Two more reasons I remain constructive on stocks; The SEC finally took action on QMMM; Why my parents retired in Kenya
1) Picking up where I left off in yesterday's e-mail...
Today, I'll share two more reasons why "I'm still not persuaded that we're in a bubble and a market crash is likely"...
The first is the Federal Reserve cutting rates when the S&P 500 Index was within 2% of its all-time high. This has only happened 21 times historically – and in all 21, the market has been higher a year later, by an average of 13.9%.
Here's the chart, courtesy of Carson Group last month (I came across it in my friend and former colleague Enrique Abeyta's recent Truth & Trends blog post: Melt Up Like It's 1999):
(Note that the chart is from mid-August. We now know that the S&P 500 rose nearly 20% in the year following the September 18, 2024 rate cut – thus bringing the average even higher. Barring a sharp decline, the streak will soon extend to 22 for 22, as the index is up by more than 10% since November 7, 2024.)
Enrique argues (correctly, I think) that the Fed is likely to continue cutting for two main reasons...
First, going into the most recent cut earlier this month, the federal-funds effective rate had only declined by 100 basis points (one percentage point).
That was less than one-fifth of its increase between early 2022 and mid-2023 (as you can see in this next chart Enrique referenced – from Creative Planning's Charlie Bilello). Even with the most recent rate cut this month, there's still plenty of room to cut rates further:
Secondly, Enrique argues that the Fed will need to continue cutting "to prevent the economy from slipping into a severe recession" because the economy has been propped up by massive, unsustainable tech spending.
Take a look at this chart Enrique shared in his post:
As Enrique concludes:
When people ask me what the craziest market environment I have ever seen is, I tell them it's not the Global Financial Crisis, COVID, or even September 11...
It is the 1999 melt-up in the Nasdaq.
The combination of falling rates and soaring tech spending created one of the most explosive bull markets in history.
And as Enrique argues, "the same forces are building again today":
Whether you call it a "melt up" or simply a runaway rally, the lesson is the same: fight the Fed at your own peril.
The smarter move is to recognize the setup and prepare your portfolio before it fully ignites.
Of course, if the economy tips into a recession, all bets are off...
Some folks are arguing that a recession is imminent. For example, a recent Wall Street Journal column also argues that "economic growth is slowing to a crawl"... and that "business is pulling in its horns, largely due to higher tariffs and the uncertainty of the trade war."
Take a look at this chart from the column:
But what if the Supreme Court reaffirms lower court rulings that the Trump administration can't impose tariffs under the International Emergency Economic Powers Act ("IEEPA") of 1977?
These account for 71% of the tariffs the administration has imposed this year. (For a further discussion of the tariffs, see my May 29 e-mail.)
In that case, according to this recent analysis posted by think tank RUSI:
Today's average effective tariff rate in America would drop from 17.4% to 6.8%. Inflation would moderate, with projected 2025 short-run price hikes slowing from 1.7% to 0.5%. Long-term real GDP would increase $95 billion annually.
If this happens, stocks are likely to rip higher.
Of course, this raises the question of how likely it is that the Supreme Court will rule in favor of Trump's tariffs...
Well, the real-money bettors on Polymarket think that the Supreme Court is only 43% likely to overturn the lower courts. On the flip side, that means a 57% chance of a very bullish outcome.
2) Shifting gears, I'm glad the U.S. Securities and Exchange Commission ("SEC") finally took action with something I've been warning about... but it's too late.
I'm talking about QMMM (QMMM) – an obvious pump-and-dump that I sounded the alarm on in my September 3 and September 16 e-mails.
As Bloomberg reported yesterday, the SEC halted trading in the stock.
All the naive American investors who got sucked into the stock are going to lose nearly all of their money – $6.8 billion based on the current market cap – when the stock starts trading again. Here's an excerpt from the Bloomberg article:
[The SEC said] the digital media advertising firm's stock may have been manipulated by touts on social media.
QMMM's stock has surged 959% since before the company said earlier this month that it was establishing a "diversified cryptocurrency treasury" that would initially reach $100 million and target Bitcoin, Ethereum and Solana.
And as the article continues:
In its Sept. 9 release, QMMM also said it was announcing its "strategic entry into the cryptocurrency sector," citing the use of artificial intelligence and blockchain technology.
Recommendations on social media by "unknown persons" to buy QMMM may have manipulated the share price, the SEC said Monday.
As I've been saying for years, the SEC should simply ban all Chinese companies from U.S. stock exchanges.
3) As I mentioned in yesterday's e-mail, my parents are flying home to Kenya tomorrow. In response, a number of readers asked why my parents chose to retire there...
Long story short, they met and married in the Peace Corps in the Philippines in 1962 and spent most of their careers in international development. Here's a picture of them:
My dad's specialty was U.S. government-funded educational projects – teacher training, curriculum development, etc. – in developing countries. That's why I spent more than half my childhood in Tanzania (ages 2 to 5) and Nicaragua (ages 8 to11).
After returning to the U.S. for my sister's and my teenage years, my parents moved back to Africa 30 years ago for the last two projects my dad worked on: eight years in Ethiopia and eight years in South Sudan.
For the latter, my parents were based in Kenya. There, they bought a lovely house outside the capital, Nairobi. And they built a barn for their horses, which you can see in the left of this picture:
They enjoy life in Kenya (with two to three months spent in the U.S. in the summer). So when my dad decided to retire, my parents stayed there. (They maintained their U.S. citizenship, but have permanent resident status in Kenya.)
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.