Ep 20: Stock Market Update | The Bull Case for a Santa Claus Rally

Jess: Hey, Jess.

Jessie: Hi, Jessie.

Jess: I have a question.

Jessie: What's going on with the stock market? We have entered a deflationary environment.

Jess: We've got a dovish Fed.

Jessie: We have better than expected earnings, a resilient consumer.

Jess: No recession has been called as of yet.

Jessie: The market bottomed again in October, which means the markets are remarkably seasonal.

Jess: Remarkably.

Jessie: I'm more bullish than I have ever been into the end of the year, and I see productivity as the next catalyst higher.

Jess: And I see the narrative as a stubborn U.S.

Jessie: economy that can handle higher rates for longer.

Jess: Yeah.

Jessie: Okay.

Jess: Let's break that down again, but this time in English.

Jessie: You're listening to Market MakeHer, the self-directed investing education podcast that demystifies the stock market from her perspective.

Jess: We're your hosts.

Jessie: I'm Jess Inskip, what we call the resident finance expert.

Jess: I've been in the industry for about 15 years now and gave up my financial licenses for the good of all that is financial literacy.

Jessie: And we thank you for it.

Jess: And I'm Jessie Dinouye, the stock market apprentice learning alongside you, asking all the questions and keeping Jess out of financial jargon land, which she literally just went into a second ago.

Jessie: You're welcome.

Jess: Literally, you are all very, very welcome.

Jessie: We appreciate you, Jessie.

Jess: We really, really, really do.

Jessie: This is your late November stock market update.

Jess: Okay.

Jessie: So let's try this again.

Jess: You said the markets are remarkably seasonal.

Jessie: So we'll start with what is seasonality? All right.

Jess: Seasonality is in our favor.

Jessie: There are lots of market sayings, sell May and go away, Santa Claus rally, a Santa Claus rally.

Jess: Yes.

Jessie: September and October are the worst months of the year in the stock market.

Jess: Going back to 1928 and then November to January tends to be the best months in the stock market.

Jessie: December, actually the best, hence the word Santa Claus rally.

Jess: Since 1928, the stock market performs very, very well in December.

Jessie: That makes sense because people are buying Christmas presents.

Jess: The economy is stimulated, everyone's shopping.

Jessie: Usually you're happier most of the time, and that has to do with consumer sentiment.

Jess: We made a low again this October before we had this ripping rally, and the low for the overall market was also last October, last year.

Jessie: All of the seasonality is centralized around key dates, and I think that's something that's missed.

Jess: So October lows, I attribute to something that's called fall harvesting, which is done by mutual funds.

Jessie: So we'll have a tax episode, so I don't want to go down a rabbit hole here because I see that on the horizon.

Jess: But mutual funds, they have a deadline to tax harvest and realize their capital gains or take losses, and that's normally by October 31st, which means there is a lot of selling before October 31st.

Jessie: And then they start their new fiscal year.

Jess: It's a good reason.

Jessie: Yeah.

Jess: So then a lot of buys happen.

Jessie: We defined capitulation last episode when all of the sellers have exited the market.

Jess: There's a lot of selling and a lot of downwards pressure, but literally the big mutual funds have exited the market because now they've done their tax loss harvesting that they do for the end of their year.

Jessie: As retail investors, our deadline is December 31st.

Jess: Mutual funds is normally October 31st.

Jessie: Okay.

Jess: Fall harvesting refers to mutual funds because they want to sell off some of those securities within the mutual fund by October 31st because that's their deadline to realize capital gains, right? And there are some that are tax sensitive.

Jessie: And so not only is that that time that you realize your capital gains, but you also realize capital losses.

Jess: Okay.

Jessie: The Santa Claus rally, all of the sellers have left the market, leaves opportunity for buying now that you've realized your capital losses and you rebalance and readjust, which involves buying, which causes the stock market to go up because there's more demand.

Jess: Sell may and go away is another stock market seasonality term.

Jessie: We all go on summer break.

Jess: There's less volume, so less activity within the market.

Jessie: We call it light activity because literally people are quick on vacation.

Jess: That's where that saying comes from.

Jessie: So when we talk about seasonality, we're talking about seasonal monthly patterns where the stock market performs better or worse in certain months.

Jess: And this is where sayings like sell may and go away come from because stocks go on summer break too.

Jessie: And also Santa Claus rally in December because the stock market rallies into the end of the year.

Jess: It's patterns surrounding specific events.

Jessie: We talk about fall harvesting by mutual funds when they typically sell off securities before October 31st to help realize capital gains.

Jess: So that's why November through January is some of the best times of the year in the market.

Jessie: So what about the Fed and the inflation situation? I know you said that the Fed is done.

Jess: So what's happening? So if the Fed is done raising interest rates, it's normally for one of two reasons.

Jessie: One, their job is done.

Jess: They've beat the battle for inflation.

Jessie: Or two, they broke something because normally the Fed's actions are what tip us into a recession.

Jess: But that hasn't happened yet.

Jessie: We've had a bunch of impending recessionary calls now for over a year and then some.

Jess: And it still hasn't happened.

Jessie: We still haven't had a recession call.

Jess: And the data doesn't seem like there's going to be a recession whatsoever.

Jessie: We had an inflation report in November, but it was October's data and it was flat, as in there was no change.

Jess: It was zero percent up or down.

Jessie: There's a huge decline in energy.

Jess: We feel that in the pump, which is great.

Jessie: Finally, shelter is coming down.

Jess: Not as much.

Jessie: That's definitely the sticky one, but it's also lack of facts.

Jess: The bond market lost all its volatility, which is a good thing.

Jessie: And financial conditions are loosening a bit, which means credit isn't as tight.

Jess: That access to credit is a little bit better.

Jessie: And a lot of that has to do with yields coming down as well from their peaks, which we talked about on our last episode.

Jess: Now the market is shifting to when is the Fed going to cut rates? And they have as early as March of next year as to when they're going to cut rates.

Jessie: You can see if the market expects the Fed to raise rates, and that's completely off the table.

Jess: It doesn't seem recessionary.

Jessie: Definitely some slow growth will happen within the economy, but it does not seem to be from recessionary concerns because of the positive growth that we see, the positive earnings that we see.

Jess: Even on earnings calls, they give us indication into the economy overall.

Jessie: Walmart comes to mind.

Jess: They said they're seeing deflation, a deflationary environment, which is good.

Jessie: That means prices are coming down.

Jess: It seems like the Fed is done because they did beat the battle on inflation.

Jessie: I really hope they don't raise rates anymore because that could be bad and then would tip us into a recession.

Jess: The Fed minutes that came out today, though, they indicated that they're going to keep rates higher for longer, which is what we talked about.

Jessie: Interesting.

Jess: We want inflation to come down.

Jessie: And for this earnings season, forward-looking guidance has been not as optimistic as usual as a result of deflationary expectation.

Jess: For us, the consumer, they think they're finished, they did it, they can pat themselves on the back now.

Jessie: Is that what it is? Okay.

Jess: Remember, they're like Taylor Swift.

Jessie: They are data dependent.

Jess: They are not going to tell you that they are done or not.

Jessie: They just will not do that because that will send the market into a frenzy, like a good frenzy, but they just won't say it.

Jess: It's like a vicious cycle.

Jessie: Yeah, because their words are a tool, too.

Jess: If they were to say that and then people were optimistic and they started spending, then we could have a resurgence of inflation.

Jessie: You think the Fed's job is done because inflation is coming down and the consumer is like hanging in there and the market is now pricing in these rate cuts.

Jess: And there's no evidence of a recession yet.

Jessie: I have a thought, though.

Jess: I know for me, over the pandemic, I was buying a lot of things, ordering a lot of things because I was stuck in the house and I needed those like dopamine purchases to get me through the weeks.

Jessie: I've taken a step back on my spending and I've really started deciding what I do need to be spending my money on and what I don't.

Jess: And I wonder if other people feel that way and if we will see any changes in consumer behavior.

Jessie: The pandemic was just different in terms of how we were spending and what we were spending on.

Jess: Things are going to shift.

Jessie: And I'm curious to see, even with inflation coming down, how much the market shifts and where the spending actually does go.

Jess: Any thoughts on that? Stay with us.

Jessie: We'll be right back.

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Jessie: See you then.

Jess: Yeah, I do think that has to do with a resilient consumer.

Jessie: If you've heard of that trend, FIRE, Financial Independence, Retire Early, there's this whole movement.

Jess: It's not just Gen Z and millennials, it's conscious spending where you live well below your means so you can achieve financial independence and retire early.

Jessie: That has to do with the resilient consumer.

Jess: And I really think the strength in retail spending that we're seeing is coming from Gen X and boomers because they are the ones that are retiring and exiting the workforce and now have this large sum of money and are spending it.

Jessie: Cruise stocks are performing really, really well.

Jess: I don't know a lot of Gen Z and millennials that take cruises, but I know a lot more Gen X and boomers that like that.

Jessie: True.

Jess: Yeah.

Jessie: But what about earnings? What was our earnings report card like? We keep saying better than anticipated earnings and it happened again.

Jess: This was Q3 earnings and they delivered another very, very strong better than anticipated earnings.

Jessie: We had the highest earnings growth.

Jess: It was up 6.3 percent year over year since Q2 of 22.

Jessie: That's amazing.

Jess: Strip out energy.

Jessie: Energy led the rally last year and we had growth of 11.6 percent because also oil was coming down.

Jess: That's the highest since Q4 of 2021.

Jessie: And we had quarter over quarter earnings growth of 7.8 percent, the highest since Q1 of 2021.

Jess: So there was just beats all around for earnings, better than anticipated earnings.

Jessie: We had the magnificent seven, they call it, that really led the stock market.

Jess: But there are still earnings beats, which means earnings have bottomed, which always happens when we are out of a recession.

Jessie: Earnings bottom because prices have to start coming back down, right? So they're missing their profit margins or their profits.

Jess: So if earnings are on a decline and they start growing again, that's when they bottomed.

Jessie: Just like the stock market bottom, it's at a lower price.

Jess: Earnings revisions will come in because they'll say, oh, the Fed's going to raise rates.

Jessie: This is going to hurt tech first.

Jess: We're going to lower our earnings anticipations.

Jessie: They report, they still may beat, but they're beating a lower bar.

Jess: But that bar has bottomed and now the bar is being raised and they keep beating.

Jessie: So Q3 earnings was strong, better than anticipated again.

Jess: And I heard you say the highest year over year growth rate since the second quarter in 2022.

Jessie: That's right.

Jess: We've mentioned this a few times, but what about all the AI drama? What's the AIT? Yeah.

Jessie: So without going down the rabbit hole, because that was definitely the news over the weekend with the coup and Sam Altman and then Microsoft and CRM and everyone stepping in, I really think it's just proof of how valuable the AI narrative is.

Jess: Like it's in demand.

Jessie: And today they reported Nvidia earnings.

Jess: Their earnings really, really matter.

Jessie: When we're talking about the AI narrative, because you need those super valuable chips in order to have your large language models and machine learning for generative AI, it requires Nvidia chips.

Jess: So that's the first one that it's going to recognize.

Jessie: And then it moves over to Microsoft and Adobe and others with those B2C models.

Jess: Whereas it's going to take a little bit longer for other stocks to realize that, which I know is another episode that we keep saying we're going to have that we'll eventually have.

Jessie: But because it's so important to that AI narrative, they beat on the top and the bottom.

Jess: Their big issue was China and supply issues because of all of the drama that's there.

Jessie: So lots of drama with AI, but they beat by a lot.

Jess: Analysts aren't doing a good job showing how much earnings potential is there for AI, which is also a good thing.

Jessie: I think that translates into the overall tea that we're having with Sam Altman and what happened with OpenAI over the weekend.

Jess: You don't realize the power that this new technology has, which really leads me to my bigger picture of the overall market.

Jessie: The people want the AI, they want to know about the AI.

Jess: Can you talk about like, what is your bigger picture view? Yeah, it has a lot to do with AI.

Jessie: So this is real, real big picture, stepping away from everything.

Jess: You've climbed to the top of the mountain and you're looking down so you can see everything that's there.

Jessie: That's how big of a picture I'm about to take you to.

Jess: The big question that we have is, are we going to have a recession? That hasn't happened yet.

Jessie: Back to what we started this episode with, the Fed's actions normally tip us into a recession.

Jess: They put so much tight monetary policy, strains of the consumer, they stop spending, they drain their savings, and then they have to stimulate the economy by cutting rates.

Jessie: That's not the environment that we're in right now.

Jess: So then the question becomes, is it possible to have growth and a deflationary environment at the same time? The answer to that's yes.

Jessie: The numbers that we just went through are absolutely attributing to that.

Jess: We have growth.

Jessie: We talked about GDP growth on a previous episode.

Jess: We see earnings growth and we see deflationary environment because of the CPI numbers that came out and what earnings conference calls have told us.

Jessie: And the answer to that, in my personal humble opinion, is you can have both of those things at the same time if you're productive and you're prepared.

Jess: And I think productivity is the catalyst for the next leg higher, meaning that recessionary call that we keep hearing, Jamie Dimon said, prepare for a hurricane.

Jessie: And I think that's the best analogy.

Jess: Those people in hurricane areas, if you hear, oh, there's going to be a hurricane so many times, you're going to buy all the toilet paper and you're going to buy everything that you need to prepare for that hurricane.

Jessie: All your party supplies.

Jess: You do that enough.

Jessie: And if it hasn't come to fruition, when it actually comes, you're well prepared.

Jess: Your windows are boarded, you know how to handle it.

Jessie: Florida, as crazy of a place as it is, knows how to handle a hurricane.

Jess: There are dunes on the beach for a reason.

Jessie: Recessionary calls haven't come to fruition, which means it's forced corporations to prepare for any potential pitfalls.

Jess: They are prepared for the hurricane.

Jessie: And that's the first major shift that they had for reducing operating expenses.

Jess: They already did all the layoffs that they could do.

Jessie: Remember, we had a labor shortage.

Jess: But that creates a resilient, resilient company, not only resilient consumer, a resilient company.

Jessie: Even think about what happened during COVID.

Jess: We shifted to work from home so quickly.

Jessie: I was on a task force on the brokerage firm that I worked for, where we shifted so many people to work from home and it happened very quickly.

Jess: And then we put them back in the office very quickly.

Jessie: We wouldn't have been able to do that without technology.

Jess: So I think there is some shifting market dynamics that we have to discuss.

Jessie: And that leads me to, yes, the AI revolution.

Jess: It's in its early stages.

Jessie: It's a huge productivity shift.

Jess: There's some studies out there that say people who actually use all of the AI tools, 30 percent more productive, which is crazy.

Jessie: I believe it.

Jess: We're going to see that shift at a greater rate than the World Wide Web, if you think about it.

Jessie: We use the Internet for everything.

Jess: The AI revolution leads to productivity and productivity helps your operating expenses, which is a help on the bottom line.

Jessie: You can expand your profit margins and you can do more with less.

Jess: That's why I'm extra bullish on the bigger picture.

Jessie: I think we can have growth at the same time because we're going to have increased productivity.

Jess: And that's amazing.

Jessie: And when you say you're bullish, how far ahead is that looking? In other words, you're bullish right now because you feel like we're going to see continued growth in the market over the next several months, six months, years.

Jess: Is it going to keep going up? So definitely bullish until year end because of the seasonality.

Jessie: Absolutely.

Jess: Coming into 2024, you want to reassess.

Jessie: Things change.

Jess: I know we talked about health care when we had the investment thesis episode, but Ozempic came out and all of a sudden everyone is getting a little healthy.

Jessie: Things change.

Jess: This is what leads into that investment thesis, though.

Jessie: It's productivity and AI.

Jess: I'm bullish until the end of the year.

Jessie: We'll validate constantly with data.

Jess: Do I see productivity increases within the labor market? Which we did actually see.

Jessie: Are we seeing continuous growth on Nvidia earnings like we did? They have growth in their data centers, which means people have demand for these AI chips.

Jess: Companies are investing in operating efficiencies.

Jessie: And when they invest in their operating efficiencies, eventually that's going to lead to expanding profit margins or at least beating on the bottom line.

Jess: Everyone's jumping on the AI bandwagon and it's even going into like AI roles within companies now that weren't previously there.

Jessie: It's also creating new job roles, too, and new products within companies like there's a lot that goes into AI other than the companies making AI themselves.

Jess: Everyone's trying to get a piece of this.

Jessie: It's just so helpful and so useful.

Jess: Even if you don't rely on it completely, but you use it as a starting point, which a lot of people do, get things going, get a project going, get your thought process going.

Jessie: It's super helpful.

Jess: Yeah.

Jessie: You think about the big picture of how structural economic growth actually happens.

Jess: It's created through higher labor market participation.

Jessie: Everyone has a job and they have income.

Jess: When you have income, you spend money or increase productivity.

Jessie: Think about earnings.

Jess: When we say top or bottom, you beat on the top or bottom, you beat on the top because you have revenue and at the bottom because you decreased your cost to generate that revenue.

Jessie: So if you are decreasing the cost, you're having operating efficiencies, that creates a stubborn economy that can handle the higher rates for longer.

Jess: That's what's happening.

Jessie: That's very interesting.

Jess: When we talk about looking at our portfolios and how things are shifting in the market, you're like, okay, I need to sell off these stocks because healthcare is looking like it's shifting, not what I thought it was going to be in my initial investment thesis, but AI is here to stay.

Jessie: So I want to sell off some healthcare and put more into AI.

Jess: Is that kind of the thought process when we're looking at how the stock market is performing and how to evaluate your own portfolio? It's definitely a piece of it.

Jessie: So disclosure time, not personal financial advice.

Jess: Financial advice is personal and that is not what this is.

Jessie: It's twofold.

Jess: One is being tax efficient and some people really need to do that.

Jessie: They have to be tax efficient, which means you're taking losses strategically.

Jess: You're not holding things less than 12 months because of the way that they're taxed.

Jessie: It's not the same for everybody because of the tax system in the U.S., but if you're a stock picker and you're seeking alpha, which just means outperforming by choosing stocks.

Jess: Diversification is key, but also is a disciplined approach.

Jessie: You don't want to have any emotion in investing.

Jess: So for example, my investment thesis of healthcare was incorrect due to Ozempic, so therefore I exited the healthcare sector, which is so interesting because it's traditionally defensive and it looks attractive once more due to its valuations.

Jessie: It doesn't fit into the aging economy, even though that is true and that's happening.

Jess: It's not playing out as anticipated because data suggest otherwise.

Jessie: Yeah, things do change and if you're not paying attention to the market, what's happening, you might just be holding on to stocks forever that end up losing value and don't come back over time.

Jess: Knowing when to let go of those I think is important and that's something I haven't really quite figured out.

Jessie: The tax situation does make me a little apprehensive too because once I sell these stocks, is that an extra headache I don't want to deal with next tax season because I already have enough going on in my taxes? Those kinds of things are also good for us to learn about so we can not just learn how to buy strategically, what to invest in in the market, but also how to strategically sell our securities.

Jess: For sure.

Jessie: Difficult one because it's very personal.

Jess: It is.

Jessie: I know.

Jess: If we're being self-directed, we're not going to a financial advisor so we kind of need to know how to self-direct those types of things too.

Jessie: Yeah.

Jess: It's personal.

Jessie: You have to learn how to figure it out for yourself, which I would like to learn how to do for sure, which is why I think we're here.

Jess: Yeah.

Jessie: Well, I feel updated on the stock market now for sure.

Jess: And somehow I do have more questions and topics to add to our episode lineup as usual.

Jessie: So if you also feel the same way that I do, you can tell us what questions you still have by leaving us a comment.

Jess: Feel free to ask any questions at all.

Jessie: If I see them before Jess, I will make her answer them for you.

Jess: Yes.

Jessie: One day we should release our audio recordings back and forth where we like go through and explain things, make some good content.

Jess: But let us know if you are a bull or a bear on our Spotify poll and what episode you want to see from us next.

Jessie: Leave us a review.

Jess: Literally makes our day.

Jessie: Sometimes cry too.

Jess: Thank you.

Jessie: Thank you for that.

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Jess: And until next time, keep building knowledge and keep breaking those barriers.

Jessie: Remember investing involves risk.

Jess: There is always potential to lose money when investing in securities.

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