Holidays, More Macro Forecasting, and Nintendo's Rumors (NOTW#27)
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Hi reader,
It was a “relaxed” week in the market due to the festive period. The big money is mostly absent during the festive period, but there’s something always present: macro forecasts (this time about interest rates). I share the content that will be published over the next few weeks, a brief market commentary, and some recent news about Nintendo.
Articles of the week (and planned content)
I published one article this week, although paid subscribers had already had a chance to read it in last week’s NOTW. It’s about the Wall Street Journal and Zoetis regarding one of the company’s blockbusters Librela.
I discuss why this seems more like headline risk than a real risk.
You might have noticed that I have not been as active these weeks. The reason is twofold. First, it’s Christmas, and I am taking some time off with my family. This doesn’t mean I have not been working as I have been researching companies and writing, but not as actively as I would have in a normal week. The best thing about my job is that I enjoy it, so I don’t really think it’s work.
The second reason is that I have been working on a deep dive on Keysight Technologies that I will publish next week (probably on Tuesday). Rather than being a multi-part series, this article will bring all you need to know about the company in one single report and will also be available in PDF (to facilitate reading). Paid subscribers will have access to the entire report, whereas free subs will only have access to a portion of it. Feel free to subscribe if you want access to this deep dive, the historical, and future deep dives:
I am also planning to bring (outside of the regular schedule) the Best Anchor Stocks annual review sometime in January, probably before the 15th.
Market Overview
It was a quiet week, all things considered. People always say that little tends to happen when big money is absent, but there was quite a bit of volatility this week, regardless. Both indices ended in positive territory, advancing more than 1%:
Indices are on track to enjoying an excellent year, although some would say they “are running out of steam” as they have been flat over the last month. The S&P 500 is up more than 25% this year, whereas the Nasdaq is approaching 30%:
This strong market has led many people to abandon active investing to pursue passive, and I am not surprised. I believe passive is an excellent alternative for many, but it’s precisely when the markets are doing so spectacularly well that recency bias kicks in, making many believe they’ll continue to do spectacularly well forever. Interestingly, this year, this return has been heavily skewed to a handful of companies, with other companies in the index not enjoying such great performance. This makes me think that it’s probably best to stay active than to switch passive (but only time will tell).
For context, only 24 companies in the Nasdaq 100 have beaten the index’s return this year. Some of these are pretty large companies and are up triple digits (like Nvidia and Broadcom), whereas others are smaller. The bottom line here is that there’s a lot in the Nasdaq that has performed below the (weighted) average. This is also one of the perks of diversification (something the indices do well over time): being able to perform well if things don’t go your way in every scenario. This said, I believe the most important lesson of this year’s performance is that position sizing matters dearly. The Nasdaq entered the year with several excellent companies as its top positions (the Mag 7) and took advantage of them performing well. In short: it doesn’t make a difference if a position performs spectacularly well, but you make little in absolute dollars.
On the macro front, people are again claiming that the Fed is making a mistake by lowering rates. The market is showing that this might be a mistake by increasing (rather than decreasing) long-term rates. This means that the market believes that, at some point, the Fed will need to do the opposite of what it’s doing now: increase rates.
If you’ve read my articles, you should know that my goal isn’t to forecast macro but to simply try to build a portfolio that can survive through any macro environment. In this particular case, I’d caution about giving this too much thought, as many of the same people who are claiming that the Fed is making a mistake today also claimed the same two years ago. The result was not in their forecasts, though: the Fed decreased inflation without creating a recession. I assume Powell can make mistakes just like any other human being, but claiming that he is always making mistakes is a tad too arrogant, especially when he’s been right in the past. Who knows, this might be when he is actually wrong, but we’ll only know in hindsight.
And the industry map was mixed although broadly positive. The reason the indices were up this week probably has something to do with some large constituents like Nvidia and Broadcom enjoying great performance:
The fear and greed index improved slightly, although it remained in fear territory. As I’ve discussed in some articles, I wouldn’t look too much into this indicator unless it’s at one of the extremes:
The rest of the content is reserved for paid subscribers.