Weekly Report | Risk x Return | Russell and S&P 500

After 14 days, we opened another weekly report with highlights between February 9th and 12th. First, I start this writing with a relapse of thought, even if immature in words, with the following question – to be answered by the reader as well as his own reasoning: Faced with the history of humanity, since the period of the Persian Empire, moving towards the potentials of Egypt, 400 BC; of the Roman Empire; Prussian-Germanic; Medieval in their numerous fiefs; Napoleonic; bringing even the main religious, ideological and cultural revolutions, among many: communism, Nazism, socialism, Mohammedans, Hinduism, Protestantism, Judaism and among many others. Renovations and more renovations! Countless and “endless” reforms in each generation.

In these thousands of years, still countable by men, all micro and macro transformation movements had intrinsically economic motives. Greed, power, human freedom are all linked to directly economic issues. Therefore, there is a need for every individual, fully capable of executing their rational faculties, to exercise constant questioning of the “why” of their life, their physical and mental behaviors, their conceptions and beliefs of the reality in which they grew up and their real objective in this brief life. So I suggest reading the book: The Last Frontier: The Soul’s Path.
Link: https://linktr.ee/book4free

SECTORAL MARKET VALUE

Absolutely disconnected from reality! The market capitalization that the technology sector – Big Tech’s – has surpassed all possible limits. As much as they have the proven expectation that they will survive in the future, they ended up trivializing the other equally profitable and fundamental sectors for the survival of the economic, logistical and productive factor of the supply network. This vertical movement on the Blue Line demonstrates exactly how the behavior of individuals who inhabit the markets leverage the mentioned sector collectively since 2019.

Non-profitable technology companies, including heavily in the biotechnology sector, ended up benefiting from this torrent of money, accompanied by the massive flow of small investors along with the extreme ease in the world market smartphone-based.

MONEY FLOW

In the image above we can clearly see the cash flow being incisively withdrawn from the American markets. Not since 2017 has there been so much outflow of money from the assets that make up the markets in such a short time. The main investors and Investment Funds already know that difficult times will come with the high interest rate stipulated by the Federal Reserve (FED), accumulated with the problem in the supply networks, high inflation rate and withdrawal of stimulus for the purchase of bonds and assets by the FED.

Above, it is clearly noted the expectation for an increase in the US interest rate, causing a large part of the cash flow to be channeled to US Treasuries, or simply dispersed across other world financial markets. Companies with high debt and low profitability tend to suffer absolutely from this situation. It is estimated that in 2023 the interest rate will be 1.75%, however, some reputable economists with more than 40 years in the market warn of 2.50% by 2024.

The initial impact will not be felt until six months after each percentage takes effect. The market is already pricing and entering a slow and prolonged correction. Since my September reports I have been writing obsessively about the subject and yet I have been completely ignored.

VALUE OF S&P 500

Finally, the S&P 500 is at approximately 18x Profit. That is, it is still far beyond its top sustaining capability, in my humble opinion. Of course, there are great opportunities: just pan around. However, all the inflationary data added to the monetary stimuli indicate that there is still a good margin for correction. It would be more interesting in relation to Risk x Return to program for punctual entries below 17x and massive entries at 14x.

RUSSELL 2000 SHOULD STILL KEEP ITS CORRECTION

Succinctly, condensed, US markets have been entering a sectoral correction process since February 2021. Yes! I already wrote about it a year ago. This massive correction started mostly by small cap companies.

Small Caps are a class of publicly traded companies that have a lower market value. In other words, they are the group of small publicly traded companies with low market capitalization.

Usually these companies still do not have a steady and reliable cash flow generation that demonstrates their growth. Their profits, if any, come from government or private subsidies to continue carrying out their activities until they become profitable. Consequently, it is characteristic of Small Caps to incur debt to support their operations throughout their development. Debts are always directly connected with the tax system, complicating the financial life of these companies in times of monetary tightening and rising interest rates.

Thus, the “Value = 2.4x” of the Russell 2000 Index (graph above) that these Small Caps are concentrated clearly demonstrates that even after a slow and gradual correction of the index, it is still at very high levels. These levels preceded large generalized corrections in the S&P 500, Nasdaq and Dow Jones (1999, 2008, 2020).

I always look forward to seeing the Russell 2000 with a Price/Book below 2.0.

There is still a lot of remedial margin ahead.

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