At the most fundamental level, stock prices are about liquidity. When there is liquidity, a portion of it will be allocated to stocks. If/when those stock prices go higher, more liquidity is created, and you get a virtuous cycle going.
“But…but…what about earnings? Aren’t corporate earnings the true driving force for stock prices?” someone might ask. And I would answer that earnings definitely count as liquidity – liquidity that gets used for dividends, share buybacks, CAPEX, and R&D spending…
The wealth effect for households, tax receipts for the government, and consumer spending are among the virtues of a liquid economy.
This is why long-term investing and dividend reinvestment plans are the only sure path for creating generational wealth.
So long as the virtuous cycle is spinning, stock prices rise. And yes that means valuations rise too…
This is why Walmart’s forward P/E has risen from 23 a year ago to 36 today. It’s not that the future has suddenly gotten blindingly bright for Walmart. It’s that the liquidity has been a constant – revenue and earnings growth steadily rise because Americans spend money…
All that will continue – so long as the virtuous cycle keeps spinning…
The R Word
I read around 20 market-related newsletters every morning, from Bloomberg, Wall Street Journal, Reuters, IBD, Yardeni, FactSet, and so on…
In the last few days, a lot more people have been talking about the R word – recession.
I shared the GDPNow chart from the Atlanta Fed that depicts its current GDP growth estimates for the current quarter with you last week. The Atlanta Fed’s growth estimates have fallen from 2.2% to negative 1.5% over the course of a week…
Well, it’s gotten worse:
The Atlanta Fed now says the U.S. economy is shrinking by 2.3%.
The U.S. economy doesn’t fall into recession on its own. Because Americans are pretty reliable spenders. It takes a shock ot the system that pushes the unemployment rate up to put a dent in spending.
The latest Challenger report shows that U.S. companies announced 172,000 job cuts in February. That’s up 245% from the previous month. It’s the highest number since July 2020. And DOGE accounts for about a third of them.
I’ve seen estimates that up to 500,000 government employees could get the ax this year (80,000 layoffs from Veteran Affairs (VA) were announced yesterday).
Now I know government employees are a popular target. There’s clearly bloat in government spending, might as well fire a bunch of firefighters and park rangers. The $40 billion or so that DOGE has cut in federal spending so far is literally a drop in the $6.7 trillion government spending bucket. The effect on the deficit is minimal. But the effect on consumer spending is a different story…
Throw in the tariffs, and it starts to look like a shock to the system.
You don’t have to take my word for it. Or the Fed’s. You’re an investor, you can see what’s going on in the stock market. Walmart is down 10% over the last couple of weeks. Cruise operator Royal Caribbean is down 20% in a month. Shares of casino operator Caesar’s Entertainment are at 5-year lows.
Stocks are telling us loud and clear that the virtuous liquidity cycle is under threat.
The EU Counterpoint
The counterpoint coming from the EU is one of the most vivid I’ve ever seen. It’s no secret that EU economies have lagged behind the US for at least 20 years now. Countries aren’t allowed to raise debt for spending that could make their economies more dynamic, regulations are onerous – the EU has muddled along, and its stock markets perpetually trade at a big discount to the U.S…
It always makes me laugh when every year or two some strategist-type comes out recommending EU stocks because of that discount. Because again, valuations don’t make stock prices move higher, liquidity does that. And the EU never has that virtuous liquidity cycle going…
But that may be changing. Germany is rewriting its constitution right now so it can invest more in defense. The EU as a whole is doing the same thing. The UK BAE Systems is up 35% in the last few weeks. Eutelsat is a satellite company that Italy is considering as an alternative to Starlink for its secure comms network. Its shares have run 400% higher this week…
I will say it is weird to see European stocks cooking higher while US stocks are in the tank.
And I understand that the EU is rallying because of the Trump administration’s actions on Ukraine. But don’t forget 70% of the $150 billion in aid the U.S. has provided to Ukraine has been spent in the U.S., helping our own virtuous liquidity cycle. The EU won’t be eager to spend their newfound defense funds with U.S. companies – many of which are in your S&P Index Funds – though years of neglect to their own defense industry probably makes it a neccessity.
A quick follow-on to the huge run from Eutelsat, we’ve talked a couple times about satellite comms company AST Spacemobile (ASTS). Hammer told you about the company’s contract deal with Vodafone yesterday. Given the news that Italy (and Ontario) do not want to deal with Starlink, AST could potentially fill that void in Europe.
Its focus is on cellphone service right now, but that could easily expand to internet service as well, if the contracts are there. I recommended it to you on January 23, even with today’s drop, that’s a 66% gain…
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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