cannot be avoided any more than waves in the ocean can be avoided. If you’re in the stock market, you are in the ocean so to speak.
What made me think about the topic of unsustainability this week was an interview with Paul Tudor Jones, a venerable hedge fund manager. He was quoted as saying, the economy is on steroids and “in an unsustainable path.” He sees two trains hurtling toward each other. One is the “recklessness” of fiscal spending. The other is the unreasonably high expectation of productivity gained from artificial intelligence. He points out that the economy is doing great, but why shouldn’t it be? With a 6-7% budget deficit and fast consumption, the economy is on steroids. “Productivity may mask it, but we’re clearly on an unsustainable path.” And this is what got me thinking. These are government policy questions that our politicians are having difficulty tackling. The challenge, and one that he and I wrestle with daily, is when will these issues manifest? I return to my analogy of the stock market floating in an ocean. While the tides are a known quantity, and ocean currents are well documented, the individual waves are random. While the stock market isn't completely random, it is buffeted by winds, currents, and waves that we cannot control and which change frequently in strength and direction.
In less metaphysical news, regional banks are once again in the spotlight. While not an unknown issue, many regional banks are overleveraged in commercial real estate. Between a high-interest rate environment and a historically low occupancy rate in commercial real estate, it seems some of these banks may be on the precipice of trouble. The one that made headlines this week is New York Community Bank (NYCB) whose stock has fallen 60% in the last two weeks. We have avoided this industry (and commercial real estate REITS) for the past year due to concerns over this very issue. While the larger banks we own may have some exposure to commercial real estate, they have much stronger balance sheets and this is a much smaller part of their investment portfolio. As leases come up for renewal, there could be a glut of empty office buildings with regional banks holding the bag. And that’s not a good thing.
As has been the case this earnings season, we’ve seen some companies’ stocks take off and others plummet. While this isn’t a new phenomenon, the level of volatility is a little higher than usual due to stretched valuations in many cases. We should note we don’t own the following companies, but names such as Snap-on Inc. fell 10% on slower sales, Pinterest fell 11% on weak guidance, Expedia fell almost 18% despite surpassing consensus estimates in Q4, and Take-Two Interactive fell 9% after a mixed earnings report.
In closing, I want to point out a milestone that was hit this week. The S&P 500 broke through and closed above 5,000 for the first time in history today. It first broke through 2,000 in 2015, hitting 3,000 just four years later. Since then, the milestones have sped up. The index hit 4,000 for the first time in 2021 and as noted, hit 5,000 today. While the percentage gains are smaller between 4,000 and 5,000 versus 2,000 and 3,000, it is nonetheless amazing to watch the markets speed higher year by year. When I got my first job out of college, the Dow Jones Industrial Average was sitting around 2,500. I have strong memories of when it traded below 1,000. So it is with amazement that I watch as it quickly approaches 39,000. That’s a gain of 1,560% over the last 35 years. If I only had $100,000 to invest at the time… oh well, we cannot go back and change the past, but we can stay focused on the future. While the tides come in and go out, the rising ocean levels (yes, a reference to melting polar ice caps) are lifting all boats. Now you know.Bruce J. Mason, MBA