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Friday Patient Charts

The Dow Jones Industrial Average hit 40,000 for the first time this week, which may not mean anything to you because the Dow is an antiquated index that you shouldn’t pay any attention to. But it does mean something to me, because I distinctly remember the day it hit 4,000.

It was my first year on a trading desk, 1995, and when a veteran salesman rhetorically asked, “Why would anyone ever buy the Dow at 4,000,” I couldn’t think of a response other than, “Yeah, why would they?” 

Well, this is why: To be successful as an investor, all you really need is time.

Yes, stocks are expensive, but they were expensive in 1995 too, just as they were at every other all-time high.

So far, it’s always worked out.

That’s because, given time, stocks naturally get cheaper as companies (in the aggregate) make more money, more efficiently.

Microsoft is expensive now at 36x P/E, sure, but its $420 share price will probably look as incomprehensibly cheap to people in 2055 as Microsoft’s 1995 share price of $4 looks to people today.

Four dollars!

I take this as a helpful reminder that today’s expensive prices often become tomorrow’s bargains.

It may also be helpful to think about things in the other direction too.

Imagine someone in 1995 looking at this week’s news on OpenAI’s AI tutors and Google’s AI assistants — they’d have thought it was science fiction, I’m sure.

But however incomprehensible today’s technology would have seemed to an observer in 1995, I’m confident that a sneak peak at the technology from 2055 would be even more incomprehensible to us today.

If you gave me a sneak peak of the Dow Jones Industrial Average of 2055, however, I’d be disappointed to learn it was anything less than 400,000.

That’s a long way off, of course, and our patience as investors will be tested many times between now and then, so we'll have to stay vigilant in the meantime.

Let’s check the charts to see if there’s anything to be impatient about.

Mission accomplished?  

Moody’s says so, yes. On a “harmonized” basis (ex-housing, basically), US inflation is already back to the Fed’s 2% target.

Unharmonized:

If you’re not willing to exclude housing from the inflation data, you might worry about the little uptick in the services component of CPI. Unfortunately, the Fed seems unwilling to exclude housing. Fed President Kashkari said this week that he wasn’t ready to “jump to any conclusions" about underlying inflation trends.

How to deflate housing:

Housing starts disappointed again this week, failing to meet expectations of a much needed rebound in residential. The best way to lower the cost of housing is to build more of it, as demonstrated in Texas and Florida.

Utilities are the new semiconductors:

The US utilities sector has rallied 13% in a month and is now outpacing the S&P by three percentage points on the year. This is weird because utilities generally only outperform on the way down, when investors are seeking safety. Now, though, investors are starting to think about how much power AI is going to consume in coming years. That might make utilities “the best AI play out there,” according to HX Research.   

Everyone wants to be an AI play.

If this was a stock, I’d buy it.

Running it back:

GameStop shares are finishing the week about where they finished last week, but let’s not forget that they tripled in between. This chart on trading volume shows just how much of an outlier that was.

It’s mostly a US thing:

The FTSE All-world ex-US index is up just 17% over the past 10 years, vs. the S&P 500 up 181% — a reminder that passive investors need to actively think about the index of stocks they are buying (passively).

Yes, they’re expensive:

The S&P 500 is now trading at 30x free cash flow. That is no bargain, of course, so it would be no surprise if equities were soon testing our patience. 

The Wall Street Journal noted this morning that “investors have rarely had it this good” and that’s always a short-term danger sign.

But in the long-term, we’ll almost certainly have it better.

Have a great weekend, long-term readers.

― Byron Gilliam

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Picking Winners: Time To Be Bullish?

As markets continue to chop sideways, we discuss how now is the time to consolidate your portfolio into high conviction bets & what to expect in the coming weeks on the back of a bullish CPI print that gave resurgence to an otherwise sleepy market.

Watch or listen to 1000x on YouTube, Spotify or Apple.