The three-week rally in equities has been both impressive and relentless, taking the S&P 500 to 11-week highs (up +9.6% in the last three weeks) and within 6% of all-time highs.  Leading the charge last week was the Russell 2000 (up +5.48%).  Why?  I don’t know; maybe a catch-up trade into year-end, a massive short squeeze as this was the area of the market investors were leaning on, or perhaps boredom - so why not buy everything?  In addition to small caps, the S&P 500 gained +2.31%, the Nasdaq Composite rallied +2.43%, the Dow rose +2.03% and the MSCI ACWI ex-USA ripped +4.01% - no doubt aided and abetted by a U.S. dollar that plunged -1.81%.  Bonds rallied across the curve as incoming data continues to support a Fed that is stepping to the sidelines after the most aggressive tightening cycle in the last four decades.  With both yields and the dollar sliding, gold rose by +2.51% over the week and is once again making another push for the $2,000/oz level.

Keep an eye on the 4,520 level on the S&P 500 which is a key resistance level.  A sustained break above this level should only further embolden the bulls.  My best guess on the near-term is that the majority of the year-end move has already taken place.  Yes, seasonality is and will remain a tailwind that either provides support or nudges asset prices a bit higher, but we all know that too much of a good thing is bad. The S&P 500 and Russell 2000 are already up 8% on the month while the Nasdaq is up more than 10% - a further rise from here without consolidation would be no different than how overdone things were on the downside at the end of October.  Another structural variable to note is the large JP Morgan quarterly collar that is short an S&P 500 call at the 4,515 level (expiring on 12/29) which should function as an anchor for the S&P 500 in both directions into year-end. 

As for the outlook into 2024, it depends on how the data unfolds and whether the ‘soft landing’ that is already priced into equities becomes a reality or the underpriced ‘hard landing’ gains steam.  I lean in the direction of the ‘hard landing’ camp and even more so from a market pricing standpoint as that outcome has been meaningfully priced out.  Nevertheless, I am fine with taking a page out of the Fed’s playbook and being ‘data dependent’.  Sure, we have our views based upon our analysis, but most forward-looking models have been repeatedly upended this year by the resilience in the U.S. economy.  So, the best strategy continues to be one that has both patience and flexibility.  Afterall, the S&P 500 P/E multiple is pushing back up near the 19x level which is at the high end of the range over the past two decades – not an enticing level to be loaded to the gills with risk. 

As for the bond market, even with the move lower in yields since late-October, its setup is more favorable than the equity market going into 2024.  Looking back at the last six tightening cycles, once the Fed has stopped hiking for five months following a sustained period of hikes, they are done.  The next move is a cut which on average follows the last hike (July) by an average of ten months.  This puts a big bullseye on the May/June time frame if history is a guide. 

This timing makes sense in the context of the interlink between business and policy cycles.  The purpose of the tightening cycle is to slow growth, weaken the labor market, and tamp down inflation.  History shows that inevitably the tightening works (otherwise why would they still be doing it?) and the lagged impacts of this tightening cycle will be felt in full as we head into year three of this tightening campaign (first hike was in March 2022).  With cuts rather than hikes becoming the most probable next move from the Fed and Treasury yields near their highest levels in two decades, the setup for the bond market is the most favorable it has been in a long time.    

Not once in this phase from the last hike to the first cut has the Treasury market ever lost you money and bond yields have fallen 100% of the time.  The average decline in the 10-year T-note is roughly -90 basis points (the fun really begins once the cuts start… the pause stage is just the appetizer) with the mean total return at roughly +10%.  The last Fed hike was on July 26th with the yield at that time on the 10-year Treasury note yield sitting at 3.86%.  Do the math and history tells you we should be heading to 3% by May of next year.

Shifting gears to the energy market and a subject area that I’ve become quite fond of, I’m going to piggyback on some of the recent work I came across from Mike Green and Simplify ETF’s.  In a recent “Keeping it Simple” podcast Mike Green and Harley Bassman interviewed Erik Townsend (Erik is “Going Nuclear”) where they covered a lot of ground in the energy space with a special focus on nuclear power.  I first got turned on to the nuclear power industry back in late-2017/early-2018 as a possible investment opportunity.  As I began to dig into the industry the investment opportunity became as obvious and simple as any I’ve ever uncovered in my career.  Should the existing global nuclear reactor fleet remain constant (it didn’t even need to grow) there was going to be a shortage of uranium within the next five years (this was back in 2018).  Should the reactor fleet grow then the demand was going to even more intensely swamp constrained supply.  I don’t want to imply that navigating the ups and downs of this thesis was easy or a guarantee – far from it as it carried significant risks – but the asymmetry in the opportunity should it play out as I suspected, made it a once in a career opportunity. 

Back then, sentiment was bombed out, the industry was still saddled with the aftershocks of the Fukushima meltdown in 2011, and the number of viable uranium mining suppliers (fuel that goes into reactors) was decimated.  From a policy standpoint, the focus and support for carbon friendly energy supply was solely focused on alternative energy sources like wind, solar, and hydrogen with nuclear barely even mentioned in the conversation. 

But the math behind the supply/demand fundamentals in the uranium space just to maintain existing nuclear reactors around the globe suggested that the price of uranium had to move higher because there just was not going to be enough uranium coming out of the ground.  I’ll save you the effort of regurgitating the entire investment thesis, but the investment results over the past five years are likely to come as a surprise to anyone unfamiliar with this opportunity. 

In the below table I compiled the total returns over a 12-month, 3-year, and 5-year time period ending on 11/17/2023 of some of the largest and most well-known household names in the equity space.  I also included the S&P 500 and Nasdaq as I wanted to compare the performance of Cameco (CCJ) – the largest uranium mining company traded on U.S. exchanges – to see how they stacked up.  There are other uranium mining companies that could have been used, just as there are other indices or companies that could have been included in the list – the point is to provide perspective and general context.

In this non-exhaustive list of investments, the only companies to outperform Cameco (+86.77%) over the past 12-months was Nvidia (+210.04%) and Meta (+195.89%) while the S&P 500 and Nasdaq gained +15.81% and +36.16%, respectively.  Over the past three years Cameco (+372.86%) is by far and away the best performer in this list with Nvidia more than 100% behind (+265.64) as the S&P 500 and Nasdaq gained 30.04% and 36.16%, respectively.  On a 5-year total return basis Nvidia puts everyone to shame with its 1,109.76% gain, followed by Apple (+308.49%), and then Cameco (284.86%) with the S&P 500 and Nasdaq returning 79.15% and 138.65% respectively.  I’m willing to bet very few people would believe you if you told them that a stodgy, washed up, left for dead mining company in a dying industry would have generated a better return over the past 12-months, 3-years, and 5-years than Microsoft, Alphabet, Amazon, Netflix, Meta, Berkshire Hathaway, JP Morgan, UnitedHealth Group, the S&P 500, and the Nasdaq. 

My reasoning for pointing out these results is twofold – get your attention and raise awareness.  You see, in all the research I’ve done on nuclear power over the last five years I’ve come to understand that most world leaders have civilization moving down a path of regression, not progression when it comes to energy policy.  In the words of Doomberg, “energy is life” and the reason civilization has grown and prospered over time is through the increased optimization of energy.  Moving from burning dung and wood in the early settlement years to then more dense forms of energy via coal, oil, natural gas, hydrogen, nuclear, and eventually scalable alternatives (wind and solar).  Yes, there are definitely trade offs that come with the use of such resources especially as it pertains to the environment.  But I sit here today knowing that we have the best of both worlds in the form of nuclear power, but for some reason we find every excuse in the book not to use it.  The crazy thing is that the technology to harness nuclear fission was invented over seventy years ago and yet public opinion remains fixated on its military and destructive qualities rather than its efficiency and unparalleled power capabilities.  It makes no sense.  If nuclear power was invented today, it would make AI seem like an afterthought.  Imagine what could be accomplished with an abundance of efficient, carbon free, and low-cost energy.

Mike Green (yes him again, you’re likely thinking I’m developing a crush – you’re wouldn’t be wrong) penned a piece over the weekend as a follow up to his podcast, “Is the Age of Deprivation Coming to a Close?”, unfortunately its behind a paywall – but here is the summary:

1. There is a strong correlation Between Wealth and Energy use: A future with greater material comfort will inevitably require more energy consumption. The slow progress in developing more efficient energy sources has hampered economic development while conventional fossil fuel, solar and wind CANNOT provide for the transition.

2. Critique of Current Energy Solutions: Policy in the energy sector focuses on creating products that are marginally better than existing ones rather than making revolutionary improvements. This approach has led to the stagnation of true innovation in the energy field, as seen in the limited progress with alternative energy sources like solar and wind.

3. Nuclear is the solution: Improved living standards require increased energy consumption. Nuclear power offers significantly higher energy density, essential for future advancements in various sectors, including agriculture, water management, recycling, transportation, and computing.

4. Nuclear is inevitable: This transition is viewed as inevitable due to the vast potential of nuclear power compared to traditional sources. The current political and societal reluctance to embrace nuclear energy requires a more informed public dialogue on energy solutions. And the risk for America is that others do it first.

It’s great to see the societal benefits of nuclear becoming more prevalent in the mainstream media and being promoted by influencers that’s reach is much larger than mine.  But we can all do more, and I encourage anyone reading this missive to take this a step further in the interest of making a difference for future generations.  Mike has made it easy for all of us (see below) all we have to do is take a couple minutes out of our busy lives to follow his lead – not a big ask.   

“I’m asking my readers to be inspired by the potential. Write a letter to your elected representatives encouraging them to support the rebirth of nuclear power (I’ve made it easy for you. Here’s a form letter. And here’s how to find your elected representative and senators). While there are VERY few legitimate investment opportunities in the public markets currently, the reason is largely due to government intransigence. If we can change that resistance to support, then the opportunities are going to emerge.”

“Low-cost and, more importantly, abundant energy makes it all possible. 3-D printed houses; clean rivers and lakes; robots and AI; cheap & universal healthcare and education; etc, etc etc. When you hear the phrase, “the carrying capacity of the earth…” recognize that those are absurd statements predicated on a total failure to understand technological potential driven by improvements in energy density.”

If we want things to change then we have to do something about it and we all have that power to get involved.  None of us ‘have to’ do anything, that’s a luxury that’s become very easy to take for granted.  Please understand that I’m not preaching, but rather just trying to help educate, inform, and provide the breadcrumbs for those interested in having an impact. 

I will not be penning a missive next week as I will be traveling for the Thanksgiving holiday.  Thank you all for taking the time each week to read my scribbles and from our family to yours, have a safe and Happy Holiday.

The articles and opinions in "Capital Market Musings and Commentary" are for general information only, and not intended to provide specific investment advice. Performance, dividends and other figures have been obtained from sources believed reliable but have not been audited and cannot be guaranteed. Past performance does not ensure future results. Investing inherently contains risk including loss of principle. Advisory services offered through Casilio Leitch Investments, an SEC registered investment advisor.

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