Cameron Dawson, an undergrad econ major, discusses lessons learned from the rapid changes in the energy sector. She reflects on the forward-looking nature of the market and the importance of taxes for low basis stock investors. The podcast also covers topics such as stock/bond correlation and portfolio construction in a low interest rate environment.
The energy sector experienced a rapid shift from optimism to a downcycle in 2014, highlighting the market's forward-looking nature.
Consumer spending could be impacted if energy costs exceed 5% of wages, as tailwinds supporting the US economy diminish.
The concentration of earnings revisions in a few stocks raises concerns about the broader health of earnings growth and potential upside in the market.
Deep dives
Impact of Real Incomes and Inflation on Consumer Spending
Real incomes have been a sneaky surprise tailwind for consumers in recent months, with better real wage growth and other factors supporting spending. However, tailwinds such as real wage growth, student loan repayment relief, and savings depletion are starting to reverse. As energy costs rise, consumers could feel the pinch if energy spending as a percentage of wages exceeds 5%. The consumer's ability to continue driving upside surprises to the US economy could be challenged as tailwinds diminish.
Earnings Concentration and Market Performance
Earnings estimates for the NASDAQ have recently seen a boost of 9%, driven primarily by three stocks: Amazon, meta, and Nvidia. However, the concentration of earnings revisions in just a few names is a concern, as a broader participation in earnings growth would be more favorable. Looking ahead to 2024, earnings estimates are high, but the concentration of estimates in a limited number of stocks raises questions about the potential for further upside. Valuation levels have been pricing in an optimistic growth scenario with accommodative Fed support, and the timing and magnitude of earnings impact on market performance will be key factors to watch.
Lags in Interest Rate Impact
The timing and magnitude of the impact of higher interest rates on the economy is a complex issue. While the Fed argues that lags may be shorter due to the expectation channel, there are other factors to consider. The real economy impact of higher rates on consumer and corporate balance sheets, such as debt refinancing, may not be immediate and could have longer, more variable lags. We are starting to see signs of this impact, such as fewer new projects in certain sectors, indicating a more challenging cost of capital. The timing of the real economy impact is still to come, and it will depend on various factors, including the rate of debt refinancing and the overall economic environment.
Earnings Estimates and Market Expectations
Earnings estimates for the S&P and NASDAQ have been revised higher recently, driven primarily by a handful of stocks. The concentration of earnings revisions in a limited number of names raises questions about the broader health of earnings growth. Valuation levels have priced in an optimistic growth scenario and accommodative Fed support, but the potential for further upside may be limited. As earnings estimates for 2024 are high, the market will need to consider the timing and magnitude of potential earnings impact to sustain current valuation levels.
Fed's Outlook on Rate Cuts
The Fed's perspective on rate cuts signals a cautious approach to further accommodation. The Fed is unlikely to cut rates until there is a compelling reason to do so, as highlighted by recent FOMC discussions. This indicates that the market may have priced in a more accommodative stance than what the Fed is currently signaling. With valuation levels reflecting a rosy scenario and potential headwinds from higher rates, the timing and magnitude of future rate cuts will be instrumental in shaping market performance.
An undergrad econ major, Cameron Dawson got hooked on markets early, taking a class on securities and portfolio analysis in Business School which set her down the path of market study. She broke into the business as an industrials analyst on the buy-side, time that gave her an opportunity to develop an appreciation for how the macro landscape intersects with the micro business fundamentals within a cyclical universe of stocks.
In this context, we review the period from 2014 to 2016, a time of ebullience within the energy sector and a fracking supply boom. For Cameron, there are important lessons to be had in observing the speed with which this optimism gave way to a protracted downcycle by late 2014. And, in sharp contrast, when the sector appeared un-investable in early 2016, the stocks would turn, discounting the improving fundamentals that would only be visible by late 2016. Here, she sees lessons with how forward looking the market can be, noting that if you weren’t there early, you missed it.
We talk about her role as Chief Investment Officer at NewEdge Wealth, a firm delivering wealth management solutions to high-net worth investors, and I ask Cameron to reflect on how client needs are different now in a 5+% short rate. Noting that, all else equal, higher rates argue for rebalancing away from equities, she highlights the importance of taxes, especially for investors with low basis stock. We also talk about stock/bond correlation and the implications for portfolio construction. Here, Cameron suggests there is room for bonds to play a stabilizing role should the stock market run into trouble, especially in a disinflationary/flagging growth scenario.
Lastly, we review some of her recent work on reading the tea leaves of market prices. She notes the recent underperformance of high beta names versus the rest of the market as an early warning sign of flagging risk appetite. I hope you enjoy this episode of the Alpha Exchange my conversation with Cameron Dawson.
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