Economic & Market Update: Geopolitical Tensions & What They Mean For Your Portfolio [Webinar Summary]

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Here is the webinar recording from April 30, 2024. You can browse topics discussed and main takeaways using the sections and time stamps below:

  • 2024 Outlook 1:49
  • How it Started & How It’s Going 2:47
  • Long Term Market Cycles 3:41
  • The Current Secular Bull (since 2013) 4:49
  • What Everyone’s Worried About – Inflation Too Sticky 8:09
  • What Everyone’s Worried About – Interest Rates 14:11
  • What Everyone’s Worried About – Geopolitical Tensions 15:12
  • Sentiment & Cycle of Emotions 22:43
  • Are AI Stocks in a Bubble? 31:57
  • 2024 Outlook Scorecard 35:00
  • What You Should be Doing Now 37:38

2024 Outlook 1:49 

  1. The Purpose of The Webinar: Nick aims to evaluate whether the initial outlook provided in January 2024, which included varying interest rates, a continuing bull market, and no visible market bubbles, still holds true given current market conditions.
  2. 2024 Market Optimism Factors: The outlook was positive with expectations of rising stock prices supported by historical election year trends, large amounts of idle cash, and an ongoing artificial intelligence super cycle, suggesting a favorable environment for investment growth.
  3. Assessment of Changes: Nick’s goal is to evaluate earlier predictions to see if any significant shifts have occurred in the economic landscape or market behavior that would alter their previous views.

How it Started & How It’s Going 2:47

  1. Strong Start in Q1: The first quarter of 2024 saw notable increases in major indices, with the S&P 500 rising over 10.5% and the NASDAQ up 9.4%, reflecting a positive beginning to the year.
  2. Stable Bond Market: Bonds did not show significant movement, indicating they were “treading water” during a period of equity market growth.
  3. April Downturn: Despite the positive start, the markets experienced a downturn by April, with a slight recovery from the lowest points of the month, suggesting increased market volatility and a partial retraction of earlier gains.

Long Term Market Cycles 3:41

  1. Cyclical Market Patterns: Markets historically exhibit cyclical patterns, alternating between prolonged secular bear markets of little to no growth and expansionary cycles marked by significant growth.
  2. Historical Recurrence: These cycles are recurrent and are influenced by major economic and industrial changes, reinforcing the need to understand these patterns for long-term investment strategies.

The Current Secular Bull (since 2013) 4:49

  1. End of Secular Bear Market: The secular bear market that began in 2000 ended around 2013, transitioning into an expansionary phase which has shown significant market advances over the past 11 years.
  2. Recent Bull Market Initiation: The bull market that began in October 2022 marked the end of a bear market period in that year, signaling the start of a new phase within the long-term secular cycle.
  3. Current Market Dynamics: Despite retracements, the market remains within the expected patterns of the bull cycle that started in 2022, indicating continued growth potential before any major downward adjustments.
  4. Historical Perspective on Bull Markets: If the current bull market were to end now, it would be the shortest since World War II, but Nick views this as unlikely, suggesting that historical patterns support a longer duration for current market growth.

What’s Everyone Afraid Of? – Inflation Too Sticky 8:09

  1. Primary Drivers of Inflation: The persistent high inflation, termed “sticky,” is largely attributed to two main factors: increased costs in auto insurance and shelter. These areas have significantly influenced the overall inflation figures.
  2. Specific Impact of Auto Insurance: Auto insurance rates have surged by 22% compared to the previous year, driven by upstream increases in car prices and parts, making it a lagging factor in the inflationary trend.
  3. Significant Influence on CPI: In the latest Consumer Price Index (CPI) report, shelter and auto insurance alone contributed 1.87% to the overall 3.8% inflation rate. If these factors were removed or moderated, the inflation rate would drop to around 2.9%, indicating their substantial impact.
  4. Potential for Inflation Reduction: The analysis suggests that if the issues in auto insurance and shelter costs are addressed, there could be a notable decrease in the overall inflation rate, hinting at an eventual easing of inflationary pressures if these “sticky” areas can be controlled.

What’s Everyone Afraid Of? – Interest Rates 14:11

  1. Fed Rate Decision Anticipation: The expectation is that the Federal Reserve will maintain steady interest rates in the upcoming decision, reflecting caution amid ongoing inflation concerns and the timing of potential rate cuts.
  2. Market Response to Rate Cuts: Historically, when the Fed begins to cut interest rates, the market and the economy usually adapt positively over time, despite concerns of a “hard landing.” Current economic data suggest that a recession is unlikely in the near term, reinforcing this historical trend.

 

What’s Everyone Afraid Of? – Geopolitical Tensions 15:12

  1. Media Influence on Perception: Nick emphasizes that media outlets often use fear-inducing headlines to boost engagement and revenue, which can exaggerate public perception of risk during geopolitical crises.
  2. Impact of Geopolitical Events on Oil Prices: Despite fears, Nick notes that the recent geopolitical tensions have not caused significant long-term spikes in oil prices, which have remained relatively stable compared to past events like the initial invasion of Ukraine by Russia, where extreme spikes were predicted but did not sustain.
  3. Historical Market Resilience: Nick highlights historical data showing that markets have often rebounded quickly after initial drops due to geopolitical crises. For example, one year after various geopolitical events, the stock market was higher 83% of the time, suggesting strong resilience.
  4. Importance of Balanced Investment Approach: Nick advises maintaining a balanced perspective on how geopolitical events affect investments, focusing on long-term principles rather than reactive changes based on short-term crises.
  5. Expectation of Market Volatility: While the overall outlook remains constructive, Nick acknowledges the potential for continued market volatility and advises investors to be prepared for possible fluctuations, which could be influenced by ongoing geopolitical tensions or other factors.

 

Sentiment & Cycle of Emotions 22:43

  1. Seasonal Investment Patterns: The data supports the notion of “sell in May and go away,” highlighting May as historically the worst month for returns, with November to April being the most favorable period.
  2. Market Cycle Dynamics: The discussion points to the emotional cycle of markets, which oscillates between optimism, excitement, thrill, and euphoria, often correlating with market peaks and troughs. This cycle suggests that even during periods of pessimism, markets have historically recovered and advanced significantly.
  3. Impact of Public Sentiment on Investments: Despite ongoing pessimism since the 2008 financial crisis, the markets have seen substantial gains. This underlines the importance of separating personal feelings and broader societal sentiments from investment decisions, emphasizing an analytical approach over an emotional one.
  4. Investor Behavior in Market Cycles: Observations indicate that investor sentiment tends to improve as the market rises, which can lead to missed opportunities when prices are low. This behavior highlights the challenge of countercyclical investing, where the best opportunities may arise during times of negative sentiment.

 

Are AI Stocks in a Bubble? 31:57

  1. Nature of the AI Super Cycle: Nick identifies the ongoing development in artificial intelligence as part of a broader technology super cycle. This cycle is characterized by significant, yet early-stage, growth akin to past technological revolutions like mainframes, PCs, and the internet, suggesting that the AI market still has considerable room to expand.
  2. Debate on AI Stocks Being in a Bubble: A survey among institutional investors shows divided opinions on whether AI stocks are currently in a bubble, with 40% affirming, 45% denying, and 15% unsure. This division indicates that while the market is heated, it might not yet meet the classic definition of a bubble, which is typically characterized by near-unanimous denial of overvaluation.
  3. Historical Perspective on Bubbles: Nick reflects on past bubbles, noting that a true market bubble is often recognized only in hindsight and is characterized by widespread euphoria and a sense of invulnerability among investors. The current sentiment among investors, which includes significant skepticism and caution, suggests that while AI stocks have seen impressive gains, the market may not yet be in a true bubble phase.

2024 Outlook Scorecard 35:00

  1. Interest Rates and Inflation Observations: Our prediction that interest rates would lower in the first half of the year and rise later has not materialized as anticipated due to persistent inflation. The Federal Reserve is waiting for clearer signs of easing inflation before adjusting rates downward.
  2. Stock Market Performance and Election Year Trends: The stock market continues to perform well, aligning with historical trends that favor stock gains during election years. The outlook remains positive despite some market corrections, supported by the ongoing election cycle dynamics.
  3. Investment Trends and AI Super Cycle: There is a significant amount of cash still on the sidelines, indicating continued potential for investment as cash levels are being actively converted into stock investments. Additionally, the AI super cycle continues to be a major factor driving optimism in the market’s future potential.

What You Should be Doing Now 37:38

  1. Importance of a Sound Investment Plan: Effective investing hinges on having a well-thought-out plan. This plan serves as a foundation that helps maintain confidence and discipline, especially in the face of market fluctuations and sensational news.
  2. Stability Through Planning: Without a robust long-term investment plan, investors are susceptible to market volatilities and media influences, which can lead to inconsistent and undisciplined investment actions.

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