A quick note on the US Equity Market

A quick note on the US Equity Market

We do not try to forecast the direction of stock markets. This is partly because when we have tried we have got it wrong more often that we got it right, We mostly do bottom-up analysis of company fundamentals and try and ignore Mr. Market.

In the last few months, we have struggled to find companies which are fairly valued or cheap. We have not looked at too many but most if not all of the companies we have looked at in detail in recent months look fairly valued or expensive. Reports suggest the valuation of the S&P is well above historical norms. A lot of optimism is baked into markets whose leadership has been very narrow – perhaps just 7 or 8 stocks. We have not added much to our portfolio but we have not so far sold anything. Our default thought is to hold for long period and not to unnecessarily interrupt the compounding, as Charlie Munger advised

Sadly they do not ring a bell at a market top. However, we cannot help notice the headlines. We select a few below

Yesterday, the Nasdaq just posted its single largest daily volume in history with 13.4bn shares traded today. This beats the previous record of 11.9bn shares on May 16th, 2024. There was a lot of churn, but stock indices closed noticeably lower.

Long- term Interest rates have been rising. 10-year US Treasury bond yields have risen 100bps to 4.68% since September 2024. The cost of long-term capital is rising and this should be bringing down the fair value of US equities.

The S&P 500 has completed two years of 20% + gains. Most of this can be attributed to a few stocks. One indication of this is that the equally weighted S&P 500 index only advanced about 12% in 2024, half the performance of the normal market cap weighted S&P 500 Index.

The Trump Presidency will start in two weeks and that will bring policy uncertainty. His flagship policies of tax cuts and much higher tariffs on imports will be negative for the deficit and for inflation and thus point to even higher long-term interest rates. There will be countervailing forces. Tax cuts might boost economic growth and the opposition to mergers and takeovers by the FTC is likely to reduce.

Warren Buffett of Berkshire Hathaway has been selling stocks and is currently estimated to have $ 300bn in cash which is about 30% of the total assets of the company in cash. In the past, he has held cash for long periods and been in a position to buy when markets crashed and valuations became more reasonable.

The headlines yesterday reported 76% of Nvidia employees are now millionaires, with one in three boasting a net worth of over $20 million!

We do not know the future direction of the markets. However, the factors above suggest to us at least that the odds are probably in favour of a meaningful correction. It could be a price correction in which case there will be mark to market losses or a long-time correction in which case there will be a lack of significant further advance and a likely underperformance compared with recent months or even cash or some credit assets.

We are going to trim our positions in Nvidia, Meta and Microsoft today. We will increase the percentage of cash in our portfolio to 12.5% from 7%. This will be

high relative to what it has been in the last three years.