>50% of stocks down since 1st hike, plus cocoa's parabolic rise, P/E ratios and forward returns, and bitcoin flows
The Sandbox Daily (2.14.2024)
Welcome, Sandbox friends.
Happy Valentine’s Day to all those who celebrate !
Today’s Daily discusses:
most stocks are down since the 1st rate hike
cocoa: a sweet (but expensive) Valentine’s Day trade
P/E ratios and equity returns
spot bitcoin ETF flows remain strong
Let’s dig in.
Markets in review
EQUITIES: Russell 2000 +2.44% | Nasdaq 100 +1.18% | S&P 500 +0.96% | Dow +0.40%
FIXED INCOME: Barclays Agg Bond +0.44% | High Yield +0.39% | 2yr UST 4.581% | 10yr UST 4.267%
COMMODITIES: Brent Crude -1.50% to $81.53/barrel. Gold -0.17% to $2,003.7/oz.
BITCOIN: +4.31% to $51,554
US DOLLAR INDEX: -0.22% to 104.731
CBOE EQUITY PUT/CALL RATIO: 0.65
VIX: -9.27% to 14.38
Quote of the day
“Bull markets have plenty of bad days, but in bear markets those bad days stretch into bad weeks and bad months.”
- Willie Delwiche, Hi Mount Research in Will Inflation Surprises Upset the Apple Cart?
Most stocks are down since the 1st rate hike
While stock markets are forging one new high after another, under the surface most issues are not faring as well as the index.
The S&P 1500 – a composite of the S&P 500 (large-caps), S&P 400 (mid-caps), and S&P 600 (small-caps) – covers 90% of the market capitalization of U.S. stocks, so it represents a broad swath of the domestic market. Below you can see the market-cap weighted 1500 is up +13.8% since the 1st rate hike on March 16, 2022, while the equal-weighted 1500 is down -0.5%.
In fact, the majority of stocks in the S&P 1500 (52.4%) are down since that 1st hike back in March 2022.
Interest rate hikes have separated the wheat from the chaff.
Source: Piper Sandler
Cocoa: a sweet (but expensive) Valentine’s Day trade
Cocoa prices have more than doubled in the past year and have risen around 40% since the start of 2024.
The price of cocoa futures contracts on the Intercontinental Exchange (ICE) reached an all-time high last week and surpassed the previous peak recorded all the way back in 1977.
Why are cocoa prices surging?
The El Niño weather phenomenon that is contributing to historic rainfall on the West Coast of the U.S. is also drying out West Africa, where ~70% of the world’s cocoa supply is grown. There is concern the current dry spell could leave a permanent mark on cocoa yields. Supply concerns already caused a temporary stop of exports to certain players in Cote d’Ivoire last year. The country alone accounts for around 44% of the global cocoa supply. And with El Niño expected to persist through Spring 2024, the cocoa shortage could extend into 2025.
That’s bad news for chocolate makers AND chocolate consumers.
Source: Bloomberg, Barron’s, CNBC
P/E ratios and equity returns
As the forward S&P 500 multiple peaks its head above 20x, future public equity returns become a bit more of a challenge.
The scattergram below provides a visual representation of the relationship between the market multiple and future returns over the next 12 months and 5 years. The downward sloping line is the linear regression, or line of best fit, showing higher P/Es are associated with lower subsequent returns than lower P/E ratios.
As you can see, market valuations do not impact/explain much about forward market returns over shorter time horizons, but over longer time frames, valuation matters.
Historically, more lofty valuations – i.e. higher P/E multiples – have led to market underperformance.
The one caveat here is that valuation is a terrible timing tool, as stocks tend to move above or below fair value regularly and can stay overbought or oversold for long periods of time.
Source: J.P. Morgan Guide to the Markets, The Daily Shot
Spot bitcoin ETF flows remain strong
Despite a hotter-than-expected CPI, surging interest rates and U.S. dollar, and a considerable dip in most risk assets, the spot bitcoin ETFs saw their 2nd-highest day of net inflows on Tuesday with $631 million across all products.
Given the improving macro backdrop and persistent flows, the path of least resistance is higher in the near term.
Source: Fundstrat
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.