Juggling Dynamite

Unlike bonds, equities offer no return of principal dates nor contractually prescribed income payments. Contrary to the investment sales hype bombarding us daily, dividend-paying equities are not capital ‘defensive.’ Defensive for whom, we should ask.

From present valuation levels, equities are priced to underperform government bonds by 6.5% annualized over the next ten years (see arrow below, courtesy of John Hussman):

“…the gap in expected returns between equities and bonds has joined the worst levels in history, matched only by extremes in mid-1929 and early-2000.” https://hussmanfunds.com/comment/mc2310

Komal Sri-Kumar, Sri-Kumar Global Strategies president, joins ‘Closing Bell: Overtime’ to discuss the impact of the Israel-Hamas war on inflation, what this means for fixed income returns, and more. Here is a direct video link.

Leverage on leverage on leverage, who would have thought?

John Fincham, broker at Re/Max Parry Sound Muskoka Realty, joins BNN Bloomberg to discuss the Ontario cottage market. He says that many cottage owners who bought during the pandemic are now struggling to unload those properties. And as interest rates drive down prices he says cottages located on less popular lakes and listed under $1.5 million dollars could drop by 30% in value in 2024. Here is a direct video link.

Also see: Pandemic Buyers Struggling to Unload Cottages.

As for the fantasy that “rich” Torontoians are not affected by higher interest rates and falling property prices, wait for it: Mortgage defaults and forced home sales now starting to rise in Toronto.

Meanwhile, commercial real estate sales volume (across all property types shown below since 2001) has fallen to the lowest level in 13 years.
And the downdraft is global; see Paris Commercial Property Deals Hit Lowest Levels in 13 years:

Property markets across Europe have ground to a halt as rising rates have increased financing costs and hit valuations. But owners are reluctant to lower their expectations after a decade of rising prices, creating wide divergence between prospective buyers and sellers.

The economically-sensitive Russell 2000 stock index (RUT) has given back all of its early 2023 rebound and is now negative year to date, -29% from its cycle peak in October 2021 and just 1% higher than where it was in August 2018.

The more concentrated US small-cap 600 index (SML in green below since April 2019, courtesy of my partner Cory Venable) is 20% lower than its November 1, 2021 cycle peak and 2.8% higher than five years ago. Small-cap indices typically lead the economy and the large-cap S&P 500 index (below in red).

Under the surface, 98% of S&P 500 stocks are indeed following the small-cap lead. Four hundred and ninety-three (black line below, courtesy of Apollo Global Management) are flat year to date. Just the seven most expensive companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms) have rebounded to lower highs (green line below).

It has been wisely observed that markets are most vulnerable when narrow. The much-hyped ‘magnificent seven’ presently comprise a freakish 29% of the S&P 500 market capitalization, a concentration rivalled only near the March 2000 tech-wreck top.

For those betting that last October was the low for stocks this cycle, it bears noting that the equal-weighted S&P 500 index outperformed the market-cap-weighted S&P 500 coming out of the market bottoms in 2002 and 2009, and no such lead is evident thus far. The case for capital protection looms large.