Why The Stock Market Has Gone Nowhere In 2018, Plus Tesla
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN SHARES OF TSLA
The S&P 500 finished the day’s well off its lows, ending near the highs of the days.
The amazing thing is that with all the wild point swings the market is pretty much unchanged this year, with the S&P 500 up just 2 percent. It certainly feels like we have covered a lot more ground than only 2 percent worth. However, in reality, there have been many moving parts in 2018, between the fear of rising interest rate, trade wars, and a stronger dollar, to higher oil prices. There is more uncertainty today than what was confronting the stock market in 2017.
Back to the Future
The present-day stock market seems to have a similarity to the period during the fall of 2015 and the first nine months of 2016. That was when the Fed was first embarking on the normalization of interest rates, while the BOJ and ECB were beginning their rounds of negative interest rate policy (NIRP), and their forms of QE as they were trying to fight disinflation. During the same time, the stock market was facing a wave of uncertainty from slowing growth in China, the collapse of oil prices, all while corporate earnings in the US were slowing dramatically. Then throw in the shock of Brexit and the US Presidential cycle, that 12-month stretch was a wild time.
In fact, from August 1, 2015, until November 4, 2016, the S&P 500 was down less than 1 percent, more than a full year of stock market stagnation.
If one wondered why the market had gone nowhere in 2018, it would seem it’s because that for every positive, like earnings growth and a healthy economy, there appears to be a negative churning beneath the surface keeping a lid on the market, which is why we see some parts of the markets run away with things, like Amazon and Netflix. Meanwhile, the banks are way off their highs, with both going in opposite directions for different reasons.
The banks have been plagued by a flattening yield curve, as the Fed jacks up rates on the short-end of the curve, and a globally low-interest rate environment keeps a lid on the long-end of the curve. It has caused the 10-year minus 2-year curve to flatten to just 30 bps, surely not good banks. In fact, XLF financial ETF is nearly 11 percent off its highs from early January.
Meanwhile, trade tension and the risks of tariffs have crushed the industrial and staples stocks. With stocks like Caterpillar down 20 percent from its highs, Campbell Soup down over 30 percent at one point.
Additionally, a rising interest rate environment creates another headwind for the staples, because of their higher yield dividends. Rising rates means dividend yields need to rise, and that makes stock prices fall.
However, for the most part, consumer discretionary stocks such as Netflix and Amazon have done very well because their growth has been unaffected by rising trade tensions or the other macro forces. Technology, Biotech, and Consumer discretionary stock are the polar opposite of the financials, industrials, and staples, with all three rising by over 10 percent on the years.
All of these high growth stocks will benefit from a low interest-rate environment with a low-cost of funding future growth. Additionally, for many, they have no trade barriers in the way. While also providing investors with super fast revenue and earnings growth. .
At the end of the day 2018 is turning into a case of the have and have not’s, and for the most part, it will likely to stay that way, with a flurry of uncertainty that appears to have little if any clarity at this point.
Tesla reached its goal of 5,000 Model 3 per week, and nearly 2,000 model S & X, bring total production for the week to 7,000.
Anyway, I’m not going to get into too much, because it just seems like people will twist the numbers however they see fit.
However, here are the facts, the company produced 54,330 Model S, 3, X during the quarter. In total the company delivered 40,740 vehicles, and 15,558 were in transit. Some investors saw the number as a shortfall, and some saw some it as a beat.
The way I see, I don’t care, which side of the quarter 15,558 vehicles fell. First off, Tesla likely did some of this intentionally to avoid going over the 200,000 car’s that starts the sunset period on the EV tax credit.
If Tesla can keep up its 5,000 Model 3’s per week, and ramp to 6,000 per week by months end it is a huge deal, and over time everything will even out.
The more I follow the story, the more I realize how uneducated or ignorant the nay-sayers are about the company. They just do not get it. Sure Ford and GM can produce more cars in a day than Tesla can in a week, but the market, like it or not as spoken loud and clear about what it thinks of Ford and GM, by the performance of the stocks over the past 5-years. Tesla is up 185 percent, and GM AFTER it re-emerged from Bankruptcy with the US Governments help, with a cleaned-up balance sheet is a massive 16 percent, while Ford is down 30 percent.
Is this for real? GM is up 16 percent in 5 years! People want to talk about Tesla going bankrupt, and its NEED to raise capital, well news flash GM DID go Bankrupt!
Investors do not care who can produce more cars in an hour, day, week, month, or year. They only care about the future of revenue and earnings growth, and the market is betting rather clearly that Tesla will give them that growth that Ford and GM can not. Investing is about future cash flow, not who can create the most crap at one time.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.