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Sanjeev Sharma discusses his yearly S&P 500 predictions (1:00). 2024 prediction of 6,000 depends a lot on interest rates (3:00) Bonds, treasuries and safe bets (9:50). Why he’s so excited about the Homebuilders ETF (14:20).
Transcript
Rena Sherbill: Sanjeev Sharma, welcome to Investing Experts. Great to have you on the podcast.
Sanjeev Sharma: Thank you, Rena. Thank you for having me on your show.
RS: It’s great to have you on the show. Why don’t you introduce for listeners that don’t know your work from Seeking Alpha, where you’ve been writing as long as I’ve been working there, which is quite the feat, not many people can say that. Since 2008, where many things changed in the financial marketplace. Talk to us about how you’re looking at the markets and maybe your journey up until now?
SS: Yes, Rena. I started writing at Seeking Alpha starting from 2008. I decided to write, and I mainly write about the stock market. And, from the beginning, I wanted to just write once in a year, or maximum two.
But mostly, I’ve written just once in a year, in the beginning of the year to – and I predict where the stock market will be, that is the S&P 500 will be by the end of the year.
I decided to write just once in a year so that it is easy to track my track record and see my performance rather than if I solve the – and other analysts who keep writing every month, then it’s difficult to find out what exactly they predicted for the year.
So from 2008 to 2009, like, my first prediction about the stock market actually was in 2009. In the – in May 2009, I wrote that that basically the GDP is going to grow. The stock market is going to grow this year. And after that, every year, most of the year, one or two years, I could not write, but due to some other obligations or some other things. But, otherwise, I have been writing every year from 2009 to now.
And as far as the direction is concerned, if I said the market will go up, it went up. If I said market will go down, it went down. So my direction has never been wrong. I mean, I won’t say that trade is – it is like basically, the precise number nobody can give exactly.
So, for example, in 2022, when everybody thought the market will go up, I said the market will go down. The S&P 500 will be ending at 3600, and I think it ended at around 3800. It was not that far.
So last year, 2023, people were thinking market will go down. I said, this year market will go up, and my number for S&P 500 was 4250 whereas market, it did go up much higher than that, 4700.
So as far as this year is concerned, 2024, looking at my analysis, it – a lot depends on the interest rates this year just like all years. But if I assume that the interest rates are going to go down sometime during the middle of the year, then the stock market, the S&P 500 could be close to 6000 this year. That’s what my prediction is.
And it is based on certain macroeconomic variables, which impact our spending ability. So the formula I developed is based on statistical analysis, and it is based on major factors, which impact a person’s spending ability, the average middle-class person’s spending ability.
I look at the five major factors, which impact the ability of a common man’s, spending, you know, the spending ability of a common man, which is I mean, there are thousands of factors, but, so far, I’ve only used the single factor, that is – disposable income of every middle-class American, and it has always worked so far.
And it is based on this, right. The wages – the wage growth in a year, how much are the wages going to grow in this year? How much is inflation going to go up this year? Then how much is the gas? How much is the gas price going to go up this year because everybody needs to spend on heating as well as driving a car and all those things and electricity. Everything is dependent on gas prices.
So gas prices are very important. Plus home prices, you need to spend a lot of money for living and then home prices are very important. On top of that, a lot of spending is based on the interest rates because we leverage ourselves.
So these are the major five factors, which impact a person’s spending ability. Basically, a person is taking home certain wages out of which he’s spending on all these important things which he cannot avoid. That is the house he’s living in, either rent or mortgage, plus groceries, other things which you use, so inflation is important, plus gas prices and then interest rates.
So if you look at all these things, whatever is the money remaining from after spending on these basic necessities, that is what impacts his spending ability and that is what impacts the stock market.
RS: So given where you think it’s going to be by the year’s end, what are your thoughts along the way? How do you think investors are going to be experiencing the market as 2024 continues to shake out, continues to shake out, shape up, whatever?
SS: Okay. I’ll just give you a comparison between the last time we had between the Great Recession and now.
So it is easier to understand like this, right? So in the last – basically, the Great Recession, you see the interest rates start or – and the Federal Reserve started – Ben Bernanke started increasing the interest rates in the middle of 2004. And he did not reduce interest rates till the middle of 2007.
And by the middle of 2007 – till middle of 2007, that is around three years, the market kept going up, the stock market kept going up. But then in the middle of 2007, suddenly all the subprime mortgage prices and the massive problem in the home different kind of we all know what happened, right?
So all those problems started in the middle of 2007, and the stock market suddenly went down. And, of course, 2008 was very bad. So they had to reduce interest rates, but the reduction in interest rates did not help till 2009. So this, it takes some time. So if you look at it now, the Federal Reserve started increasing interest rates in the beginning of 2022. And now it’s around basically you can say two years have gone.
The good part is we don’t have that many adjustable mortgages because most people took advantage of the low interest rates and they refinanced their homes to fixed 30-year mortgages. But still around 10% mortgages are still adjustable, plus a lot of commercial mortgages, which are going to get adjusted.
So if the interest rates are not reduced, if you keep the interest rates like this for the whole of this year, then sometime in the beginning of next year, I assume, or towards the end of this year, there will be a crisis. So I think the federal reserve also understands this.
They don’t want that kind of situation to happen again. So they will start reducing interest rates before that happens. So sometime before the beginning of next year, towards the end of this year, or maybe, I would say, July, August, they can start reducing interest rates.
And the impact of that would not happen right away. When the Federal Reserve started increasing the interest rates in the beginning of 2022, it did not stop inflation for another six to eight months. Around six to seven months later the inflation rate continued to go up for another six to seven months, though they started increasing interest rates.
So the impact of reducing interest rates also would not happen right away. It would take six to eight months. So that’s the way I would say is going to happen.
Sometime during this year, we have to start cutting down the interest rates, but the impact of that is not going to happen for another six to eight months. And in between that period, there could be an impact of all these mortgages, some of the mortgages or commercial mortgages, loans, which are going to mature and they – when they have to refinance, they realize that interest rates are double of what they initially got it.
But the exact percentage of those mortgages or loans, I don’t have that number. So I would not be able to say what is the real impact, whether it will be as bad as it was in 2008. But I think the Federal Reserve would have done those calculations. They would start cutting interest rates before that happens. So that’s the way I look at it.
RS: What are your thoughts about bonds and treasuries based on where you think inflation is going?
SS: Yeah. I mean, bonds and treasuries are definitely, because they are at very high level right now. If you look at long-term, like, the 10-year treasury is around 4.3% right now, giving a yield of 4.3% right now.
So if somebody buys it today and plans to hold it for, like, a few couple of years, of course, I expect that this 10-year yield, at least, for what we have seen the last 20 years is definitely going to come below 4 at some point.
Maybe another one or two years, it should definitely – maybe this year itself, it could come down to below 4. It could be, like, 3.5, 3.4, and that’s like a measure if the yield goes down by 1%, that’s almost 20% increase in the bond price.
So, that’s a good, I mean, I would say almost quite safe bet because, I mean, you don’t have to sell it. You can keep holding it, and then you still get 4.3% secure returns.
RS: And is there anything that would happen in terms of data coming out that you’re watching and the factors that go into what make up your thesis and how you look at the markets? What would happen to make you change your mind or to make you alter your position or your prediction?
SS: If the interest rates continue to go up, if the Federal Reserve doesn’t cut down the interest rates, and if the economy continues to be very strong, then basically, the mortgage rates I mean, interest rates will not come down.
If the interest rates continue to see this from the beginning of the year, the 10-year treasury yield has actually gone up instead of going down. So if, let’s say, it continues to go up, that’s a major problem.
And there is a slight possibility it can happen because the economy has been strong so far, and the demand is quite good so far. So it is possible, there is a little possibility that the interest rates are not cut at the same level at which we thought.
If the interest rates don’t go down, the market will go down, definitely.
RS: And how much would that alter your, the 6000 number?
SS: See, when I did my calculation and I wrote the article for this year, I assumed either the interest rates will go down by 1% or they will, a maximum 1%, they can go down. They cannot go down more than that, or they will not go down at all. That means – and I took the middle point of that, for my number which came to 5800 S&P 500. That is 0.5, basically. There is – the interest rate is going down by 0.5, 5%.
So I still hold that because I think the lowest is that the interest rates will not go down much, they will stay at where they were when the year started. And in that case, my number is 5100 in that case.
RS: Your lessons to get to where you are now – either investing in the markets or observing the markets?
SS: I think stock market people are not able to understand it because they are looking at so many different factors. They assume one particular factor is more important than others. So for, like, some people are worried about the debt. Some people are worried about war and some – different kinds of things.
One of the most important things for the stock market is the population growth in a country. It doesn’t matter how much innovation you have, how much technology you have. If the population goes down in a country, stock market goes down, whether it is Japan, Germany, or any of the other country you see, population growth is very important.
So, luckily for us, we have an immigration-based society, where essentially, the population growth is continuing despite a large number of people retiring very fast. You can see now almost 4 million people are retiring every single year. But because of immigration the United States is able to manage its population growth. And so that is a very important factor.
RS: And anything to say about the various S&P ETFs that track the market? Any preference or insight there?
SS: Yeah. I’m quite excited about the homebuilders ETF (XHB), because I think if you look at it, most of the homes here in United States are very old, like, easily, I would say 60, 70 years old. Some of them are, like, in the East Coast, you will see homes which are 100 years old. If you look at 25 years back, the type of homes people were okay living with and the type of homes people like to live now, you can see the taste of people have changed.
Everybody wants modern homes, bigger homes, and that is not possible for such a large country without these major homebuilders. So all these companies, like Toll Brothers (TOL), you know so all these large companies, I think, they will do very well in the years to come because everybody wants modern homes, new homes, and most of the homes have to be replaced.
And it’s not easy to build a company like that which can build new homes at that large scale, like tens of thousands of homes building at the same time. So I think those type of companies have a bright future.
RS: Anything else you’d like to share with investors, whether they’re looking at your work or in general thoughts that they might benefit from?
SS: Yeah, they should check out my formula, they can google Sharma Disposable Income Formula, and they will see all my articles from 2009 to now about the stock market. And you can see it’s a very unique track record. I don’t think there is, at least, I’m not aware of any analyst, who has been correctly predicting the stock market year after year like me.
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