Author: Smart Investing

Economy

Data Driven Investor: Why the Normalcy Bias is Dangerous for Investors

Posted on by Smart Investing

Sometimes, investors get caught in market changes like a deer in the headlights. We tend to have a great few years of market performance between sharp bear markets. So it’s easy to lose our edge and forget that markets can go down.

We often have big changes occurring that take some time for investors to figure out. In economic terms, this is called normalcy bias. We continue thinking that things are normal, until it’s clear that they are not.

In a life-or-death situation, sticking with normalcy bias can lead to death. In a financial situation, it can mean being too late to avoid large losses.

Last year’s banking crisis led many investors to sudden major losses. Those who saw dangers in regional banks invested elsewhere instead. Or sold out as soon as the danger became apparent.

At the end of a crisis, the normalcy bias means investors remain fearful.

Following a bear market, a new bull market is met with skepticism. Cash stays on the sidelines. It’s only after a big move higher that the last of the fearful money moves in.

We’re now in the second year of a bull market. Investors who missed out on the bottom in late 2022 or the opportunity to buy after the various drops in 2023 may start to move soon.

When that happens, a new round of cash could flood into markets, sending them higher.

 

To get a full understanding of normalcy bias and how it impacts your investment returns, click here.

Stock market

A Wealth of Common Sense: Is the U.S. Stock Market Too Concentrated?

Posted on by Smart Investing

Currently, six stocks in the S&P 500 have market caps of over $1 trillion. That’s up from zero a decade ago. And the largest companies have been flirting with a $3 trillion market cap.

Individual companies in the group, such as Nvidia (NVDA) now have a market cap higher than the entire Chinese stock market. The numbers are incredibly large. It also raises the question of market concentration.

Historically, when just a few stocks have dominated the overall market, there has been a fast reversal.

The tech bubble of the late 1990s saw a handful of tech stocks reach high valuations. Those crumbled. And the stock market concentration crumbled with it.

Just 10 years ago, the top 10 stocks in the S&P 500 made up 20 percent of the index. Today, that ratio is 34 percent.

There are two ways this imbalance can return back to its original trends. First, either these big tech companies underperform and trend lower. Or, other companies could outperform while big tech stocks take a breather.

In either event, investors may want to lighten on the big tech names now. And look for other investment opportunities.

While concentration may continue to increase, when the trend reserves, it could change quickly. Investors may want to take some profits on tech stocks and look for other opportunities now.

 

To read the full implications of today’s high market concentration, click here.

 

Economy

FX Evolution: Stocks Might Have Just Made a Big Switch

Posted on by Smart Investing

After hitting all-time highs last week, cracks have started to appear in the stock market. This could be a moment where markets make a healthy pullback, before moving even higher in the months ahead.

Given how bullish the market has acted the past few months, this kind of pullback is healthy. It’s also seasonal in nature. Investors tend to see a pullback after a strong start to the year.

While the market has been trending higher since late October, stocks are now showing signs of rotation. Investors are taking profits on high-flying tech stocks. And capital is starting to move to other parts of the market.

Over the longer-term, this is a strong sign of a healthy market. Investors are still bullish overall. However, a selloff in tech stocks could lead to a market pullback. That’s because these companies tend to be more volatile than the overall market.

In the meantime, central banks are looking to cut interest rates later this year. The data increasingly suggests that will be later rather than sooner.

A slow pace of rate cuts indicates a relatively strong economy. In contrast, fast rate cuts indicate that there’s an issue in the economy that needs to be addressed immediately.

So while the market may pull back in the coming weeks, we’re on track for better longer-term moves higher this year.

 

To view the full analysis, click here.

Cryptocurrencies

QTR’s Fringe Finance: Why I Bitcoin

Posted on by Smart Investing

After being the best-performing asset of 2023, bitcoin has taken a backseat so far in 2024. However, that could simply be the result of speculation ahead of ETF approval. A bitcoin ETF allows investors to profit from bitcoin without having to deal with it directly.

Now that 11 ETFs have been approved and are trading, demand for bitcoin may continue to rise. That suggests a higher price over time as billions of dollars gradually flow into bitcoin ETFs.

With demand rising, a supply shock is imminent. The bitcoin halving is set to occur in mid-April, just over two months away.

This will be the fourth time bitcoin has had a halving. This is the process where the reward for mining bitcoin is cut in half.

Bitcoin is the first form of digital scarcity yet created. It can’t be copied and pasted. There will ever only be 21 million bitcoin. And a few million have already been lost.

That’s in contrast to physical money, which can be printed up. Or the digital money in your bank account, which can be changed with a few keystrokes.

That points to a tremendous value in owning some bitcoin. It works as a piece of technology still in its early stage of adoption. And it acts as a way to store value over time better than inflation-prone currencies.

 

To read the full rationale behind owning bitcoin ahead of the next halving, click here.

 

Cryptocurrencies

ARK Invest: Big Ideas 2024 ITK with Cathie Wood

Posted on by Smart Investing

Tech trends can take on a life of their own. That’s especially true if the trend has the power to make some big transformative changes to the economy.

For instance, the rollout of the internet in the 1990s helped unleash a massive productivity boom. It was felt among all sectors of the economy. And higher productivity helped boost the real economy and increase wages. Today, AI offers a similar promise.

Late 2022 saw the release of Chat GPT, a form of generative AI. While such AIs have been in development for years, the sudden wide access of this technology has been transformative.

Now, the global equity market value associated with disruptive innovation could soar from 16 percent of the market to 60 percent by 2030.

Plus, the costs of training new AIs could drop 75 percent by 2030. That’s thanks to improving AI software, as well as improved hardware better equipped for AI’s rollout.

The rise of AI is just one part of the increasing digitization of the economy.

Rising smart contracts and other applications using blockchain technology could soar in the coming years. Smart contracts could generate annual fees of over $450 billion in less than a decade.

Plus, investor interest in cryptocurrencies such as bitcoin is still in its early stages. That’s why the crypto may soar to $250,000 or more by the end of the decade.

 

To look at some of the big trends driving 2024 through the end of the decade, click here.

 

Income investing

Dividend Growth Investor: 25 Companies Rewarding Shareholders with Raises

Posted on by Smart Investing

Dividend investing hasn’t gone out of style, even as tech stocks lead the market to new all-time highs. With tech giant Meta Platforms (META) now announcing its first dividend, tech investors have another way to benefit from a company’s growth.

And unlike earnings, a company can’t restate a dividend. Paying a dividend means a company has the cash flow to regularly send some of that cash on to shareholders. And over time, great companies raise their dividends.

With earnings season underway, a large number of companies have announced dividend increases.

That includes companies like Imperial Oil (IMO). The energy company jus increased its dividend by 20 percent. That’s a bigger increase than its 10-year average annualized return of 14.75 percent.

Plus, Imperial has been raising its dividend for 29 consecutive years. The current yield of 3.2 percent is above average, and a steadily rising dividend will mean a higher payout for long-term shareholders over time.

Another company increasing its payout now is United Parcel Service (UPS). The company increased its payout by 0.6 percent, reflecting some of the weakness in the logistics space right now.

But UPS is an industry leader, and has a 10 percent annualized growth rate over the last 10 years. Today’s buyers can geta 4.6 percent yield, and likely higher growth in time as the industry gets back to growth.

 

To view the full list of 25 stocks raising dividends right now, click here.

 

Economy

George Gammon: Did the Next Phase of the Banking Crisis Just Start?

Posted on by Smart Investing

It’s been nearly one year since the economy saw the second, third, and fourth largest bank failures in history. When trouble reared its ugly head last March, regulators were quick to shut down these banks. And move their assets over to stronger banks.

What caused these banks to fail? It was mostly the high risk of a bank run due to duration risk. Many banks invested in long-term bonds. Those fell in value as interest rates rose. It left banks illiquid.

To avoid that trouble, the Federal Reserve created a lending facility. They would hold assets such as long-term bonds, and pay banks the full face value. There would be no risk of having to cash out a bond at a loss.

While that restored faith in the banking system, the lending program came with a one-year expiration date. The Fed announced in January that they would not renew it.

That could mean a renewal for the banking crisis. Investors are already seeing cracks, as indicated by the dividend cut at New York Community Bancorp (NYCB). The regional bank’s issues stemmed from its office loans, not its bond portfolio.

Other banks could see similar issues. The office space sector continues to lag the rest of the real estate market. And several property owners have either sold at steep losses or are looking to walk away.

For now, investors may want to scale out of bank stocks and look to buy later when regulators step in again.

 

To view the full analysis, click here.

Stock market

Elliott Wave Options: Bulls Don’t Care About Fed Delays … S&P 5,000 Target

Posted on by Smart Investing

For the past few months, stocks have been in an uptrend. The narrative has been around the fact that the Federal Reserve stopped raising interest rates. In late 2023, the central bank even stopped hinting at further rate increases.

Since then, investors have turned to the idea of interest rate cuts. However, the Fed has still continued with its “higher for longer” mantra. However, investors haven’t cared.

That leaves stocks trending higher. And that trend has held up well. The economy has also held up well. Economic growth remains strong. Unemployment has ticked up, but is still historically low. Inflation is declining, particularly producer price inflation.

Overall, it’s a solid picture. However, it’s not weak enough for the Federal Reserve to think about cutting interest rates anytime soon.

Even the news of layoffs at big tech companies sounds similar to last year. And tech stocks did well last year, even as they cut staff overall.

For now, that suggests that stocks will trend higher, even with the S&P 500 index hitting 5,000. And investors are rethinking the idea of interest rate cuts as early as March. They now may not even happen in the first half of the year.

Typically, the Fed doesn’t get to choose when it cuts interest rates. Market conditions will tend to for the Fed’s hand one way or another. So investors should remain bullish, as long as interest rates can stay where they are.

 

To watch the full analysis, click here.

Commodities

Kitco News: Silver Equity Market Resembles That of Uranium in 2022

Posted on by Smart Investing

Commodities have had mixed performance over the past few years. Some commodities such as uranium and coffee have soared, although for different reasons. Uranium demand has increased while supply hasn’t caught up. And coffee demand has remained strong while supplies have dropped on weaker weather.

Other markets have been a bit more mixed. But overall, valuations generally look low following the bout of inflation in recent years.

Today, reasonable valuations and interested institutional investors could bode well for commodity prices going forward.

For retail investors, one place that could fare well for investors this year is silver. That’s because the market is as overlooked as uranium was in 2022 before its big rally over the last year.

The next 18 months could see strong demand for the metal. Its value both as a precious metal and for use in technologies should see strong demand.

Gold may see further upside this year amid a number of market fears. And where gold goes, silver also tends to follow. And when it does, it tends to have a bigger percentage move higher.

In the meantime, silver companies may see some merger and acquisition activity. That’s because large established companies have strong balance sheets and increasing cash flows to buy smaller companies with the best opportunities.

 

To listen to the full interview, click here.

Stock market strategies

Tastylive: If You’re Losing Money with Fundamental Analysis, This is Why

Posted on by Smart Investing

Investing involves trade-offs. The decision to buy one stock means not buying another. Or an asset class. So on some level, investors need financial and economic data to make that determination. That’s why fundamental analysis matters.

Fundamental analysis looks at data specific to an asset, such as the earnings of a stock or the par value of a bond. It can also include other factors such as an upcoming earnings report or a Fed meeting.

Investors tend to gravitate towards fundamental analysis, as it may point to reasons to buy or sell an asset. Traders may be more focused on other factors such as price and the trend in price.

More specifically, fundamental analysis can give investors an idea of what the market already sees and has priced into stocks. From there, they can either agree with the market’s assessment or not.

For traders, technical analysis can indicate price action and where it may make the most sense to enter or exit a trade.

Given the potential for a mismatch in the stock market between the price of a stock and its value, fundamental analysis plays a key role.

But investors should also employ technical analysis to reduce risk and avoid losses. That can help overall returns and improve an investor’s win rate.

 

To watch the full debate, click here.