Walking On Ice: By Tom Lombardozzi

Good Morning-

I am very proud and excited to introduce my new and improved newsletter on Beehiiv, Secondary Opinions. While similar to my first newsletter, Gen Z Voice, this version will be more focused on later-stage companies and public markets.

This newsletter will mostly include commentary on public and private markets from the vantage point of a young adult (23yr old). Why? The latest generation is a beneficiary of the largest transfer of wealth in history. Combined with our increasing incomes during this part of our lives, we will be an important and increasing driver of markets into the future. The commentary this letter will provide should hopefully be very insightful to the way my generation thinks.

This newsletter should NOT serve as your primary source for financial knowledge, in fact, I’ll say now that nothing in this newsletter is financial advice. What this newsletter should do is serve as a Secondary Opinion for everything money-related. I don’t claim to be an expert, I am just an optimistic next-gen voice with some useful perspective.

Now, let’s talk markets.

I was at my friend’s housewarming party last weekend talking to a few 23 and 24yr olds about the economy and the markets (don’t worry they got a mortgage rate below 7%). Everyone was speaking very cautiously, feeling scared by recession fears, and not wanting to take too many risks with the extra money that they are saving.

Between wealth managers, the Fed, and especially my age group, it feels like everyone has been walking on ice for the last few months. No one believed in the “soft landing” the Fed was touting for months. Now, that rhetoric has started to turn.

Due to this changing rhetoric, recent consumer habits, and other factors to be discussed later, I am currently long the S&P 500 until the end of Q1 '24. More specifically, because I currently have high-risk tolerance, I am long the SPXL, a 3x leveraged ETF*. For me, it is important to have money where my mouth is.

I am long for the following reasons:

1. I believe the rate hike cycle is close to, or completely finished

2. The consumer is stronger than expected

3. Money inflows into equities and out of cash

4. The S&P 493

The Rate Cycle

If the last rate hike wasn’t the end of the cycle, I believe we only have one, maybe two left in the cycle. Inflation is cooling, wage growth is cooling, and the housing market is suffocated. The Fed promised a soft landing and it is shaping up to become one. They took way too long to raise rates, then raised them aggressively. As long as economic indicators keep pointing to an economy that is coasting, I see the peak either being behind us or right in front of us.

And when that peak does occur, the market historically outperforms on an average of +9% in the following 3 months…

As the markets and economic indicators continue to coast, one thing will continue to outperform in my eyes; the consumer.

The Consumer is Strong

I’m going to take an extremely fundamental approach to this. I am very active in my life, I travel, go to concerts, go out on the weekends (maybe even weekdays now and then), golf, and generally I am very social. Either this planet is getting too small, or people are spending like they haven’t spent before.

In terms of travel, we are back to pre-pandemic levels, as Airline Weekly states, “the trade group forecasts U.S. airlines will carry 257 million travelers from June 1 through August 31, a nearly 1 percent increase over 2019 numbers”.

From a social perspective, I have been out in Charlotte and New York frequently throughout this summer. Both cities are packed every weekend night. Now this is expected for young adults, but in the past, I have seen people take rest weekends or take some time off. Right now, it feels like most of my peers around me are just full speed ahead with socialization and spending. 

The only way that I could see it slowing down is when student loan payments start in October, but we will see what happens when that gets turned on.

I believe that this is all driven by Covid hitting during our post-college or college years, we have a new appreciation for social lives and are always going to prioritize it. We will be responsible and save money, but we will also not turn down an opportunity to be social or travel.

Money Inflows to Equities

On top of a strong consumer and potential peak rate cycle, the recent Bank of America fund manager survey showed that money is flowing back into equities and out of cash.

This piqued my interest because cash is yielding above 5% in a high-yield fund. Money flowing out of these funds and into equities can show that people think there are better places to make money (i.e. equities).

The chart below illustrates how investors are doing this exact move. In fact, investors are the last overweight cash since Sept 21’.

The chart below shows more about the recent flows in investor positions. This shows the month-over-month changes in positions, and as we can see equities are by far leading the way and almost a 15% increase, while cash has decreased by over 10%.

The S&P 493: A Broadening of the Rally?

The S&P 500, the best indicator of the overall markets, soared for the first half of this year. Yet when you break it down a different story is told. The “magnificent seven”, consisting of Meta, Apple, Amazon, Google, Microsoft, Tesla, and Nvidia soared 58%. While the other 493 stocks in the index only went up 4%.

With the inflows into equities from hedge funds and private clients, I wanted to see more money flow into the small caps and the rest of the S&P 493, which would indicate a potential broadening of this rally.

Below, you can see this starting to take shape as hedge funds poured into consumer discretionary stocks (a large % of the S&P 493).

Beyond hedge funds putting money into consumer disc, the chart above illustrates large inflows into small caps that we haven’t seen for quite some time. Another potential indicator of a broadening rally.

A Final Note

I will start by prefacing again that nothing in this newsletter is or ever will be financial advice. Through the trends I’ve seen, the consumer strength in the markets, and the data laid out above I believe investors are trending back into equities and I believe that we could see another 5-10% rally by year-end for the markets.

Or, I could be wrong. Only time will tell.

Have a great day,

Tom