We will be giving some macro-economic market updates on a weekly basis. No equity recommendations will be given in this commentary and we encourage you to contact us if you have questions regarding our observations.

 

BEACONS OF THE WEEK

The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.

Lighthouse Faro Chúa, San Pablo de Tiquina, Bolivia

This lighthouse stands at 33 feet tall on the side of a mountain top. The lighthouse is one of the highest lighthouses sitting at an altitude of 3,870m.

Shelter Cove’s Cape Mendocino Lighthouse, California

Cape Mendocino Light was a navigation light at Cape Mendocino, California. The former lighthouse was relocated to Shelter Cove near Point Delgada, California in 1998. The lighthouse was automated in 1951 and stands at 43 feet tall.

*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *

The ultra bull

Market strategist and Wall Street veteran Edward Yardeni made some bold predictions on Monday that caught the attention of many investors including one of our analysts. Yardeni calls for the S&P 500 to reach 10,000 by the decade’s end. He raised his index price targets over last weekend after a Trump victory. He said he expects the party to continue across equity markets and that “animal spirits are back” and will fuel the market.

Yardeni also cited corporate tax cuts, increased productivity, and deregulation as reasons for his revised price targets. Yardeni also said he expects margins to expand over the next few years.

In the near term, Yardeni expects the S&P 500 to hit 6,100 by year-end, and 7,000 by the end of next year.

The market benchmark has been on fire even without Trump. The S&P 500 has closed at a record high 51 times so far in 2024. Since 1954, the S&P 500 has averaged 18 record closes.

Overall, Yardeni said he expects consumer and business optimism and sentiment to increase during a second Trump Presidency.

 

New government department

President-elect Donald Trump announced a new department in the Federal Government on Tuesday. The newly launched department and its goals have been a focus for Trump and his allies in recent months. The new Department of Government Efficiency (DOGE) will be led by Elon Musk and Vivek Ramaswamy, two of Trump’s closest allies. Musk has long said that government waste is unsustainable and that he could cut the government’s budget significantly without impacting consumers or efficiency. We will say that it is ironic that a department of efficiency has a leadership system with two leaders, not very efficient if you ask us.

The announcement from Trump highlighted some of the department’s objectives which include dismantling government bureaucracy, slashing excess regulation, and restructuring Federal agencies.

Originally Musk’s shareholders liked this announcement, however, shares quickly lost their gains on Tuesday morning. Perhaps, shareholders are worried over Musk’s focus and time management as he already runs Tesla, SpaceX, Twitter (X), and now this government agency—quite the workload for the world’s richest man. We do not think investors will bet against Musk (we think that is a losing strategy that could blow up in your face). However, it is worth noting that Tesla shares severely underperformed indices when Musk originally bought Twitter and his focus was primarily on free speech advocation and the social media platform.

The new department’s work is slated to wrap up by July 4th, 2026, so it will be a dash to cut spending and increase efficiency for Musk and Ramaswamy. Both men are highly familiar with leading successful companies and can more than likely sniff out the fat in the federal government. Regardless of your thoughts on Musk, we think he will figure the government out, after all, he understands rockets and electric vehicles.

Before you ask: “Why do we need a DOGE?” Look at the chart below and its growth, it tracks the total amount of U.S. government workers. Almost 24 million are employed by the government, quite the count!

This new initiative shows how much influence Musk will have on the White House moving forward. Tesla will certainly not be left out of an EV conference or credit program under this administration. It also leaves the potential for Trump to fast-track approval for autonomous technologies and AI initiatives during his presidency.

Trump’s victory has already made Musk a huge winner in recent days. Before Tuesday, Tesla shares were up 5 days in a row for a total of 44%. This is Tesla’s best four-day run since March 2020. The run Tesla shares have gone on has expanded Musk’s lead as the world’s richest man. Musk is now worth north of $300 billion and according to The Forbes Real Time Billionaires List, he is worth $76.7 billion more than the world’s second richest man, Larry Ellison. $76.7 billion would make you the world’s 20th richest person and you would be richer than David Thomson and family, Charles Koch and family, Ken Griffin, as well as many others.

Tesla shares are up 38% year-to-date.

 

All in on nuclear

The Biden Administration made an announcement on Tuesday which caught our eyes. The outgoing administration unveiled plans to triple nuclear power generation by 2050 as demand for nuclear energy continues to soar and the shift toward cleaner energy generation continues. Biden’s White House aims to see capacity rise by 200 gigawatts by mid-century through the construction of new reactors, plant restarts, and upgrades to existing facilities.

The Trump administration has also been pro-nuclear in its election platform and is interested in expanding the grid’s dependence on nuclear energy. Trump has said new reactors could supply electricity to energy-hungry data centers and factories. Trump ally, and renewable energy expert Elon Musk has also revealed himself recently to be in favor of nuclear energy.

According to BloombergNEF, nuclear energy currently accounts for 100.6 gigawatts of electricity generation capacity in the U.S. Nucler energy lags behind both renewable sources and fossil fuels in terms of capacity.

It is not just the government that is supporting these nuclear initiatives. Large technology enterprises have struck deals to secure nuclear energy supplies for their data centers moving forward.

This announcement by Biden comes as the world converges for COP29 in Azerbaijan.

After Biden’s Administration made this announcement, the physical price of uranium jumped significantly on Tuesday. Sprott’s Physical Uranium Trust jumped 8.3% on Tuesday.

Disclaimer: MacNicol & Associates Asset Management holds Sprott’s Uranium Trust across various client accounts.

 

Secular trends

It is important to note long-term trends and to realize when they can pivot. We think we are on the precipice of a major equity market pivot.

Over the last 12-14 years U.S. equities on a relative basis trounced Emerging Market equities. Why does that matter? Historically U.S. equities and Emerging Market equities rotate which outperforms. From 1989-1994 and 1999-2010, Emerging Markets completely outperformed U.S. equities. Globalization, rapid growth rates in emerging economies, and two U.S. market downturns led to this.

We think this trend is about to rotate and that many Emerging Markets will see equity markets boom in the coming years. We are particularly bullish on India and Mexico. We think the West diversifying their supply chains away from China will benefit India and other nations in Asia. The nearshoring that is underway by U.S. companies will benefit the Mexican economy over the next few years.

We do not think you should solely invest in Emerging Markets and ignore U.S. markets moving forward but believe all investors should have at least some exposure to Emerging Markets, especially at this current moment.

 

The impact of tariffs

A lot has been said regarding Trump’s plan to increase tariffs on foreign corporations. He says this will lead American firms to move operations domestically or force them to buy American. In October, he said at the Economic Club of Chicago that “the most beautiful word in the dictionary is tariff”. Most of the details on his tariff plans are not available. However, Trump campaigned on a 60% tariff for Chinese imports and a 10-20% global tariff.

Over the last year, the U.S. has imported $4 trillion worth of goods and services, $433 billion from China. The costs initially of these tariffs would more than likely be passed along to consumers. However, down the road, it is meant to strengthen the domestic economy, rotate trade with other nations, and weaken its dependence on China. Trump has long critiqued American politicians and corporations for selling out to China. He is also highly critical of the CCP and the ruling class in China. In his first Presidential term, he introduced tariffs on Chinese goods. The tariffs were universally approved by Americans and Biden increased some of those tariffs over the last few years. These tariffs were approved as they were directed at select industries in high technology areas. Trump’s new platform is general and will impact all goods and the tariffs are much higher this time around.

For example, the U.S. imported $42 billion worth of smartphones from China over the last year. That is approximately a tenth of the U.S.’s total Chinese imports. The 60% tariff will impact smartphone prices massively as over 80% of smartphone imports in the U.S. come from China and there is no substantial production in the U.S. for smartphones. Apple sources most of their iPhones from China and they own 57% of the U.S. mobile market. Ultimately, roughly 45%-50% of the cost of an iPhone is imported content. A 60% tariff on the imported portion of the price would therefore come to a tax on Apple of roughly $216 to $240 per iPhone 16, an effective rate of 27% to 30%.

We would expect many consumers to notice this price jump for a new phone. We would also assume that many may forego upgrading their device which could slow or decrease Apple’s sales. Apple was impacted by Trump’s tariffs during his first term. However, a 60% tariff would need to be addressed, and Apple would be more than likely forced to increase prices or settle for lower margins on their products. Either way, we think Apple (along with some other American firms) could have some downside from here if Trump gets his way with tariffs (on Chinese products).

According to Barron’s, Vietnamese exports to the U.S. have increased 170% since Trump’s original tariffs were put in place. This shows how capital and sourcing products rotate out of unfavorable jurisdictions like China and into friendlier jurisdictions. Apple along with many other Western firms is investing in India to increase production away from China. We think these strategic moves by companies will continue and they will divest away from China as the decoupling of the East and West accelerates.

 

Pricey times

After the recent run-up across markets, the S&P 500 is now trading at its highest cyclically adjusted price-to-earnings ratio since 2000.

It’s an expensive time for equity investors. These sky-high valuations point us to value stocks, physical precious metals like gold, silver and platinum and some downside protection which we have exposed our investors to at this current moment. We think there is elevated risk across equity markets at this point which is why we have been proactive in adding physical precious metal exposure over the last few quarters as well as our newly launched Safe Harbour Fund which protects investors against market downturns and volatility spikes. Email us today if you have any questions regarding the Safe Harbour Fund, the fund can be held in any type of account and is available on numerous platforms for planners.

 

 

MacNicol & Associates Asset Management                                                             

November 15, 2024

 

Click here for the PDF: The Weekly Beacon November 15 2024 US