Market Pulse
Friday, November 8, 2024
Welcome to this week's Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Donald Trump’s victory in this year’s US election was always a possibility, but the scale of that victory took many by surprise. Not only did Trump win the election, but he also won the popular vote, something no Republican candidate has done since 2004. While some races are still being tallied, the Republicans could end up winning both chambers of America’s Congress, giving Trump a clear mandate and platform to enact his legislative agenda.
Owing to Trump’s mercurial style of governance, predicting that agenda is challenging. Increased protectionism and reduced regulation, however, are sure to play a role. On the campaign trail, Trump has called for a 10% general tariff in addition to higher targeted tariffs on countries like China and Mexico. Domestically, Trump has promised to lower the corporate tax rate while overhauling several regulatory agencies (notably including the SEC, America’s investment regulator).
On the back of these policy expectations, markets have had a complex reaction to Trump’s victory. Thanks to the promise of a more friendly operating environment, risk markets rallied, with the S&P 500 climbing 2.5% and Bitcoin hitting an all-time high. Fears of tariff-driven inflation, however, drove Treasury yields up 15 basis points on Wednesday.
These moves are oddly in tension with each other. Generally speaking, higher structural rates are bearish for risk assets. Not only do higher rates tend to slow down business investment and M&A activity, but they also make low-risk investments look relatively more attractive in comparison.
Nonetheless, the logical connection between higher inflation and higher rates is far from clear under a Trump presidency. Trump has said that should have a say on rate decisions since he has “better instincts” than Fed policymakers. With Fed chair Jerome Powell’s term expiring in 2026, America’s central bank may face significantly less operational independence in the future.
As post-election market moves show, any simple narrative that ties a Trump victory to the outperformance of a certain asset class is insufficient. If anything, we expect dispersion to increase thanks to the multifaceted impact of his proposed policy agenda. Nuanced analysis and active selection have arguably never been more important.
Back in 2022, Warren Buffett was emphatic about his belief in Apple stock. “Unless something dramatically happens that really changes capital allocation strategy, we will have Apple as our largest investment,” he told Berkshire Hathaway shareholders at the time.
Two years later, the Oracle of Omaha is unloading shares at a rapid pace. While Apple remains the company’s largest holding, Berkshire sold 100 million shares in Q3, reducing its stake by nearly two-thirds over the past year. And it’s not just Apple – disclosures also show Berkshire selling large chunks of Bank of America.
While Buffett’s stock selection always draws media attention, these divestments don't appear to have much to do with the operating quality of the underlying businesses. Instead, they have to do with the relatively high valuation levels of US stocks.
At 37.8, the S&P 500’s cyclically adjusted price-earnings ratio is at a historically elevated level. As a long-time value investor, this market environment conflicts with Buffett’s time-tested strategy. In the absence of any significant bargains, Buffett has preferred to build up Berkshire’s cash position rather than deploy capital.
But although valuations may be high, earnings growth (which ultimately supports those valuations) remains strong. Preliminary results from this quarter’s earnings season show 5.1% year-on-year earnings growth for the S&P 500, the 5th straight quarter of positive growth. Moreover, three-quarters of reporting companies have posted a positive earnings surprise.
While no one should doubt Buffett’s extraordinary results and investing acumen, value investing does not have an unblemished track record compared to growth styles. Dogmatic value investors may benefit from closely tracking Buffett’s sales, but the rest of the market should be careful of reading too much into them.
In a sign of the luxury industry’s growing malaise, LVMH’s flagship Louis Vuitton store in Beijing remains closed months after its scheduled opening. The store’s troubles are reflective of the sector as a whole. Just as much of luxury’s growth can be traced to wealthy Chinese consumers, its recent slowdown is the result of declining sales in the world’s second-biggest economy.
LVMH’s most recent earnings report showed sales in Asia ex-Japan falling 16% year-on-year. Since 2021, the region’s contribution to LVMH’s revenue has slipped by nearly 30 points to 6%. Recent retaliatory Chinese tariffs on certain luxury goods are not helping the situation either.
But while the luxury industry is going through a China-driven slump, this slump may not last much longer. Certain factors driving the decline are secular, such as ‘luxury shame’ in the wake of China’s wealth crackdown. Others, however, are merely cyclical, relating to China’s deteriorating economic condition.
Amidst a slow-moving property crisis and poor levels of investment, the country has experienced a significant slowdown, resulting in a marked decline in retail sales. While the extent of the slowdown is uncertain, owing to the opacity of Chinese economic data, it is substantial enough for officials to be taking it seriously. Chinese policymakers have unveiled a wake of measures to kickstart the country’s economy, including a potential $1.4 trillion fiscal package.
Depending on the effectiveness of these stimulus measures, we are optimistic that luxury’s slowdown could be short-lived. In the meantime, depressed valuations mean that accretive deals are on the table. Recent reports indicate that Moncler & LVMH are considering a bid for Burberry, an opportunity that we discussed last month.
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𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.
