You might be surprised to learn which wealth class is parked in cash...
Intuitively, you might say it's the low- and lower-middle class – those without much exposure to stocks. But the data shows the opposite. And this could fuel a big bull trend in general and in certain sectors starting soon.
Check out this chart of the allocation to money-market assets – a proxy for risk-free yield – by income percentile:
(All credit to contributing editor Lucas Downey on this one for scraping the data together.)
Turns out, the bottom half of wealth in the country owns almost no money-market assets – 1% of the total allocation.
Meanwhile, the top 10% of earners in the U.S. hold more than 76% of all money markets. The top 1% alone owns more than a third.
At the same time, the growth in that money market exposure has more than doubled across the top 50% of earners since the start of 2022 – when the Fed's rate hiking campaign began.
What does this tell us?
Wealthy investors are savvy. They've taken advantage of the highest real risk-free yield in many years by parking cash in money markets.
Now, though, these savers face a reckoning. Interest rates are dropping, and this week's rhetoric out of the Fed suggests they'll drop quickly. Here's Federal Reserve Bank of Chicago President Austan Goolsbee on Monday, from Bloomberg:
"As we've gained confidence that we are on the path back to 2%, it's appropriate to increase our focus on the other side of the Fed's mandate — to think about risks to employment," Goolsbee outlined in talking points for a moderated Q&A event in Chicago Monday. "That likely means many more rate cuts over the next year."
Wealthy investors pay attention to remarks like this. They understand that the risk-free real rate of return they've been enjoying for the past two years is about to go away... and quickly.
So, what are they going to do?
Most likely, they're going to buy stocks. So, get bullish.
According to expert investor Eric Fry, you have until September 30th to make this imperative step. Hundreds of stocks could soon collapse 50% or more in the coming weeks, and there’s one simple tool that could help you determine an optimal time to sell everything.
Let's look at how consumer staples and energy are faring against the S&P 500...
The ratio charts of the consumer staples and energy sectors look especially interesting right now. (As a reminder, ratio charts compare one asset to another. In this case, we're seeing how each sector is performing against the S&P 500.)
Below is the staples chart. Since the start of 2023, when it started to become clear the previous bear market was over, staples stocks peaked at nearly one-fifth the value of the SPDR S&P 500 ETF (SPY). Since then, they've traded poorly against SPY, falling over 30% in relative value:
But take a look at how that blue line pops up above the trend line recently. Staples rose above long-term downward resistance on this ratio chart, which means they've potentially broken their downtrend.
Granted, they did surge above this resistance once before, only to collapse lower. But this time, the breakout has sustained since August and is putting in a slightly higher low this week.
That's noteworthy. And to us at TradeSmith, it suggests a rotation taking place –from sidelined cash and into the cheap and dividend-paying staples sector.
Staples currently trade at just 23x earnings, on average, and pay about a 2.5% dividend. That's compared to 1.32% dividend yield for the S&P 500, and an earnings multiple of almost 28. So, it's a good target for safe money.
Now, take a look at energy's ratio chart. Energy stocks peaked at a relative value of almost a quarter of the S&P 500 back in the fall of 2022. Since then, they've dropped as much as 38% against the benchmark:
This is a downtrend, no doubt about it. And this downtrend has had an interesting effect on energy stocks – they're super cheap and pay great yields.
Right now, the energy sector pays out an average dividend yield of nearly 3.5%. And they trade at a dirt-cheap earnings multiple of 12.
What really has me interested in energy is that chart, though. The ratio chart between energy stocks and the S&P shows a potentially bullish falling wedge pattern. When these patterns break out to the upside, it's a strong sign of a change in trend.
This chart would need to trade up near 0.17 by the end of the year for the breakout to occur. And when we look at seasonality, we can see the odds of that happening are actually quite strong.
Our TradeSmith Seasonality chart for XLE over the past 26 years shows that XLE has risen through this period 76% of the time. The average return has been about 5.6%:
To be clear, energy stocks would need to do a bit better than this to break out of the falling wedge. It could pull it off if the S&P 500 is flat for the rest of the year, but that seems unlikely.
Still, energy is cheap and paying great yields right now. If it does start to outperform stocks in a major way, you'll be happy you bought them today. And the same goes for staples.
Let's look at some other curious outperformers...
Dedicated readers will know that my big trade idea for 2024 was that foreign stocks will outperform U.S. stocks this year.
The year's not out yet, but that hasn't quite happened on the whole. As you can see in the chart below, only two key foreign markets – India (INDA, the purple line) and China (FXI, the dark red line) – have outperformed U.S. stocks:
Japan (NIKKEI, green line) has traded well, but not U.S. well. The other two economies of the classic "BRICs" group, Russia (IMOEX, light blue line) and Brazil (EWZ, the dark purple line), have lost money this year. And altogether, the ex-U.S. market – represented by the Vanguard Total International Stock Index Fund ETF (VXUS, red line) – has put up a respectable but lagging 11.69%.
So, let's talk about the elephant in the room: that dark red line suddenly shooting up to the head of the pack.
China's stock market just recently ripped over 8% on news that the Chinese government is unleashing major stimulus for its economy. Bloomberg sums it up nicely:
In what amounts to a massive adrenaline shot for an economy on the cusp of a deflationary spiral, the governor of the People's Bank of China and other top financial officials unveiled a series of easing measures that market watchers had wanted for weeks at a rare, high-level press conference on Tuesday in Beijing. They include interest-rate cuts, more cash for banks, bigger incentives to buy homes and plans to consider a stock stabilization fund.
But like an adrenaline shot, this stimulus is risky. It's aimed to reviving its shaky real-estate market by granting lower interest rates and lower down payments for new buyers. That's going to attract the wrong type of buyer, though – potentially causing a default crisis some time down the line.
China's economy has a ton of headwinds, and while this shot in the arm might give it some short-term momentum, I'm skeptical if it will be enough to reverse course.
India, however, is in a much better spot as a foreign market. Its gains have been much more stable this year. So, if you're going to be on an emerging market, India seems far more rational.
As for U.S. stocks, a global macro expert sounded the alarm bells last night...
The U.S. stock market has done great so far this year, far better than most, as we discussed. And the latest interest rate cut from the Fed – while perhaps a bit worryingly large – could juice it further.
But it never hurts to keep caution at the back of your mind.
So, just for caution's sake, let's say today's the peak. What then? Do you have an exit plan?
And even if it's not – do you have a plan to invest in the right stocks, at the right time, and avoid the rest?
If you don't have a specific "plan of attack" in mind, I urge you to watch this research presentation from Eric Fry, who partnered with our CEO Keith Kaplan last night to issue a warning message:
The way Eric sees it, there are serious economic headwinds companies have to contend with in the months and years ahead. Some of them have what it takes... but many don't, to put it bluntly.
As such, Eric feels that hundreds of stocks could collapse 50% or more from here.
Some of these stocks should be side-stepped, for now...others are simply to be avoided.
Eric and Keith showed how TradeSmith's software helps you opportunistically trade the market during both good times and bad. It helps you always avoid excess risk, build portfolios that have the potential to beat the market, and notify you when key trends are about to shift.
That way, you can take all the great research from these experts – and invest in just the right way to get up to 300% better returns on the very same ideas.
