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| The soft-landing thesis has gained traction among investors. Fittingly, this future is seen above through the crystal ball of an AI-generated image. The pitfall of AI image generation is for now always in the details- something is slightly off on close examination. [Image © Grayson/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
The year is 2024. After some initial weakness, stocks experienced an inflow of optimism and cash in just a few short weeks, with the “smart money” crowd moving some of their investments from one set of sectors into another during the month of January. The so-called Magnificent Seven – as a group – have performed just fine (and more than fine) despite some expectations that those companies would sell off as investors booked profits during that pivot. The major stock indexes now hover at or near historic, all-time highs. But we’re getting ahead of ourselves. Let’s take a brief moment to review the last year before we begin looking ahead!
The year is 2023. The month is January. Sky-high inflation and an aggressive Fed mean that recession is as unavoidable as a white dwarf star headed for a black hole in space. A few months later, the sky is falling. Between the broader market selling off and banks collapsing, AI-related companies seem to be the only bright spot for investors. Yet the stock market proves resilient, with a monster November and December rally finishing off a winning year. The Ignorant Investor is highlighting the shifting sentiment to emphasize the wisdom of Warren Buffet's words: “Be fearful when others are greedy and greedy when others are fearful”. From the end of 2022 to the end of 2023, the S&P 500 saw 24% gains; the Nasdaq composite rose an astounding 43%; and the broad-market Russell 2000 moved 15% higher. Those are some incredible numbers! Congratulations to all who stayed invested – and even more so to those who put fresh money to work – during 2023.
Now back to the present. Recession fears have mostly faded. Many market participants expect 2024 to be a decent year for stocks. True, we have a complicated presidential election coming up, but that’s hardly relevant (see below). After all, the economy has been humming along. Employment is strong. The consumer has proven resilient and current sentiment is optimistic. Inflation numbers appear to be moving downwards and the Fed is widely expected to begin lowering interest rates. To top it all off, domestic energy production is booming, meaning external geopolitics are not as impactful as several years ago. Some potential things to keep an eye on in 2024 are listed further on in this article, as well as some market-related stories. Of a plethora of interesting topics to discuss, The Ignorant Investor was forced to leave a dozen or so on the cutting-room floor. For now, real-life responsibilities must take precedence!
The Fed
The twelve members of the Federal Open Market Committee will be meeting as usual to discuss interest rates among other things, but analysts widely anticipate at least several rate cuts in 2024 as inflation numbers likely improve, employment runs a little less hot, and consumers begin to show some signs of financial strain (more on that below). Are they going to cut rates at the next meeting? Will they make three cuts this year? The Ignorant Investor doesn’t know and honestly doesn’t really care about these specifics. After all, they are smart people who continually state they will remain data dependent. With the worst of inflation likely in the rearview mirror, the Fed’s role in the stability and performance of financial markets should melt further from the spotlight as 2024 progresses. Better to focus attention on identifying well-run, quality companies that are expected to grow revenue and – more importantly – profit this year!
Inflation, credit headwinds, and the consumer
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| The US consumer has a myriad of varying intentions, motivations, and preferences [Image © Alexander Ozerov/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
The US consumer is an amalgamation of a varied group of hundreds of millions of people, each with their own preferences, motivations, and financial situations. In 2023, the consumer readily overcame obstacles that included incredibly high inflation and a continuing housing shortage to the surprise of many analysts. The most widely telegraphed recession in history disappeared with a whimper. Yet interest rates remain elevated even as credit card debt (and total household debt) has increased to historic levels. Shopping trends reflect that many consumers are reacting to the higher cost of, well, everything. Keep in mind that in the US, the consumer is basically the economy, and the economy is the consumer. And while inflation is expected to abate this year, what happens if it doesn’t fall as quickly as expected (say should geopolitics push energy prices higher again)? This simply points out that while the soft-landing thesis is now in vogue (and does look likely based on economic data), the average US consumer continues to face some daunting headwinds in 2024.
Game time! Political football is BACK!
Election year is back again! And this time, it’s another big one. Whenever politicians hit the campaign trail, some companies and entire industries get dragged through the mud and kicked back and forth as a political football between the donkeys and the elephants (ie Democrats and Republicans). This year may be especially contentious (for some outside the USA, entertaining?) since the two contenders from the last election appear likely to face off again in 2024. Of course, some small level of political instability may be a possible grey swan event given the candidates. And there is always the potential for the current tariff regimen to shift with a changing of the guard. The good news here is that the stock market historically does well in an election year. And take campaign promises with a pinch of salt- seldom do these “promises” make it to regulation or law once a candidate takes office.
Geopolitical Tensions
Geopolitical tensions continue to remain relevant to investors worldwide and the number of active conflicts continue to expand (remember Myanmar circa 2020? That sad situation is still happening). Below are several areas to keep an eye on in 2024:
The late-2023 flare up in the Middle East. Ostensibly tied to the Hamas-Israel conflict, tensions are high and this area currently has the most direct impact on the global economy. With the Houthi militants lobbing missiles at cargo ships in the Red Sea and Iranian proxies launching attacks against civilians and militaries stationed across the Middle East, the situation could destabilize quickly (remember Iran and Pakistan exchanging cross-border fire a few weeks ago?). For now, the most direct impact on US companies is through energy prices and shipping complications.
The ongoing Russia-Ukraine conflict. This is arguably the most dangerous to the global order since potential missteps by either side could quickly lead down the rabbit hole to catastrophe. Stretching into its second year, the two opposing sides haven’t gained or lost much ground in 2023 and appear no closer to a ceasefire, let alone a potential peace agreement. While this conflict feels distant to the USA, it does impact energy prices. And as far as potential contagion effects go- didn’t suspected Russian hackers likely plant a proof-of-concept digital bomb in the Nasdaq stock exchange back in 2010?
Who’s in charge? Corporate control and financial stakeholders
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| How well stakeholders cooperate often determines the success the company [Image ©alotofpeople/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
Stakeholder is a great catchall word for everyone that shares a common interest in a business’s success. This could include customers, employees, suppliers, and investors, or branch out more broadly to local communities and beyond. Within a corporation that has good synergy, all stakeholders are working to achieve a similar goal. Disunity or simmering animosity between the owners, leaders, and/or rank-and-file employees is bad for business- and generally bad for all stakeholders too.
Disputes between financial stakeholders can have disastrous effects on the business. Typically, the CEO is accountable to an independent board of directors, and the board of directors accountable to the owners (in publicly traded companies, these are the stockholders). In an ideal case, the members of the board should also have a vested financial interest in the business. But what if the CEO is also the chairman of the board? Or a founder with the CEO title also owns a significant portion of the company’s stock? Or one party or organization is a minority economic partner but holds a majority of voting shares (ie controls the business yet has a relatively small vested economic interest in said business)? It’s important for investors to keep an eye out for intracompany complications that could derail what would otherwise seem like a decent investment. Let’s take a brief look at some recent examples of tricky financial stakeholder situations:
2024 Tesla’s CEO pay package. It’s the talk of the town right now, but basically a Delaware court voided the CEO’s $55.8 billion stock option pay package (negotiated in 2018 *gasp*) earlier this week. The judge suggested that the board was likely dominated by Elon Musk (the CEO) and did not act in the interest of shareholders when negotiating the CEO’s compensation. In typical cases, a company benefits from a strong, independent board. However, in Tesla’s unique position, Elon Musk IS Tesla, and Tesla is Elon Musk. Against the backdrop of a struggling EV market, the board will likely best fulfill their fiduciary duty to shareholders by keeping him engaged with Tesla- and avoid distraction by his many other companies.
2024 Tesla’s CEO voting control. In mid-January, Elon Musk (the CEO of Tesla) openly mused that he wants greater voting control over the company. Granted, the desire was within reason: 25% of voting control, instead of the 13% or so his current stock holdings warrant (for comparison, Meta’s Zuckerberg owns a similar percentage of stock in the company he founded but retains an eyebrow-raising 50% control). But who exactly is expected to simply hand their voting rights over to Mr. Musk? And what, shudder to think, is the worst-case scenario if they don’t acquiesce to this request?
2023 OpenAI board’s abrupt firing of CEO. Everyone reading this blog knows about this story, but it IS relevant to the section, so we’ll briefly review. In November 2023, chaos reigned when the Open AI board confounded the world and shocked stakeholders of all shapes and sizes when they unexpectedly – abruptly – announced that they would remove the CEO from his position. This move led to mutiny across the entirety of Open AI’s staff and open displeasure from their investing partners, led by the giant Microsoft. In the end, a rogue board was brought to heel less than five days later as the CEO was reinstated and leadership stability restored. A happy ending after all.
2019 CBS acquisition of Viacom. We’ll gloss over the extensive tabloid details for simplicity, but in the heady prepandemic days of the late 2010s, the controlling shareholder of Viacom and CBS wanted to merge the two entities. The CEO of CBS litigated extensively against this before resigning. The controlling shareholder decided the following year to have CBS acquire Viacom. Here is where the details become juicy. In a lawsuit that was settled by the company for $122.5M in 2023, former Viacom shareholders (including the powerful CalPERS pension fund) alleged that the Viacom board did not act in the economic interests of all shareholders, but instead functioned as proxies dominated by the controlling shareholder.
Stories of Note
What’s it worth? The stock market doesn’t always know.
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| The stock market sometimes has a valuation problem. What IS it worth?!? [Image © Philip Steury/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
The Wild, Wild West of the stock market is undoubtedly the biotechnology sector. Fortunes are made or lost on the unfair coinflip of experiments and scientific advancement (the odds for success is around 10% for a drug to move from development to FDA approval. The average cost for bringing a new drug through development to market is billions of dollars. Failure is the norm). Therefore, we frequently see the stock market struggle to assign an accurate value for such companies. When a small biotech is acquired, the acquisition price is often multiples – sometimes many multiples – of where there the stock trades. Throughout 2023, The Ignorant Investor has observed some decidedly strange behavior in other corners of the stock market.
Let’s look at banks. Bank stocks blew up in March but were suddenly bid up by huge percentages in November and December (hey, look no further than PNC Financial Services let alone some of the “riskier” banks which we will not name here). Was there any fundamental change in the banks in November and December? No. Only consensus opinion (and fund flows) changed. And then boring industrials. US Steel was valued by Nippon Steel Corporation at a price more than double the value the stock market had assigned to it, shocking analysts who had been widely pushing a different thesis. And retail. For months, storied Macy’s shares traded very low. Then in December, Arkhouse Management and Brigade Capital Management offered to acquire the company at a near-80% premium to where those shares had been trading (hey, the real estate alone is incredibly valuable). And there are other prominent examples, some which are in play even now.
Let’s wrap this up. The Ignorant Investor does agree with the thesis that the stock market will over time value a company near where it should be valued. If it’s valued too high, the price will go lower. Too low, the price will go higher (or the company will be outright acquired). Recent M&A action appears to indicate that select public companies may be worth quite a bit more than the stock market gives them credit for.
A cautionary tale: know the rules and how the game is played
Always, always, always take the time and effort to understand WHAT you are investing your hard-earned money in! For the average investor this means looking over public companies with a financial advisor, creating a strategy and buy list with said financial advisor, and then joining the average Jills and Joes placing their money to work in the stock market. As Warren Buffet has said, “risk comes from not knowing what you are doing”. Even the most sophisticated investor must be extremely careful (and expect some slipups) when navigating dimly lit, unfamiliar investment territory- yet much like digging for gold, sometimes great reward hides in such areas.
The Ignorant Investor has followed at a distance and with some modest interest Carl Icahn’s bet against American malls, which began in 2019. That bet has seen some big wins (pandemic shutdown, anyone?) and some eye-watering losses (the Phoenix-like-rising-from-the-ashes by the US consumer and return to malls in subsequent years). Apparently, the voices loudly proclaiming an imminent demise of the American mall were a bit premature. Now, this is where it gets interesting. Icahn’s bet against the malls was indirect, placed using credit-default swaps (CDS; yes, those same things you learned about in 2015’s The Big Short. No, Margot Robbie talked about subprime mortgages, not this). CDS are complicated instruments that in this case have their basis in bonds but are directly tied to this and depend on that (bond insurance, loans, properties, and more, oh my). Nevertheless, monsters that specialize in these obtuse things (huge, sophisticated players) may have gotten the better of Mr. Icahn by actively protecting their long positions at crucial junctures. Opponents choosing to lose small battles to win the war? Makes sense. And thus, this is a cautionary tale. The Wall Street Journal has a good article with some of the spicy details from an interview with Carl Icahn using this link.
Work life balance in an industry of hustle
When The Ignorant Investor first started working after grad school, compensation was good – very good, in fact – but the regular work week usually included a full day on Saturday. Then the boss would call and ask for part of a Sunday too. The tradeoff was that prices and costs for, well, anything, didn’t really matter. After a good many months of this, the question The Ignorant Investor started to ask himself was “Am I working to live, or living to work?” (I did end up leaving that position soon afterwards). Yet professional success in the vast, ever-evolving world of finance generally requires such 24-7 dedication. While technology helps enhance the capability and accuracy of analyses, it also exacerbates the constant pressure to make quality decisions near real-time, which frequently leads to burnout. The Ignorant Investor read with interest that Peter Brown, known for running the hugely successful Renaissance Technologies hedge fund, slept for thousands of nights in his office to achieve his “70% average return” over the past twenty years. Read about Peter Brown in this article at Fortune.
Coming soon to the USA: preventative full-body MRI scans
The Ignorant Investor has been aware of several health-conscious individuals who travel to Asia (India and Thailand, specifically) every four or five years for full-body MRI scans. This appeared to be overkill since they don’t have any serious condition and are near the peak of health for their respective age groups. Yet this approach may very well become the norm for proactively identifying health issues. The startup Prenuvo, backed by prominent names from the business world like Eric Schmidt and Daniel Ek, can do full-body MRI scans as a preventative measure in the USA for about $2,500. So far, results have some spectacular testimonials from individuals who have had pancreatic or other forms of difficult-to-identify-early cancers found by the company’s scans. Insurance companies are taking a closer look too since the relatively modest cost may offset expensive efforts to treat more advanced issues at later dates. Does the money really matter? The Ignorant Investor would say no. But a win-win scenario is always best for everyone and makes that question irrelevant. Read about newly available full body MRI scans at The New Yorker using this link.
