Clean Sweep

Good Afternoon. The most important week of 2024 ended with clean US election results and an expected 25bp rate cut decision by the Fed (unanimously, unlike the last meeting).

• President Trump achieved a clean sweep by winning all seven swing states and the popular vote, which he didn’t in his first election. The Republican party is also approaching a clean sweep with just five short of the 218 majority in the House and Senate already in the pocket. Trump's win and the Fed's easing are both expected to be good for economic growth, and that led to markets recording the best week of 2024.

  

  Source: Reuters

• I think the main reason for Trump's solid victory is high inflation. One of my office friends summed up this result very well. He said Democrats misjudged the mood. Social issues matter to people, but after feeding their families - check curated insights for more.

• Fed chair Jerome Powell's comments seem to indicate that he is very confident that inflation will stay near the Fed target for the medium term, which almost guarantees another rate cut in December. Chair Powell mentioned that even housing services inflation is cooling now for the new leases. I believe in what he is saying, as, coincidentally, yesterday, I got an email from my building management that they are running a referral program to get new tenants. Winter is generally a slow period for leasing, but there was no such referral program last year at this time. It shows that the leasing market is tightening, and winter will also help. Overall, there is a good chance for inflation to come down further.

• The Dow surpassed 44,000 for the first time, the S&P 500 touched 6,000, and recorded its 50th all-time high in 2024. The Nasdaq reached a new all-time high.

• Tesla hit a $1T market cap with ~30% gains for the week, helping Elon Musk cross the $300bn net worth. Another notable stock of the week was Palantir, gaining ~40% for the week —check curated insights for more.

For the week:

• The S&P 500 is up 4.66%, the Nasdaq is up 5.74%, and the Dow 30 is up 4.61%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 61 (Greed) out of 100, up 2 points from last week. Details here

The top five trending stocks on Reddit are Tesla, SPY, Nvidia, Trump Media, and SMCI. Read More

Here is a summary of this week’s key economic releases:

• The macro data did not surprise us this week and shows a strong US economy. The services sector continued to grow in October, marking its fourth straight month of expansion. The Services PMI reached 56%, its highest level since July 2022, reflecting sector expansion in 50 of the past 53 months.

Target Rate Probabilities for Dec 18th FOMC Meeting:

CME Fed watch: * Data as of 9 Nov 2024 02:20:39 CT

The Federal Open Market Committee unanimously reduced its benchmark overnight rate by 25 basis points to a target range of 4.50%-4.75%. Read

Nvidia overtakes Apple as the most valuable company. Read

Mortgage rates increased for the sixth week, tracking the rise in Treasury yields amid the presidential election. The average 30-year fixed-rate mortgage reached 6.79%, up from 6.72% last week, while the 15-year rate held steady at 6%, per Freddie Mac data. Read

Elon Musk's net worth has exceeded $300 billion for the first time in nearly three years, driven by a surge in Tesla Inc. shares amid speculation that his strong connection with President-elect Donald Trump will benefit the company. Tesla hits $1T market cap. Read

Nissan plans to lay off 9,000 employees and reduce manufacturing capacity by 20% following a 94% drop in net income for the first half of the year. To manage cash flow challenges, Nissan will also divest part of its stake in Mitsubishi Motors Corp., having expended ¥448.3 billion ($2.9 billion) over the past six months. Read

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, indicated that robust economic performance and rising productivity growth may lead the U.S. central bank to implement fewer interest rate cuts than previously anticipated. Read

Anthropic has partnered with Palantir and Amazon Web Services to deploy its Claude AI models for select U.S. intelligence and defense agencies. Read

Bitcoin surged past $80,000 for the first time, driven by President-elect Donald Trump's support for digital assets and the potential for a Congress with pro-crypto legislators. Read

Arms Holding Beat: Chip designer Arm Holdings beat expectations. Revenue increased by 5% to $844 million, compared with analyst estimates of $808.4 million. The company projected revenue in line with Wall Street expectations. Although enthusiasm for AI computing has fueled a substantial rise in its share price since its IPO, the forecast didn't meet the high expectations set by AI chip designers like AMD and Nvidia. Read

Qualcomm Beat: Qualcomm reported fourth-quarter earnings on Wednesday, surpassing Wall Street expectations for revenue and profit, and projected a strong performance for the December quarter. The board also approved an additional $15 billion for share buybacks. Last month, Arm threatened to revoke a critical license with Qualcomm, with a trial over the ongoing license dispute scheduled for December. Read

Lyft Beat: Lyft projected higher-than-expected gross bookings for the current quarter after reporting strong quarterly sales, reflecting steady demand for ride-hailing as more people return to workplaces. Revenue jumped 31.5% to $1.52 billion in the quarter ending Sept. 30, exceeding the $1.44 billion average analyst estimate. The company anticipates annual gross bookings growth of around 17%, topping Wall Street's 16.3% forecast. Read

Arista Netword Beat: The Santa Clara, California-based company projected fourth-quarter revenue above Wall Street estimates on Thursday, driven by increased demand for its networking equipment as data centers expand amid the AI boom. It forecast revenue between $1.85 billion and $1.90 billion for the current quarter, surpassing the analysts' average estimate of $1.81 billion. Read

Underarmour Beat: The sportswear maker raised its annual profit forecast, expecting benefits from lower input costs and cost-saving measures, including fewer discounts at its stores and online. Read

US Elections:
High inflation is the main reason for Trump's solid victory. A few months ago, I listened to Ruchir Sharma's interview, in which he shared the data he analyzed for his book on Indian democracy, “Democracy on Road.” He said that no government in India has won the election when inflation is high, a common issue worldwide for existing governments getting voted out. Even though US inflation slowed this year, prices of essential goods have risen much higher than the pre-pandemic levels due to higher inflation in the last few years. The recent slowdown shows the prices are growing at a low rate but are going down as such (Prices only go down if there is a deflation, which is not good for the economy).

Reference Prices: Even if the economy is doing well and wages grow more than inflation, people still perceive inflation as higher due to the concept of “reference prices”. Consumers are experiencing sticker shock in grocery stores. These are the perceived fair costs based on recent past purchases; thus, paying $4 for a slice of pizza feels excessive when consumers are accustomed to paying $3. Read

The U.S. election likely signals a Republican sweep, which will help Trump implement policies such as tax cuts, reduced regulation, tighter immigration, and import tariffs. Historically, a clean sweep election is not the best market outcome. In last week’s newsletter, I covered that US equity returns average 7.6% (sweep) vs. 12% (Split).

Peter Lynch Philosophy: Invest in What You Know: 

Peter Lynch’s philosophy is to invest in the companies you understand and stay invested until the story is intact. The better you know a company and understand its business and competitive landscape, the greater your chances of identifying a promising “story” that materializes. In multiple interviews, he mentioned that retail investors can do better in the stock market if they stick to their industry. For example, if you work in the restaurant industry, you can have unique insights into restaurant stocks that no outsider can have, giving you an edge. The main advantage of investing in companies you understand is knowing what to do when the market goes down, i.e., investing more if the stock's fundamental story is still valid. If one doesn’t understand the stock he/she invested in, panic sets in when the market falls, and investors often lose money.
 
I considered discussing this today as I have a perfect example to show how it works. This week’s showstoppers are Tesla and Palantir, gaining ~30% and ~40%, respectively, in five days. A YouTube influencer, Tom Nash, only talks about Tesla and Palantir on his channel. Rather, his portfolio is only invested in three assets: 40% in SPY, 40% in Palantir, and 20% in Tesla. Before becoming an influencer, Tom was a senior manager at Deloitte and a technology consultant. He loves only investing in two stocks, and I remember even when Palantir hit $7 last year, he told everyone he was buying more. So, instead of panicking with the rest of the market, he took advantage of mispricing as he understood the stock's fundamentals well. Today, Palantir is trading at ~$60. Even this week, he posted videos about Tesla and Palantir on YouTube and explained why he was convinced about them and continued to buy more. You can go to his channel and check how he has been sticking to his story for a few years now and following a standard dollar-cost-averaging approach to investing rather than chasing every bright story. Over the long term, this approach will indeed work. I never invested in these two stocks (until recently) as I did not understand them well. With Trump as the president, I think both these companies will benefit.

Tesla: Everyone knows about Tesla’s products, etc., so I won't waste time on that. I used to think of Tesla as a glorified auto company until this month. The recent record Q3 results showed that Tesla is doing great when leading automakers are suffering. For the first time in its history, Volkswagon announced plant closure, and Nissan is also cutting 9000 jobs.
Elon Musk's close relationship with Trump is the main game changer now that will help Tesla. We have seen how having a close relationship with power can shield a business from everything with the Adani saga in India post-Hindenburg allegations. The Indian government went all out to protect Adani despite severe charges of wrongdoing. Elon Musk, on the other hand, is an innovator with no issues (unlike Adani). The Trump closeness will surely benefit Tesla for the next four years.

Palantir: Palantir’s US Governement revenue rose 40% this year. The US military and defense services mainly use its products. With Trump as president, defense spending will not slow down, and Palantir is uniquely positioned to profit from this.

The crux is that conviction + concentration is the winning formula. The fundamental knowledge of a stock gives conviction to take concentrated bets and make uneven gains. Until recently, Apple was 40% of Warren Buffet’s portfolio.

I am not recommending investing in any of the stocks mentioned here. These examples just highlight the core philosophy of Peter Lynch: to find your story and stick with it for the long term by dollar cost averaging.

Rebound in Growth is Coming:

The macro data show that the US economy is strong; I cover that in each newsletter in the section above.

Apollo highlighted specific stats in the blog yesterday, pointing to a robust US economy. Data shows above-trend GDP growth, robust retail sales, durable goods demand, low jobless claims, and rising average hourly earnings. Additionally, default rates are falling, corporate profits and forward profit margins are at record highs, and U.S. household balance sheets are exceptionally strong. Read

In addition, one crucial fact: Check the graphic below. Central banks of seven out of ten major economies are cutting rates. This will increase the liquidity in the system over the next few years, which should drive economic growth and market returns.

Source: Reuters