October 29, 2021

I got my Happy Halloween present last night.  I want to thank all of my Green Bay Packer friends for saving my football season. See, as a life long Miami Dolphin fan, there has been only one thing to look forward to in the last 20 years, and that’s when the last undefeated team goes down. Last night’s game went down to the final seconds, but Green Bay pulled out the victory against the undefeated Cardinals. Speaking of Trick or Treating, Janet Yellen says the new Build Back Better Spending Bill, which is now only a mere $1.75 trillion, is actually non-inflationary. Is this a trick or a treat? Really? Inflation today just notched a fresh, 30-year high, but somehow adding another honey pot of money is magically not going to impact inflation? The good news is that my friend “Brandon” says that this spending bill is free and already paid for. If that’s the case, why not go big or stay at home? Another freebee that got my attention this week is that the current administration is considering offering $450,000 in reparations for immigrants that were separated while crossing our southern border illegally. Wow, we didn’t even provide that benefit to our family and friends killed in the attacks on 9/11.

Moving on, I don’t know if you saw this week that Tesla has passed $1 trillion in market valuation. It is insane that we offer tax payer-funded credits to Tesla for cars that the average American can’t afford. In addition to this, does dysfunctional Congress understand that you just can’t plug your Tesla into your home outlet at night? Well, actually you can with a converter, but it’s going to take you four full days to charge your car. If you charge your car overnight, you are going to get a full four miles for your next day. Only 63 percent of homes in the US have garages or carports, which means we are going to have to build out infrastructure for the electric vehicle market. What will our apartment and condo dwellers do? Maybe before we put the cart before the horse, we should understand what it’s going to take and cost for electric vehicles to become mainstream. My “treat” for you this Halloween— you might have seen that Facebook changed its company name this week to Meta. This is like an episode of Star Trek the Next Generation. Maybe Mark Zuckerberg should have thought this name through a little bit better— I saw on the “interweb” today that Meta actually stands for Make Everything Trump Again.  Happy Halloween!

 Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Initial Jobless Claims once again set a new pandemic low, coming in at 281,000. While this is still historically high, it is the continuation of a declining trend since last summer. However, is it declining because people are gaining employment, or is it declining because people are giving up on searching for work and leaving the labor force? That remains to be seen.

The three major indices all have handily recaptured their 50-day moving average, with all three at least two percent above this indicator. This further confirms the incline following the pullback from September.

The CBOE Equity Put/Call Ratio, a sentiment indicator that compares the number of put options being purchased (bearish) to the number of call options being purchased (bullish), had its lowest reading since mid-June at 0.36, implying strong bullish sentiment amongst investors.

Market Seasonality

One of the most underappreciated traits of successful investors is the ability to set realistic expectations. Whether it is the frequency of market corrections or historic market performance, having realistic expectations allows investors to avoid the two most dangerous emotions of investing: greed and fear. Today, we will discuss the seasonality of the stock market, and how it tends to affect market returns.

Market seasonality, also known as the “Halloween Effect”, refers to the unique market phenomenon that involves the stock market having a historically “strong” six months and a historically “weak” six months. The strong season refers to the period of November through April, whereas the weak season refers to the period of May through October. Since 1950, the market’s strong season has averaged a return of 7.16%, whereas the weak season has averaged a modest return of 1.67%. Since 2000, the market’s strong season has averaged a return of 5.23%, whereas the weak season once again lagged significantly with an average return of 1.09%.

Surprisingly, there has yet to be a conclusive reason for this consistent occurrence in the market. While there are multiple theories behind this phenomenon, one of the most prominent ideas simply has to do with investor psychology. As the year begins to wind down and we head into the holiday season, investors tend to renew their optimism towards their investments and the new year in general. In the same way that an overly ambitious New Year’s resolution fades after a few months, the reality of the new year tends to set in for investors by the time summer comes around. This reality check coupled with summer vacationing has caused some analysts to suggest that this diminished investor involvement and optimism may be the cause for the lull during the weak season.

Now, you may be asking yourself, “does this mean I should only invest from November to April, and then sell my investments in May?” Well, not exactly. If you were to buy the S&P 500 in May 1950 and only own it during the weak seasons, you would have a gain of 140% as of today. Conversely, if you only owned the S&P 500 during the strong seasons over the same timeframe, you would have seen a return of 9,683%, a significant difference. However, if you were to simply buy and hold the S&P 500 from May 1950 to the present, you would have seen a return of $23,349%!

In short, while the strong season significantly outperforms the weak season, the weak season also produces a positive return on average. With this in mind, you are able to have realistic expectations for your investments whenever a seasonal market lull occurs.

Market indices

Year-to-date returns

Large  Cap indices

S&P 500:                                      22.37%

Dow Jones Industrial Average:    16.47%

Nasdaq-100:                      22.42%

Mid and Small Cap indices

S&P 400 (Mid Cap):                                 21.10%

S&P 600: (Small Cap):                             23.22%

Russell 2000:                                16.36%

International indices

MSCI EAFE Developed Index:         9.64%

MSCI Emerging Markets:               -1.18%

MSCI ACWI ex-US:                                   7.26%

Economic sector indices

Basic Materials:                              17.86%

Communication Services:            22.95%

Consumer Discretionary:             21.77%

Consumer Staples:                         6.56%

Energy:                                            53.46%

Financials:                                      37.02%

Healthcare:                                     16.67%

Industrials:                                     17.84%

Real Estate:                                    32.71%

Technology:                                    23.28%

Utilities:                                             7.18%

TESLA: The Future of EV?

To say that Tesla’s stock price is not based on today’s fundamentals is an understatement. In June 2020, Tesla surpassed Toyota as the largest car manufacturer in terms of market cap, which is simply the stock prices multiplied by the number of shares outstanding. Last Friday, Tesla made its most notable move yet, surpassing Facebook as the fifth-largest U.S. company in terms of market cap. For comparison’s sake, Toyota and Facebook had revenue of $248 billion and $86 billion in 2020, respectively, while Tesla had $32 billion in revenue. Also, Toyota sold over 9.5 million vehicles in 2020, while Tesla sold just under 500,000; for perspective, that is a market cap-per-vehicle-sold of roughly $30,000 for Toyota and $2.1 million for Tesla. In short, Tesla’s current stock price is dramatically being influenced by future expectations for the company and its industry as a whole.

Another aspect of Tesla’s to consider is how regulatory credits have affected its profitability. Regulatory credits are credits received from the government to incentivize certain industries- in this case, electric vehicles, or EVs. One way in which Tesla has made money has been by selling these regulatory credits to other car manufacturers who purchase the credits as insurance against future regulatory uncertainties. Prior to the past two quarters, Tesla had not had a profit when disregarding their regulatory credit revenue, meaning that the profits that earned Tesla a spot in the S&P 500 were due to their regulatory credits and not organic growth.

Still, Wall Street and everyday investors alike continue to maintain their best-case scenario valuation for Tesla. However, we believe there may be two causes of reflection for investors: increasing competition amongst the old guard of car manufacturers, and the costs and infrastructure required for EVs to become mainstream.

While Tesla has become the face of EVs and autonomous vehicles, the familiar names in the car manufacturing industry seem poised to throw their hats in the ring. General Motors CEO Mary Barra recently commented that GM can “absolutely” catch Tesla in U.S. EV sales by 2025, in part due to the construction of a $2.4 billion EV facility being built in Tennessee. Also, GM has already announced deals with FedEx and Verizon to provide an electric fleet for both companies, entering the commercial EV business before Tesla has had a chance to enter this space. Additionally, Ford announced earlier this year that they would be releasing an electric F-150 to maintain their market share on pickup trucks as the industry evolves. Speaking of market share, business analytics company IHS Markit projects Tesla’s market share of the EV industry to drop from 79% in 2020 to 56% in 2021, and all the way down to 20% by 2025. In short, Tesla’s virtual EV monopoly seems poised to face plenty of competition in the near future.

Finally, while a transition to EVs as a society would be a step in the right direction, the costs and infrastructure required to make this a reality remains a roadblock for companies like Tesla. Depending on the size of your EV’s battery and the quality of your charging station, the time required to charge an EV today can be anywhere from 30 minutes to 12 hours. If you have a charging station at your home, then the charge requiring a few hours isn’t a big deal. However, this would be a real hassle for anyone who lives in apartments or can’t afford an at-home charging port; if they have to go to a public charging station, what happens if the charge takes a few hours, or if there is a line to use the charger? At this point in time, our infrastructure isn’t prepared to handle that kind of demand. Regarding costs, while charging an EV is notably cheaper than gasoline on average, mounting a personal, at-home charging station can cost anywhere between $1,500 and $4,500. While EV owners today may expect to pay a premium for their vehicle, including the current costs of installation for a personal charging station may price out would-be EV owners.

Despite the increasing competition and infrastructure questions, the market continues to price Tesla for a perfect future. From this valuation, we can assume that the market is viewing Tesla in a different light: instead of being a car manufacturer, perhaps the market is viewing Tesla as a technology company, envisioning a future focused on EV software and EV battery innovation. Whatever the case may be, it will be interesting to see how both the EV industry and Tesla’s valuation evolve over the next few years.

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor