Sometimes in life you just have to laugh. Fed speakers waffle, markets turn on a dime, and investors ignore fundamentals. Life is crazy sometimes - hence, the
inspiration for this week's musings, the 1981 film "Arthur." You will be hard-pressed to find a movie that will make you laugh more than this film.
This movie was a huge success by 1980s standards. On a small budget of only $7 million, the movie grossed more than $95 million. Clearly audiences enjoyed Dudley Moore's infectious laugh.
So much of the film was ad-libbed by Moore that other actors and Director Steve Gordon became agitated at times. In the famous "moose" scene, Moore kept ad-libbing so much that fellow actor Stephen Elliott got enraged and famously said, "Will you forget about the moose, for now!" You can tell by Moore's reaction that it wasn't in the script. They left the scene in the film.
Moore's laughter was so infectious that he kept cracking up the cast and crew. One particular scene took 27 takes to finally get the scene on film.
Sir John Gielgud, who won an Oscar for this film for his role as the butler Hobson, was very unsure of himself in this comedic role. He was constantly asking his fellow actors if his lines were funny.
The Bach family fortune referenced in the film as worth $750 million would be approximately $2.1 billion today (inflation-adjusted).
Here's what we've seen so far this week..
Many Pictures. At one point in the film "Arthur," Hobson, who often retorts to Arthur's questions with cynicism tells him, "Here, read this magazine. There are many pictures." This is how the Fed often treats investors.
This week's inflation data paints a different picture than the one presented by the Fed and economists. Despite coming in largely as expected for December, both CPI & PPI increased on a year-over-year basis. We saw in early 2021 that when PPI begins to exceed CPI, it's a sign that inflation could be headed higher, which was what happened in 2021-22, despite the Fed narrative that it was "transitory." Yet, there are still some sticky aspects to inflation that are hampering consumers. The following inflation categories year-over-year are still much higher: Car Insurance (+11.3%), Transportation (+7.3%), Car Repair (+6.2%), Utility Gas (+4.9%), and Homeowner (4.8%).
It would make sense, given this information, that the Fed would signal fewer cuts in 2025 as it did at the December meeting. At that meeting the Fed pulled back on 4 rate cuts in 2025 to only two. In fact, some economists have indicated that the Fed would not cut at all in 2025 and the Fed Futures continue to indicate June as the earliest opportunity for a rate cut. And yet, as is typical, we got Fed double-speak this week from FOMC member Waller who stated, "I don't think March can be ruled out for rate cut." In the same speech, Waller said, "Three or four cuts could be possible this year if the data cooperates." If so, then why does the Fed's Dot-Plot indicate only 2 cuts in 2025?
It has been a while since we visited the Fed's overnight liquidity tool - Reverse Repos. For anyone who needs a refresher, overnight repurchase agreements between large banks and institutions to fund short-term liquidity needs. In 2019, banks and institutions lost faith in each other's collateral, so the Fed stepped in by offering "reverse" repos to banks directly. As of late, the Fed is basically removing liquidity from the system as the amount of reverse repos and the number of counterparties has hit a 3.5 year low. The Fed appears to be handing us the magazine and telling us to just enjoy the pretty pictures without reading the fine print.
Welcome To The World Of Investing. As clients take a look at their year-end statements, there's likely going to be some disappointment. As Hobson tells Arthur when he starts to feel sorry for himself, "You're a man who has everything, haven't you, but that's not enough. You feel unloved, Arthur, welcome to the world." It shouldn't come as a surprise if you're in a diversified portfolio that it might be under-performing one of the more concentrated markets we've seen in more than a couple of decades.
It's difficult for investors to understand concentration when we talk about it in terms of the top 10 names or percentages. However, when it's a picture, it may be more powerful. As you can see from the pie graph, the market cap of the top 5 stocks in the S&P 500 is equal to the market cap of the bottom 407 other holdings of the index. This kind of concentration is difficult to overcome in terms of performance unless you just own those top 5 names. But, for most investors, that would change their risk profile considerably.
This type of concentration has led to consecutive 20+ return years in the S&P 500. As you can see, there is an 80% probability of at least a 10% correction when the market is as overvalued as it has become. Depending on the type of correction, it's likely that the top 5 names of the S&P would see more downside risk than the bottom 407 names.
Additionally, when the market does not face much volatility in a given year, the odds for more volatility moving forward increase. In 2024, the S&P 500 did not trade below its relative 200-day Moving Average. In years when that happens, historically, the following year is more erratic in terms of returns. In fact, the average return following a year with no close below the 200-day MA is only +0.9% (with only a 50% probability of a positive return). Investors should consider staying the course with their current financial plan and stay diversified moving forward.
Here's the famous moose scene...
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Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
Past Performance does not guarantee future results.