Return of the Real

A lot of people these days like to use the term “real” to describe something or someone they admire. We say reverently that he or she is the “real deal,” or this team is “for real,” or this macho specimen is a “real man” or that this restaurant serves up “real Chinese cuisine,” etc. Hey, I use the term “real” too, as we all know what it means, even if it can be used in many different contexts.

In 1996, “real” rap music icon Ice-T released his sixth studio album titled, “Ice-T VI: Return of the Real.” Now, I bring up Ice-T here not just because of his “realness,” but also because he happens to be the celebrity keynote speaker at this year’s largest gathering of free minds, FreedomFest.

I will be there, along with my fellow Eagle Financial Publications scribes George Gilder and Mark Skousen. This event is going to be amazing, as it features one of my favorite thinkers, Steven Pinker, as one of the keynote speakers. We also have one of the world’s most intriguing political figures, President Javier Milei of Argentina, who will also deliver a keynote address.

If you want to attend FreedomFest this year (and why wouldn’t you?) I am going to make it easy for you. This year’s conference takes place in Las Vegas, July 10-13, 2024, at the Caesars Forum Convention Center. And because you’re a reader of The Deep Woods, I am able to offer you a very special discount of $50 off the registration price.To take advantage of this special discount, simply go here, or call Hayley at 855.850.3733, ext. 202. Use the discount code EAGLE50 to get $50 off the registration price. (This discount ends on April 30, so act now.)

Getting back to the “real,” check out these lyrics from Ice-T’s hit “I Must Stand”:

And bein’ black ain’t easy, prejudice is real
But health and liberty is all we need for us to build
We gotta come together, unseparated
Check yourself like I did, black man, because we’re all related…

That’s as real as it gets, and it’s why I am excited to see Ice-T deliver his keynote.

Now, there’s another return of the real taking place right now, and here we come to the field of focus of my newsletter advisory services. That return of the real is the beginning of a return to reasonable equity market values.

As those of you who read my newsletters likely know, the macro environment in this market has deteriorated on numerous fronts over the past month. We know that because over the past month, we have seen a decline in stock prices that is, A) Appropriate and B) Likely not over unless news turns more positive.

In fact, three of the five biggest market influences we track witnessed deterioration last month. The biggest here was the expectation for a June interest rate cut by the Federal Reserve. Hope of a June cut was extinguished by the hot March consumer price index (CPI) report, and now the market must deal with the possibility of just two (or even fewer) rate cuts in 2024 (remember the market started the year expecting as many as seven cuts).

Related here is a stall in the decline of inflation, which has proven “stickier” than the bulls had hoped. We know that because of the aforementioned hot CPI data. Finally, geopolitics has reared its ugly head again as an influence on the market due to the escalating conflict between Israel and Iran. That rising tension is pushing oil and other commodity prices higher and weighing on sentiment.

Importantly, this deterioration has not resulted in a change in what I call the “fair value” for this market given the current set up. Right now, the fair value, call it “real value,” is the S&P 500 index trading at a 19-20X multiple. And at the current expected 2024 S&P 500 earnings-per-share estimate of $243, that means an S&P 500 trading range between 4,617 and 4,860, with the midpoint being 4,739.

As of this writing, the S&P 500 traded at 5,023. So, here the “real value” of the S&P 500 (the midpoint value of 4,739) now is 5.65% below the current price. That’s still a bit higher than real value, but when you consider that at its high of 5,254 on March 28, the S&P 500 real value was nearly 10% below that price, the market is getting increasingly more “real.”

Now, does this mean we are likely to get a pullback of 5-10% in the S&P 500 from here? Not necessarily.

Things could materially improve for the market if the Fed signals a June rate cut is back on the table, if inflation data declines faster than expected and if artificial intelligence (AI)-related earnings remain strong and geopolitical risks decline. Of course, the opposite could take place. The Fed could push back on the idea of any rate cuts in 2024, economic growth could suddenly roll over, inflation metrics could rebound and AI-related earnings could disappoint.

This latter scenario would essentially undermine the assumptions behind much of the market’s robust rally in Q4 2023 and year to date. And given how stretched markets still are, the net result would be substantive declines in stocks. And while the outcome here remains an open question, it’s a question we all, as investors, must be keenly aware of if we want to successfully navigate this “real” market.

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And Speaking of Real…

“Only the knowledge that comes from inside is the real Knowledge.”

–Socrates

They certainly kept it “real” in Ancient Greece, as thinkers of that amazing era sought to study and codify the real wisdom of the world. Here, Socrates tells us that knowing ourselves is the truest, realist, knowledge.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods