ONE YEAR ANNIVERSARY FOR THE SANDBOX DAILY(!!), plus AT&T, market valuation, and the recession
The Sandbox Daily (7.19.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
AT&T stock endures another difficult blow
is the market overvalued or fairly valued?
the recession narrative is turning
Happy National Hot Dog Day – looks like markets are as green as the relish on those Chicago-style hot dogs!
Let’s dig in.
Publisher’s Note: ONE YEAR ANNIVERSARY!
Today marks the 1-year anniversary of The Sandbox Daily !!!
One year ago today, we started with 2 subscribers.
Fast forward one year, we have 859 total subscribers.
No marketing, no distribution, no media network. Just relentless effort and dedication.
Quality, value, and timeliness are the fundamental cornerstones to our publication, and we hope to have delivered across each metric.
There are many people to acknowledge and thank, but it mostly starts and ends with my wife, Jen. She has been incredibly supportive and patient while I’ve published 238 notes over the past 365 days. I’ve written The Daily in the car, on the boat, from the airplane, commuting on trains, at birthday parties, on the golf course, during dinner, disrupting vacations, New York’s Time Square, staring at the Eiffel Tower in Paris, and on and on and on. With her love and support, I am able to deliver this daily market’s newsletter even when life gets in the way. So to Jen, THANK YOU, THANK YOU, THANK YOU.
And to you, the reader! Thank you for spending a few minutes of your precious time reading our market commentary. We all lead busy lives; distractions and phone notifications constantly distract us, while work and personal obligations fill every waking hour. So, we here at The Sandbox Daily are truly grateful that you spend 5 minutes with us each day when markets are open. THANK YOU, THANK YOU, THANK YOU.
Cheers to another great year ahead and, hopefully, cooperative markets!
Thanks,
Blake
Now, onto today’s post.
Markets in review
EQUITIES: Russell 2000 +0.45% | Dow +0.31% | S&P 500 +0.24% | Nasdaq 100 -0.09%
FIXED INCOME: Barclays Agg Bond +0.31% | High Yield +0.08% | 2yr UST 4.768% | 10yr UST 3.752%
COMMODITIES: Brent Crude -0.20% to $79.47/barrel. Gold +1.21% to $2,019.2/oz.
BITCOIN: +0.62% to $29,969
US DOLLAR INDEX: +0.35% to 100.289
CBOE EQUITY PUT/CALL RATIO: 0.50
VIX: +3.46% to 13.76
Quote of the day
“If your portfolio risk exceeds your tolerance for loss, there is a high likelihood that you will abandon your plan when the going gets rough.”
- William Bernstein, The Four Pillars of Investing
AT&T stock endures another difficult blow
The major stock indexes and AT&T are heading in decidedly opposite directions, as equities roar back in 2023 while AT&T’s stock hits a 30-year low.
A bombshell investigative report released last week from the Wall Street Journal showed that telecom giants like AT&T (T) and Verizon (VZ) have left behind a network of toxic lead-covered cables across the United States.
The cables were spread across the United States between the late 1800s and 1960s during the rollout of the U.S. telephone service. But, in the 1950s, telecom companies began transitioning towards plastic and fiber optic cables — but often retained the network of old lead cables that have been contaminating local soil and water sources.
Telecom stock prices have been hit hard in the days since – coinciding with Wall Street analysts’ downgrades – but there’s still too much uncertainty on the clean-up cost, potential lawsuits, and time it would take to handle the situation.
Which brings us to AT&T (T). The stock price just hit its lowest levels in over 30 years!
No matter which way you slice the performance data, AT&T has been an absolute dog for its shareholders. Since the inception of the Vanguard Communication Services ETF (VOX), AT&T has trailed the S&P 500 by a vast margin, its own sector, and its closest competitors (VZ, TMUS).
In fact, after being a darling of the Communication Services sector for decades, AT&T is now just the 11th largest holding in its own sector, a far cry from its glory years when it was the largest publicly traded company in the 1930s, 1940s, 1950s, and 1960s.
Many investors (and retirement plans) stayed in the stock over the years due to its dividend yield, however that investment thesis is under the microscope. In 2022, AT&T cut its dividend as part of the Warner Bros. Discovery spinoff; now, many shareholders are left wondering if another cut is coming.
Source: Wall Street Journal, State Street, Investment Moats
Is the market overvalued or fairly valued?
Many investors are struggling to wrap their heads around the strong equity market rebound in 2023. By most measures, this year has been a banner year for stocks AND we’re only in July.
The Nasdaq-100 index leads the way up +44.7%, while the S&P 500 and Dow Jones Industrial Average each post double-digit gains (+18.9% and +12.2%, respectively). The Russell 2000, caught up in the regional banking crisis and early fears of recession, is the laggard of the group, up just +5.8%.
Perhaps even more surprising? The S&P 500, Nasdaq-100, and Dow Jones are all within 5% of all-time highs!!
In our view, the stock market bottomed October 12, 2022 and the rise over the past 9 months is the start of a new bull market. This sounds counterintuitive since we had no “recession” nor “Fed cutting rates.” But we’ve had a huge decline in inflation and the inflation war is the war the Fed is waging and seemingly winning. To be clear, market risks remain, but the known knowns are abating so perhaps the elusive soft landing is possible.
What is puzzling investors is the market multiple. Stock prices are rising fast, even if profits are not (i.e. earnings recession). Behold the multiple expansion:
At 19x, the market is nearly 1 standard deviation expensive against the 25-year average of 16.8x.
But, back out the FAANG stocks and the forward P/E multiple of the S&P 500 ex-FAANG stands at 16.4X, a mere +0.7x increase from 15.7x at start of the year. P/E should expand as companies are viewed as resilient and the market is at the start of a new EPS cycle (“slipping into expansion”).
The equity market has been a “game of inches” all year, with a lot of blocking and tackling. And then periods of market progress. This likely continues in the second half, assuming volatility remains in check, the U.S. dollar remains muted, and interest rates don’t back up materially.
Source: Fundstrat, J.P. Morgan
The recession narrative is turning
Goldman Sachs economists trimmed the estimated probability of a U.S. recession over the next 12 months to 20% (from 25%). In March, Goldman had the odds at 35% following the regional banking crisis that emerged.
This remains only slightly above the average postwar probability of 15% - a recession has occurred approximately every seven years.
Last weekend, the Wall Street Journal's survey of 69 economists showed them cutting consensus probability of a downturn over the next 12 months to 54% (from 61%).
Why the change in outlook?
The main reason is recent data has reinforced the market's confidence that bringing inflation down to an acceptable level will not require a recession.
More and more investors are embracing the soft-landing scenario.
Source: Goldman Sachs Global Investment Research
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. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.