More Than A Feeling

Market valuations are high and comparisons continue to be made between today's market and that of the 2000s. How far can equities continue to run? The answer lies in

relying on data rather than just a feeling. This week's inspiration for the musings is the 1976 surprise hit song, "More Than A Feeling" by the band Boston. Here’s some trivia about the song:

• This song peaked at No. 5 on the Billboard charts in 1976 and sold more than 2 million copies worldwide - certified platinum. The song was named by Rolling Stone as one of the songs that helped shape Rock and Roll. However, it shouldn't have been a hit at all.

• Boston leader Tom Scholz wrote this song and recorded it in his Watertown, Massachusetts basement studio, dubbing all of the instruments over one another to create the recording. When Boston was finally signed by Epic records, per union rules, they had to re-record the song, to which Scholz took offense.

• This song was a surprise hit and Boston rose to stardom quickly. The song, because it was created in the studio and so polished that it was radio-friendly and received lots of airplay.

• Scholz was very precise and often came off as arrogant about his music. In the early 1990s, some accused Nirvana's song "Smells Like Teen Spirit" as stealing some of the chord progression from "More Than A Feeling". Scholz's response was, "They didn't do a great job on the chorus. I heard the story about people thinking that part of that song sounds like it was a swipe from 'More Than a Feeling.' I don't hear it."

"I looked out this morning and the sun was gone

Turned on some music to start my day

I lost myself in a familiar song

I closed my eyes and I slipped away

It's more than a feeling (more than a feeling)

When I hear that old song they used to play (more than a feeling)

And I begin dreaming (more than a feeling)

'Til I see Marianne walk away

I see my Marianne walkin' away"

Here's what we've seen so far this week..

More Than Just A Feeling. Markets feel over-extended and expensive. And, in some ways that's true. However, investing isn't about just a gut feeling. It has to be about

data and metrics. Economic fundamentals are strong, as we witnessed in the releases last week. Second quarter GDP was revised much higher and 3rd quarter GDP, according to the Atlanta Fed is expected to be +3.8%. Heading into year-end, that information bodes well as the 4th quarter is historically the strongest quarter of the calendar year for equities. On average, the return for the 4th quarter is typically twice as strong as the other three quarters of the year and positive in 80% of occurrences. In the same token, the 4th quarter of a post-election year is also strong with a 78% probability of a positive return.

There is an often-quoted investing phrase which states, "Don't fight the tape." It's a reference to when the stock market prices were quoted on a machine that spit out a tape of the numbers. It means, don't necessarily go against a rising or falling market unless well-armed with contrary information. This year, September was an unusually strong month compared to past September periods. There were at least 8 new all-time-highs in September. Historically, when new highs are made in the month of September, October tends to be good. Usually, October the most volatile month of the year, but this September being unusually strong, could point to a better-than-expected October return for equities.

If more evidence is needed, this year's September return of +3.5% is the best September return in 15 years and the 2nd best return in 27 years. Now enter the naysayers - what about the government shutdown. Well, so far, it has been a non-event in terms of market performance. The S&P 500 Index has made two new all-time-highs in the first two trading days of October, which coincides with the beginning of the shutdown. The last time that happened - 1968, 1996, & 2017. How did the 4th quarter turn out in those years: +4.6% (1968), +7.9% (1996) and +6.1% (2017). The reality is the average length of a U.S. government shutdown has been 8 days and the S&P 500 Index has ended higher one year after a shutdown at least 86% of the time. Perhaps the government should shutdown more often?

Lost Myself In A Familiar Song. There are risks at the margin for investors in today's market. Some investors are taking on more risk than their investing profile would

suggest. Financial professionals should make sure clients invest according to pre-established financial plans and not let their clients take too much risk given their goals, time horizon, and risk tolerance. That being said, this market is not exactly like the Dot.com market of 1999. The number of internet companies that came to market by December of 1999 was greater than 450. Ten years later, approximately 20 pure internet companies remained as actively traded stocks on the exchange. Today, only about 30 pure AI companies are traded on the NYSE. Most of the companies involved in AI - Google, Apple, Microsoft, Amazon, Meta, Tesla to name a few - have multiple other sources of revenue and are not solely dependent on AI. Do we really think these mega-cap companies will disappear in similar fashion to the Dot.com crash?

Speaking of AI companies, Nvidia is one of the mega-caps that is more dependent on the growth of AI. As you can see from the revenue chart, Nvidia's revenue exploded with the initial release of Chat GPT. However, there are real revenues associated with the stock's growth, which was not always the case in 1999 with internet-related companies. In addition, Nvidia has positive net income, suggesting the story is not all about wild expectations and the potential for profits down the road. Investors should be mindful of current valuations for the company and invest accordingly, but not necessarily looking for the next shoe to drop.

Lastly, while Big Tech capital expenditures on AI has continued to expand, it's not the primary driver of U.S. GDP. The consumer is still the driving force of economic growth, as last week's Q2 GDP revision revealed. Right now, cap ex spending on AI accounts for about 1% of GDP. The latest projection of Q3 GDP by the Atlanta Federal Reserve shows Consumer Spending to be greater than 2%, or to say it another way, more than double AI cap ex. For now, investors should stick to their investment plans and invest accordingly in equities, but also not necessarily be looking for the next market crash.

More than a feeling...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.