US markets might just be priced for perfection

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SIMON BROWN: I’m chatting with Craig Antonie from AnBro Capital Investments. Craig, I appreciate the time today. A very strong first half [for] offshore markets. The S&P had a good first half; tech really had a spectacular first half. Was this really just an AI rally – because the argument is that it’s not broad based by any stretch?

CRAIG ANTONIE: Good morning, Simon. Thanks very much for having me. I’m happy to be here and hello to all the listeners. I think when you come off a year like 2022 and you see the Nasdaq coming down as much as it did, and the big tech stocks in particular down sort of over 40% or so as a basket, it is a fair enough assumption to make that we could see some sort of rebound in this space.

However, it’s been incredibly strong – I think a lot stronger than many people anticipated in the light of all the continuing macro struggles out there. The ‘Magnificent 7’ [stocks] as they now call them, or the ‘Super 7’, have had a particularly great year.

I think in part certainly the magic of AI and all the promise which is now being priced into these shares has a lot to do with it. It all kind of started off with an Nvidia earnings report last quarter and their forward guidance, which just shot the lights out and everyone woke up to this whole AI theme. And it has been sort of guns blazing since then for stocks in that space.

SIMON BROWN: It does feel – and maybe this is just the curmudgeon in me – like markets have got a bit ahead of themselves, notwithstanding our still being in an interest-rate hiking environment. Inflation is coming down, but still outside of the bands. A whole bunch of other data suggests the economy’s okay in the US, and to a lesser degree in Europe, but maybe not half as okay as the market is saying.

CRAIG ANTONIE: Yes, definitely. I think if you look at a lot of the indicators out there and the data coming out, as you alluded to, Simon, it’s not all sort of flowers and roses and sunshine and happiness. I think if you take all the data coming out – which is clearly showing that there is a slowdown in the US economy – there’s a slowdown in the consumer. Jobs markets held up very well; I think that, in conjunction with a very strong dollar or still a relatively strong dollar, is what’s keeping it all together.

But if you look at it and sort of zoom out a little, the Nasdaq in particular has been rallying for about seven months off its lows. You have an elevated put-call ratio, which just shows you that people are all sort of skewed to the upside. The fear and greed index which people like to look at has been hovering around ‘extreme greed’ for the last month or so. If you look at investor sentiment and financial advisor sentiment in the States, it’s pretty much as bullish as it was in November ’21, when the Nasdaq peaked.

And other things like the Vix – the Vix has posted eight 52-week lows in June, which is the most in any month since 2004. Now, [for] people who like to look at the Vix and a continually lower Vix, there’s a sign of a bit of complacency in the market where people aren’t necessarily taking risk into account.

And then last week in particular, after those jobs numbers that came out, you saw US treasuries take a bit of a sharp move lower; historically that’s not always a very good sign for tech stocks – and the Nasdaq in particular.

So yes, I think it’s all been very strong, but there are signs out there that things aren’t actually that strong under the hood. So you’ve got to be a bit careful.

SIMON BROWN: You do have to be careful. Earnings season in the US is kicking off and those earnings are going to be important – I mean growth margins. There’s a lot expected from the market because, as you say, everything seems to be priced for perfection and yet there are some worries out there.

CRAIG ANTONIE: Certainly. I think if one looks at the last year or so, inflation shot up. Many companies were able to push prices up to combat the inflation and the impact that would have on their earnings. However, that also coincided with a consumer who was pretty strong, who had a lot of savings post Covid and was coming out into the economy ready to spend.

Now they’re kind of coinciding with these higher prices and a consumer who seems to be slowing down, and one’s got to then ask the question as to whether companies can keep raising prices in order to offset this inflationary issue. Wage numbers have also been holding up relatively well. So if companies have to pay more wages but can’t keep pushing prices up, what does that mean for margins? Are sales starting to slip a little bit?

Costco came out with updates on Friday and Costco’s a pretty big barometer for consumers in the States. They pretty much said that volumes are a little lower than they were hoping for – and they were tracking a bit lower. So I think earnings are going to be big this season. Everyone’s going to want to make sure that not only are companies doing okay and that they’re able to keep raising prices and keep expanding margins.

If you’re seeing volumes decline and margins start declining, then you think, oh well, consumers might be slowing down too, and that could put the market in a bit of trouble, and perhaps we’ll see a little bit of a reset.

SIMON BROWN: A quick last question. You run the Unicorn Portfolio. Of course, you’ve also got a dividend-focused portfolio with higher rates. Does that take some of the shine – perhaps more on the prices of the shares rather than the dividends? I’m thinking dividends are not going to be directly linked, but suddenly an investor can go and buy a treasury yield at a decent rate.

CRAIG ANTONIE: Certainly. I think if you are stressed about being in the markets and worried about things perhaps falling down, or the US economy going into recession, or the global economy for that matter, you can go and buy yourself a short-dated US treasury and get yourself 5% per annum risk-free. That’s a place that a lot of people haven’t been in for a very long time.

The dividend stocks have certainly felt the heat this year as a result. People are looking at companies that are paying 3% or 4% and saying, well, should I risk my capital by being invested in those businesses, or can I just bank my 5% that the US government’s given me and go and sleep at night? So yes, if we look at the Ancom portfolio, it’s lagging a little bit behind markets right now, but the dividend growth has been strong and it’s been continually growing, which is what we’re after there.

So I think once the markets settle down and you get to a point where you either get to a risk-off type situation or there’s normalcy in the economy, and the breadth in the market starts improving and it goes beyond these uber-big, mega-cap stocks which have been driving the growth, people start looking for businesses that have a good track record of steady income growth and steady balance-sheet growth and performance and profit growth, then those sorts of stocks will come into their own.

But certainly, I think for this year, in particular, those more conservative sectors like healthcare and utilities and even property – which tends to do well when people are stressed or looking for dividends – have had money flow out of them, either into the fomo [fear of missing out] markets, the ‘magnificent seven’, or just into cash, straight-up cash [where] we can get good income with very little risk.

SIMON BROWN: Yes – 5% in the US. It was probably before the financial crisis of ’08 that we last saw 5%.

We’ll leave it there. Craig Antonie of AnBro Capital investments, I appreciate as always the time.

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