Shesa's SEPTEMBER 2024 Investment Blog

 By Shesa Nayak

U.S. Stock Market Update 

Current Market Trend

A few days ago, the stock market was hit hard and fast taking Nasdaq to the correction territory losing -10.61%. That was the fastest correction since March 2020 when COVID rocked the market. Despite the good earnings in the semiconductor sector, it was hit the hardest loosing -23.66%. However, last week the market bounced back with a vengeance. Now we are in September and historically it’s the worst month for the investors. The stock the market remain very volatile during September and early part of October. Since 2020 NASDAQ has always been down in the month Sept with over -5% consistently, except in 2022 when it was down -10.5%. Furthermore, the stock market tends to be more volatile during election year. Irrespective of which party is expected to come to power, there would be volatility till around election day i.e. November 5. Because market does not like uncertainties. Having said that, it does not necessarily mean that history will always repeat, though often it does. We will see how it goes this time, but as an investor we should have some strategy to deal with the market volatility. 

Economy

The CPI, PPI, PCE and all of them are trending lower. The CPI/inflation came at 2.5% YOY, PPI came at 1.7% YOY and PCE was 2.6% YOY.  The unemployment has been picking up. The U.S. economy added 818,000 less jobs than previously reported between April 2023 and March 2024. The unemployment is rising (4.2%) and unemployment claims have been rising steadily. In other words, the labor market is cooling for sure. This is concerning because higher the unemployment, lower will be the consumer spending. That would potentially cause recession and that’s negative for stocks. Overall, the economy is weakening. And without Federal Reserve intervention it’s likely to get into recession. Currently, the 10-year Treasury yield now stands at about 3.65%, down from about 3.9% at the end of August and much less than 4.3% in late July. It can be noted that, this yield had gone up to as high as 4.7% in late April. Furthermore,

Federal Reserve

The above data point indicates that Fed is expected to cut rates. The market is anticipating the first rate cut this week during FOMC meeting on Wednesday, Sept 18 when FED is expected to cut 0.25% interest rate followed by possibly two more cuts on November 7 and Dec 18. But we will have more clarity on Wednesday about Fed’s future policy. If the rate cut happens and federal reserve gives dovish comment then that would be very positive for the stock market. Any dip after or even before the rate cut would be a good long term buying opportunity.

Presidential Election

As you may be knowing two presidential debates have taken place so far. Democrat party has replaced Biden with Harris. Both the candidates Donald Trump and Kamala Harris are running neck-neck at this time. Who will win is difficult to predict. But the question is, whether any specific candidate would be better than the other from stock market perspective? Well, it’s difficult to predict but based on the current policies probably Trump is little bit more favorable for the stock market. Let me clarify that this is not a political opinion, rather a market perspective.

I have said it before but just want to reiterate that election years become very volatile from around September till the election date. The polls and many other factors keep tilting either way and Wall Street does not like uncertainty. That’s the reason it becomes very volatile. The next earning season is more than a month away. But rate cut is just on the door step. So, one question comes to mind, is the rate cut going to help stock market? What can we expect on the presidential year? I will analyze all these but before that let’s glance to the stock market indexes.

Indexes	Open 1/2/24	Close FRI 9/13/24	Change in 2024	% Change in 2024	All Time High
DOW	37,689.50	41,393.78	3,704.28	9.83	39,908.00
S&P 500	4,769.83	5,626.02	856.19	17.95	5,570.33
NASDAQ	15011.35	17,683.98	2,672.63	17.80	18,671.07
Russel 2000	2,012.75	2,182.49	169.74	8.43	2,442.74
SOX (Semi)	4,023.04	4,980.49	957.45	23.80	5,931.83

Economy News

• Interest Rate: 5.5%. 
• GDP: Q2: 3%; Annual GDP: 2.9%
• Inflation:   June: 2.5%
• Unemployment: 4.2%
• Retail Sales: June: 1%, August number will come on Tuesday, 9/17.
• PCE: 2.63% 
• Consumer Confidence: 69 up from 67.9 
• U.S Crude Oil: $69.24 a barrel
• U.S Treasury Yield%: 2 yr: 3.58, 5 yr: 3.63, 10 yr: 3.65%, 30 yr: 3.98%. 
• US Mortgage Rate: The 30-year fixed 6.2%.

The September effect

Despite the fact that August was highly volatile in the beginning, S&P 500 ended positive for straight four months in a row. But now that we are in September, the market is expected to remain volatile particularly because it’s election year. As we know September happens to be the worst month for the Stock Market. On an average S&P 500 has lost about -1.1% in the month of September since 1928. Over the last 95 years, the S&P has recorded a September gain 42 of the years and lost 53 years, the S&P has suffered an average decline of -4.7%. Well, we always think this year would be different and it could, but we have to be careful. Let’s take a closer look to the indexes in last 5 years.

Year	Nasdaq %	S&P 500 %
2019	0.46	1.72
2020	-5.16	-3.92
2021	-5.31	-4.76
2022 (Tech bust)	-10.50	-9.34
2023	-5.81	-4.8
2024	??	??

This yea also the stock market was hit early September. T

he investors/traders were worried about a recession because of the current economic trends. Undoubtedly, the economy is weakening. And without Federal Reserve intervention it may potentially go into recession.

So, how to deal with such volatilities?

These days the trend is that market does not go down for too long but because of the high frequency Algo-trading and large number of sectorial ETF causes to crash the stock immediately. The trend continues for few days or weeks. Hence, it does not provide the opportunity to the retail investors to do a lot of thinking to take actions. As such, it’s better to hedge the portfolio. Hedging is “protecting the portfolio from the market/stock downturn”. Basically, it’s an insurance against our portfolio. If market crashes or goes south then we gain, otherwise we may lose. But in order to deal with market volatility it’s important to allocate small percentage of portfolio to hedge. But I personally won’t try to hedge more than 5% unless we are trending towards a recession or bear market. In order to hedge, one can buy puts, or VXX, UVXY or Short Sell etc. Personally, I avoid short selling.

Does Interest Rate Cut have impact on the economy and Stock Market?

I can hardly recall any situation when interest rate cut or hike did not have impact on the economy! Well, usually it takes time (around a couple of quarters) for the interest rate impact to be felt and reflect in the economy. Moreover, the magnitude of rate cuts (how much) is another key factor. If we look back the rate cut during COVID in 2020, it had a huge impact in invigorating consumers demand and ultimately caused inflation not seen for decades. For instance, the last major cut was on March 16, 2020 when FED did cut full 1% bringing Fund rates to almost 0% due to COVID. Since then consumers demand picked up unprecedentedly causing supply chain problems and resulting in higher inflation which reached 9% in June 2022. Again, FED hiked rates from March 17, 2022 till July 26, 2023 taking the interest rate from 0.25% to 5.5% and bringing down the inflation to 2.5% as of date!! All these have/had major impact on the economy. Now the mortgage rate has fallen from about 8% little over a year ago to 6.2% now. So, the rate hikes or rate cuts alway have an impact on the economy and general public as well. The magnitude of rate cuts/hikes are the key parameters for the impact on the economy. Having said that, it takes time to show the impact on the economy and recovery time may vary from time to time. Whenever there is a rate cut the stock market has been positive almost 100% of the time after one year from the rate cut date. So, this is good for the stock market.

As we are all aware, higher interest rates causes huge problem for high price items like real estate market, automotive market, the home repair market, construction and manufacturing industries. Because higher interest rates make it hard to borrow money and of course it becomes very expensive to pay off debt. The higher rates hit harder to the smaller companies and consumers because they are dependent on getting financing, getting loan for buying homes, refinancing, buying automobiles or any such big ticket items. All these factors leading to a major slowdown in consumer spending and ultimately slowing the economy. But once the Federal Reserve starts cutting rates then these get reversed. In other words, loans/debt/financing becomes easier and that helps all the above sectors and general public. However, I can term the interest rate cuts into two categories - the Good ones and bad ones. 

I term good rate cuts when the economy is not in recession but potentially trending towards it.  These rate cuts restrengthen the weakening economy and provide impetus for a strong stock market rally. On the other hand, the bad ones are rate cuts that happen when the economy is already in a dire state. These rate cuts try to revive the economy which is already in terrible state or in recession. So, the stock market loses confidence because the economy takes long time to recover and hence it would impact the revenue and earnings of the companies. As a matter of fact, the stock market does not do well and chances of getting into a bear market. The current condition is that we are in a good rate cut environment since economy, particularly corporate earnings are still strong, consumer spending is not bad and unemployment is still not too high. 

The economy grew at a 3% last quarter. It is projected to grow at a 2% - 2.5% this quarter. Unemployment is still below 4.2%. There are still more job openings than unemployed persons. Consumers are still spending reasonably well. The August retail sales data will be published this week. We will see how it goes but that will provide some more evidence on consumer spending.

Election Years are historically good for stock market

The U.S election will be held on November 5, 2024, just 51 days left. There is a historical presidential-election-year market pattern. Who will win is a top call to make at this time. However, in my personal view, the stock market probably would do better if republican wins. Moreover, the stock market does not seem to be too perturbed whoever wins the election. The stock market this year has been OK to say the least. On top of that, the Federal reserve is about to create a broad macroeconomic tailwind by cutting rates. Though the stock market may become volatile and certain group of stocks/sectors would tend to move one way or the other depending on which government (Democrat or Republican) will form the government. But until the counting is over, nothing can be predicted with surety, hence volatility increases till the election is over. Furthermore, if history is any evidence then stock market tend to do well in the election year after the election. My view is that, if stocks do not go too ahead of themselves before the election then we may see some good rallies to end the year. Since last five election this is how S&P 500 has performed: 

2004: 11% (Bush - II)

2008:  -37% (Obama)

2012: 16% (Obama)

2016: 12% (Trump)

2020: 18% (Biden)

2024: ?? (Trump/Harris)

According to Yardeni Research, the S&P 500 has climbed an average of 6.2% in the election year since 1932. But let’s remember that the final seven months of presidential-election years (from June 1 to December 31) are often the best-returning months. In 16 of the past 18 presidential-election years, the S&P 500 was up over that span of time. And in all those instances, the index averaged a 10% gain. The stock market becomes highly volatile from September till the Election date due to the following reasons:

• Investors reacts to latest poll data
• Debate create anxiety and chaos
• Potential change/turn/twist in the outcome of the election

Historically, the major spike of stock may happen after the election day as market rallies post election.

S&P 500 Earnings projections for 2024

Q2 2024: Earnings growth of 11.3%, Revenue growth: about 5.3%

Q3 2024 (projected): Earnings growth of 4.9%, Revenue growth: 4.8%%

Q4 2024 (projected): 15.4% and revenue growth of 5.3%

FY 2024 (projected): earnings 4.9%, Revenue growth: 4.8% (projected)

 Stock Market TOP sectors for 2024

Sector	YTD Performance in %age
Information Technology (TOP)	26.21
Utilities	23.18
Communication Services	21.12
Financials	17.90
Consumer Staples	17.71
Health Care	14.22
Energy (worst)	1.83

Please note that none of the sector is red Year to Date. You can click below link to view complete sectorial performances:

https://www.barchart.com/stocks/sectors/rankings?timeFrame=Ytd

Source: barchart.com

Now let me discuss this month’s stock picks for my Blog Portfolio. 

Salesforce, Inc (CRM)

Salesforce, Inc. provides Customer Relationship Management (CRM) technology that brings companies and customers together. The company's service includes sales to store data, monitor leads and progress, forecast opportunities, gain insights through analytics and artificial intelligence, and deliver quotes, contracts, and invoices; and service that enables companies to deliver trusted and highly personalized customer support at scale. Salesforce was incorporated in 1999 and is headquartered in San Francisco, California.

Why do I like Salesforce?

Salesforce is the world leader in cloud based Customer Relationship Management software service provider. It also offers a range of cloud-based services including marketing, e-commerce, analytics and enterprise collaboration. The company has solid balance sheet and has initiated its first dividend. Off late, the sales growth has slowed as revenue grew just 8% last quarter and expected to grow 8% - 9% for the full year. However, the AI adoption is expected fuel growth next year. As I have been saying since last few months, the AI growth is expected to gradually shift from semiconductor (hardware) to the software side. But please note that AI (chips) still has a long way to go as mega data centers and AI factories are build around the world. Once these data centers and AI factories are set most companies will start investing in software to take maximum advantage of AI capabilities and language models. Since many are already setup, we should start seeing the momentum to pick for AI software. Salesforce has introduced AgentForce, suite AI-powered autonomous agents designed to perform tasks autonomously to increase efficiency and productivity. It also offers hundreds of out-of-box AI capabilities tailored to specific industry models. This will provide customized AI solutions. It has also unveiled new AI models viz. xGen-Sales and xLAM to transform various enterprise automation. These agents use large language models (LLMs) and generative AI to understand the full context of customer messages. It autonomously determines and executes appropriate actions, such as processing requests or resolving issues, based on the company’s CRM data guidelines. According to a recent IDC study, the AI powered cloud solutions are expected to generate net gain of about $2.2 trillion in business revenue impact between 2022 to 2228. In other words, the businesses using Salesforce are expected to generate that much of profits. So, that will enormously help Salesforce to increase its top and bottom line. This week Salesforce is expected to unveil its AgentForce in its Dreamforce convention at San Francisco.

Financials

During the last quarter (Q2), the company came with EPS of $2.56 vs. $2.36 expected and revenue was $9.33 billion vs. $9.23 billion expected. For the current (Q3) the company has projected in-line guidance with earnings of $2.42 - $2.44 per share and revenue of $9.31 - $9.36 billion. Also, management is expected to deliver $10.03 - $10.11 per share in adjusted fiscal 2025 earnings, and $37.7 billion to $38 billion in revenue, implying a growth of 8% - 9%. 

Company Fundamentals

Market Capitalization	$243.37B	Total Cash	$12.64B
Trailing P/E	44.35	Total Debt	$12.19B
Forward P/E	25.64	Book Value per share	60.16
Price/Sales	6.84	52 weeks high	318.71
Revenue	36.47B	52 weeks low	193.68
Quarterly Revenue Growth (YOY)	8.4%	52 weeks change	26.33%
Gross Profit	N/A	Held by Institutions	83.43%
Net Profit	5.63B	Held by insiders	2.64%
Quarterly Earnings Growth (YOY)	12.8%	Float	929.17M
EPS	5.73	Annual Dividend (Fwd)	0.63%

My View

If we see the above financials it does not look compelling and I am not too impressed with its revenue and profit growth as a growth investor. Having said that, I believe the AI revolution should help Salesforce to pick further momentum as corporates, government, other institutions starts implementing AI and automating their software. Now we have the momentum for Chips and the next phase of AI is expected to move towards software. So, this is where I see opportunity for CRM. The company had missed its Q1 earnings and the stock got hammered. Since then the stock has recovered and currently trading at $254.57. The stock had 52-week high of $318.71, so there is a 20% discount from its 52-weeks high. So, I guess it’s worth creating a portfolio with gradual accumulation. I bought it a few months ago when the stock was hammered. But I feel there is still a good opportunity to accumulate for long term.

Mostly, I never buy any stock at once because nobody can predict the top or bottom of a stock. Hence, my strategy is to keep accumulating in small quantities and build the portfolio. Also, I do not to fall in love or emotional with any stock. This is not easy but leaned from past lessons. I also take some chips out of the table when a stock run ahead to book some profits and mitigate risks. If I find that the stock has further momentum then I usually add it on a pullback. That’s just my perspective. But it depends on every investor’s own investment framework.

Risks

All equities carries risks. When market comes down most of the stocks gets hammered and every stock looks cheaper. Though Salesforce is a stable company but when market falls, no stock is immune to risk. Also, now that we are in September and election is coming in November stock market may remain volatile for a foreseeable period.

My final thought: Salesforce (CRM) has emerged as a leader in CRM software. Now that the world is moving towards AI, I see Salesforce as a major force. This AI trend and momentum should really benefit the company in the long run. This week company is going to unveil various AI related software during its Dreamforce convention at San Francisco. But this is not the reason to buy the stock. This is a stock to accumulate and hold for long term. I am invested because I feel that CRM has the potential to be a long-term winner and a leader in the cloud software space. Having said that, if I see any red flags then I don’t hesitate to pull the trigger and Salesforce is no exception.

Shesa’s Blog Portfolio (As of SEPT 15, 2024)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	222.5	1/25/13	1625%	HOLD
META	47	524.62	11/13/13	1016%	Buy/Accumulate
MA	77.18	493.36	12/12/13	539%	HOLD
AMZN	15.58	186.49	4/12/14	1097%	HOLD
SHOP	13.48	72.45	11/25/18	437%	HOLD
SPG	54.59	164.02	5/25/20	200%	HOLD
ENPH	45.3	109.91	6/28/20	143%	SOLD on 10/30.
SAVA	51.49	28.12	10/10/21	-45%	Accumulate
NVDA	23.9	119.1	2/13/22	398%	Accumulate Long Term
TSLA	290.25	230.29	5/1/22	-21%	Long term BUY
AXSM	77.13	93.67	1/1/23	21%	HOLD
RDFN	8.87	14.45	4/6/23	63%	Buy on dip (Trimmed)
SOXL	15.66	33.43	4/6/23	113%	Buy on dip
GOOG	123.25	158.37	5/21/23	28%	HOLD
PLTR	20.49	35.59	11/19/23	74%	Accumulate
MSFT	376.04	430.59	1/1/24	15%	Accumulate Long Term
FLNC	20.54	21.73	2/1/24	6%	HOLD
PANW	284.13	346.90	3/31/24	22%	Buy on dip
SMCI	857.44	457.16	4/28/24	-47%	Accumulate
ENVX	10.48	9.7	4/28/24	-7%	Accumulate
DELL	138.96	114.30	7/6/24	-18%	Accumulate
Z	51.92	59.74	8/11/24	15%	Buy/Accumulate
CRM	254.57	254.57	9/14/24	0%	NEW ADDITION
	ETF
IHF	27.82	58.13	8/16/15	109%	HOLD
MUTUAL FUND
PRMTX	59.45	147.89	12/20/14	149%	HOLD
FSRPX	9.05	20.11	1/15/16	122%	HOLD
FSMEX	43.66	67.51	9/24/17	55%	HOLD
** Note: Dividends Adjusted

A few Key Economic report this week (9/16 - 9/20)

TUE, 9/17: U.S. Retail sales, Industrial production

WED, 9/18: FOMC interest-rate decision, J Powell press conference

THU, 9/19: Existing home sales, Initial Jobless claims

Equity Sold since my Last Blog

None

Here is my YouTube channel link:  https://www.youtube.com/channel/UCt7oLVUMG3NkJUzAVUzl4Tg

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do NOT provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions on what I do. Please contact a professional money manager to buy/sell any security. I do not charge any fees or commission by writing the blog except anything from Google AdSense. I have position(s) on whatever security I put on my blog portfolio and avoid including any security that I do not own or follow. Anyone buying or selling the equities mentioned here must do at their own risk.

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