RETURNS HAVE BEEN GOOD – EVEN EXCEPTIONAL!
Financial market returns in 2024 have been favourable for most sectors, but none more so than crypto. Bitcoin was up 150% during 2024, hitting a high of $108,410 before easing back to $93,627 by the end of the year.
No doubt some of the enthusiasm was triggered by the return of Donald J. Trump as the 47th President of the USA. Our last update was published the day after the result, and we reported that the USD would likely strengthen, it’s up 6.3% since. We also cautioned on Drug companies, which are now down 5.6%. We thought copper, gold and commodities in general might benefit, but copper has fallen from $4.51 per pound on 5 November, to only $4.08 per pound today.
But what we really missed was FARTCOIN. Yes, the cryptocurrency called Fartcoin is up a massive 2,940% since 5 November. The market value of all fartcoins on issue is $1.3 Billion. Some in-depth research I read said that ‘hot air rises, so of course fartcoin will keep going up, maybe to a $10 Billion valuation’.
On reflection I severely underestimated the impact of the memes and dreams of the crypto bros all hyped up at the thought of Trump & Musk being in charge of the country. It almost makes one want to retire from the thoroughly boring career of traditional fundamental valuation of companies.
Still such nonsense does tell us something about the economy.
Interest rate settings are still too loose, and rates need to stay higher for longer.
BOND YIELDS ARE WEIRD!
In the chart below, the top panel shows the 10 year US bond rate. The bottom panel shows the US Fed Funds rate. (similar to the RBA Official Cash Rate).
As you can see, the ten year bond yield hit a low of around 3.60% in mid September. Just before the Federal Reserve started cutting rates. Instead of the ten year bond yield then going even lower, it reversed course and started to rise – all while the Fed was cutting rates. Very strange indeed. In fact, the US ten year bond yield has never in history risen by 1.00% in the months following a rate cutting cycle.
While looking at bond yields let’s have a look at China.
The Chinese 10 year bond yield has been plummeting. Now down to 1.6% p.a. Normally this would be indicative of a severe recession. But if that was correct we would also expect iron ore prices to be rapidly falling. (they are trickling down, but not plummeting) It could be simply a function of China’s massive trade surplus with the world. That trade surplus is almost $1 trillion per annum. Since the Yuan is not readily able to find its way into foreign assets, surplus capital may be finding its way into the bond market, pushing prices up and yields down.
It will be interesting to see what impact the Trump trade tariffs have on this situation. It seems unlikely that the vast majority of Walmart stock is going to be replaced by American made goods. Tariffs are likely to only make inflation more sticky, keeping rates higher for longer, and thus a continued strong US Dollar.
MARKET REPORT
It is a bit too early for the official data on sector returns for CY2024, so we will post that in our next update.
TIME FOR CAUTION
As you can see from our commentary, we think that markets are quite irrational at the moment. Valuations are expensive compared to history.
This table from Lonsec reviews the profit growth and price to earnings (P/E) growth of the major stock sectors in Australia.
The sector with most growth next year is Industrials, where earnings are expected to grow 8.6%. Yet the sector is trading at a 32 times earnings multiple (P/E). Financials, with only 2% growth expected, are trading at 20 times earnings. In aggregate stocks are about 25% above the 15 year median P/E ratio leaving room for underperformance.
Global stocks in aggregate have a similar overvaluation. However, they are barbelled by US stocks which are expensive (making up the majority of the index) at 23 x forward expected earnings and others like Japan at 14x earnings; Germany at 13x and Singapore at 12x.
When the major market sectors become expensive, it is increasingly tricky when putting money to work.
WRAP UP
In our next update, we will do a deep dive into some of the current sub-markets and assets where we see reasonable risk/reward trade offs.
Spoiler Alert; don’t expect the deep dive to include a Fartcoin recommendation.
