Stocks continue to climb wall of worry
My Bloomberg colleague Alex Semenova had a great piece this week about how Wall Street strategists have been scrambling to boost their 2024 forecasts for the S&P 500, which has continued to climb this year after its 24% gain in 2023. In the past week alone, Piper Sander, UBS and Barclays have boosted their targets. Meanwhile, Goldman Sachs and UBS have already done it twice since December. As Semenova noted, some of these same firms were also caught off guard last year. The difference is that in 2024, they aren’t waiting to revise their targets.
I asked long-time strategist Alec Young about the Wall Street catch up. Young, of MAPSignals, stood out in our conversations dating back to 2022, rarely wavering from his belief stocks would entering a bullish stretch.
I wanted to share with you some insightful comments Young shared in our latest television interview this week.
“Most investors are investing towards long term goals. And we would stay with this market,Young told me. “The biggest risk is getting spooked out of the market. Bull markets are born on despair and we saw that in October of 2022, when people were very negative. They mature on skepticism, which we’re kind of seeing now. They mature further on acceptance. And eventually, they die on euphoria. We’re nowhere near that. The average bull market lasts 3.5 years, 4 years… 5 years. And when strategists are basically calling for the market to be flat for the year and scrambling to raise their targets, that’s not a sign of euphoria.
So, while there might appearance of euphoria in certain parts of the market — AI related stocks, for example, that’s a very narrow slice of the market. If you look at the broad U.S. stock market, there’s a lot of very reasonable, non-euphoric signals out there.
So our advice would be that unless you’re very short-term oriented, stay the course, tune out a lot of the cautious noise. Stocks will find a way to continue to surprise the crowd by going higher and higher. It’s a classic wall of worry situation.”
Stat of the week: January, February gains are a bullish sign for the year
Can you believe it’s March already? That gives us a quick chance to review the market performance so far this year. Both the S&P 500 as well as the TSX in Canada posted positive returns in both January and February. And we wanted to know – is that a good sign for the balance of the year?
Well, Sam Stovall and the team at CFRA research looked historically at what happens in the U.S. after gains in both January and February. There have been 21 such examples going back to 1971. And literally every year for the S&P 500 during which that occurred has netted a positive year overall. Now, there were a couple of examples where, in the final 10 months, the stock market pulled back. But the key word there is “a couple” – just two years out of 21 – 1987 and 2011. So, said another way, 90 percent of the time when the S&P is up in January and February, it continues to climb for the rest of the year. And, the average return in those 10 months that follow January and February is 13 percent.
Now by comparison, I looked back at the last 10 examples in Canada where the TSX rose in the first two months of the year. In that smaller sample size, the Canadian benchmark was still higher in the majority of years where that happened – 80% of the time, to be exact, looking back at the 10 years since the year 2000 when the TSX was higher in February and January. And 60 percent of the time, there were additional gains in the 10 months that followed February.
Big call: Amazon clothing segment may reach $100 billion in sales
Amazon has been hustling to win over your disposable income. And one of the lesser talked about parts of its e-commerce empire – is fashion. In fact, Bloomberg Intelligence now estimates the company may capture more than $100 billion worth of apparel and accessory sales next year. For context, that’s nearly a quarter of the fragmented industry. And that number would compare to around $82 billion in 2023. Amazon got a notable lift in its clothing related drive during the pandemic, when department stores were out and online shopping surged.
But it has maintained growth with a whole host of tech tools – Amazon Fashion, Prime Try Before You Buy, The Drop, and its Zappos marketplaces for example. Throw in the company’s aggressive push with social media and live streaming – as well as a larger assortment of discount clothes, luxury gear and athleisure — and the math starts to add up.
Fast growing players like SHEIN and Temu are keeping Amazon on its toes. But Bloomberg analysis suggests that last year, Amazon had grown so large that it accounted for 19 percent of all apparel and accessories sales in the u-s, up from around 10 percent five years ago. BI research suggests they’ll be above 25 percent within five years.
All of this is an important trend when it comes to profit. Apparel tends to generate greater profitability than electronics. Amazon’s cloud business has helped improve bottom line performance, but this is an example of the e-commerce arm showing margin improvement.
Big call: Bitcoin headed to $100,000?
This week, I had a follow-up conversation with Geoff Kendrick, Head of Digital Assets Research at Standard Chartered. Geoff previously made headlines last year predicting $100,000 for Bitcoin by the end of 2024. I had spoken with Geoff in January when he reiterated his bullish stance.
Since then, the cryptocurrency has rallied another $15,000 or so, in large part tied to the excitement over the Bitcoin ETF launches in the United States.
Kendrick described it as the most successful launch of a new asset class the ETF market has seen, thanks to a surge in new pension money coming from the 401K market.
“When prices go up, participants follow it,” Kendrick said in our television interview.
He is particularly constructive on the the fact that a larger investor base will reduce overall leverage within the market.
While he’s expecting a “grind higher,” he is sticking with his $100,000 call for this year and a $200,000 call for next year, adding that those numbers “are starting to look conservative.”
Move of the week: Apple ditches car plan
For years now, Apple watchers have been curious about the company’s electric car plans. That’s because we know the company has a put a lot of time and effort into making that a possible reality. And so, the tech world has been buzzing this week after Bloomberg’s report (kudos Mark Gurman) that Apple is giving up on its car efforts, after a decade of work. The internal announcement reportedly surprised the nearly 2 thousand employees who have been working on the project – that includes several hundred hardware engineers and vehicle designers.
Project Titan, as it was called, didn’t just require a big team. It also involved billions of dollars of investment, dating back to 2014. But, as Bloomberg’s reporting notes, the project struggled nearly from the start. There were often leadership and strategy changes. Meanwhile, cracking self driving technology proved challenging. And, one of the biggest questions large companies face when they are prioritizing projects is what does the demand picture look like. Recently, we’ve heard stories about a cooling market for electric vehicles – that, especially with economic uncertainty, the price point for EV’s already has Detroit players like GM and Ford scaling back their short term plans.
Bloomberg’s reporting notes Apple, in recent weeks, had reached a make or break point on the project. And there, reportedly, were just too many debatable issues. Most recently, Apple had imagined the car being priced at around $100,000 – but, executives were concerned that, even at that price point, Apple would not be able to enjoy the kinds of profit margins in has grown accustomed to with its products.
In addition, the board was reportedly concerned about continuing to spend hundreds of millions of dollars each year on a project that might never see the light of day – especially when it’s rolling out other products, like the Vision Pro, and focusing on bringing AI to more of its existing products.
An analyst at New Street Research shared a somewhat more sobering take: “maybe the golden rule of tech applies – being very good at one thing doesn’t make you good at any other.”
Those comments were a nod to Tesla’s position in the EV market, which would appear poised for continued dominance.
On that note, there was an interesting takeaway from the rare time when CEO Tim Cook talked publicly about Apple’s car ambitions. He called it the “mother of all AI projects,” while speaking with Bloomberg in 2017.
Indeed, autonomous vehicles represent one of the most important AI stories, despite all the attention ChatGPT is getting. It seems clear that in the long run, the roads will be populated with electric, self driving vehicles. That is a seismic change for one of the most identifiable product categories in the world.
Elon Musk, who was quick to react to the Apple report on X, has spoken very publicly about how Tesla in many ways is an AI company, with the technology that is teaching cars how to self-drive eventually set for other use cases.
You’ve probably heard about Tesla’s humanoid robots, which are learning from that same software.
We heard this week that Jeff Bezos, Microsoft and Nvidia are all investing in a humanoid robot startup.
To sum it up, the story today is about incorporating AI into existing form factors.
The bigger question is how will AI influence which form factors win in the future.
Another big number: Apple shareholder returns approach $1 trillion!
Okay, now that Apple is moving in away from the car plans we just talked about, its next big investment may simply be on itself. Let’s dive deeper on that.
Apple has become a very shareholder friendly company. In fact, total returns of capital to shareholders since 2012 are quickly approaching a whopping $1 trillion. The company routinely buys back stock and pays out dividends – two reasons why Warren Buffett loves Apple as an investment.
Now, Apple currently has board approval to buy back another $54 billion in stock. But Bloomberg Intelligence is betting that when Apple reports its next set of results, it will boost that plan up to $90 billion – just based on the reality that Apple’s cash has limited alternative uses. Now, you might say – hold on, Apple needs to spend that on all sorts of things, including R&D. And that’s true. But what you have to understand about Apple is that the business has been so successful that it is constantly spitting out piles of cash. Bloomberg estimates annual free cash flow will approach $350 billion over the next three years.
As of the last quarter, Apple’s cash and equivalents stood at $173 billion. Technically, the net cash number is lower, but that overall figure is so massive that we wanted to compare it to the other cash giants in tech – Alphabet, Microsoft, Amazon and Meta, as an example. They’ve all got huge amounts of money. And none are even close to Apple.
Meanwhile, a final point on Apple’s bond market borrowing. Even with all that cash, Apple regularly taps the debt market – quite simply, because it can. There is a huge appetite for its bonds, which it can issue at reasonable rates. And it can use some of that money to return to shareholders. In other words, just the fact that Apple has a lot of cash gives the company the ability to borrow money from banks to then pay out to shareholders.
Stock picks of the week
Adam Johnson, Bullseye Brief: Uber, Boston Properties
Diana Avigdor, Barometer Capital: Stantec, Crane, Eaton, Microsoft, Eli Lilly
David Nelson, Belpointe Asset Management: Vertiv Holdings, Walmart
David Szybunka, Canoe Financial: Crew Energy, Secure Energy Services
Ryan Bushell: Pembina Pipeline, Emera, Brookfield Infrastructure
Ross Healy, Strategic Analysis Corporation: Canadian Western Bank, CIBC
JJ Kinahan, IG North America: Citigroup, Costco