In partnership with

Hey Money Maniacs,

Welcome back to another edition of 5 Fact Friday! Here are this week’s biggest stories in the world of money:

1. Stock Market Breadth Grows 📈

The markets keep roaring along!

This week, we saw the S&P 500 hitting new highs, Bitcoin cruising past $70,000 for the first time, and gold shining brighter than last week’s peak.

But here's the million-dollar question: Are we in a bubble about to burst, or are these valuations justified?

The Bull Case 🐂📈

The number of stocks sitting at all-time highs is on the rise, reaching levels not seen since May 2001. Plus, the S&P 500 Equal Weight Index just notched a new record.

Clearly, the market is no longer being dragged forward by the Magnificent Seven.

The S&P 500's broadening gains signal a robust market foundation – not a speculative bubble. And greater market breadth typically precedes further growth.

Although valuations are elevated, leading S&P 500 stocks are still less expensive than in the dot-com era. This restraint may indicate a more rational market environment.

The Bear Case 🐻📉

S&P 500 companies are worth 21 times their expected earnings over the next 12 months. That is well above the long-term average of ~18x (yet below the recent peak of 24x).

Plus, those “expected” earnings might be a challenge to deliver.

Analysts are calling for 11% growth in 2024 and 14% growth in 2025. If companies underperform these lofty projections, their present values may be even more inflated than they look today.

Although the party is in full swing, the music could stop at any moment.

If inflation makes an unwelcome return or economic indicators start to falter, the Fed may keep rates high. This move would dampen economic growth and put pressure on stock prices.

The Middle Ground? 🤔

So, what's the real deal? Maybe it's a bit of both.

The market's breadth and the recent cooling of AI stocks suggest a level of maturity and selectiveness among investors.

However, those lofty valuations and economic speed bumps remind us to keep our party hats on straight. Whether you're team bull or team bear, diversification and an open mind are the keys to success.

Make your money rise and grind while you sit and chill, with the automated investing and savings app that makes it easy to be invested.

Learn more.

2. Inflation Remains Above 2% 👀

The latest inflation reading had my eyebrows raising and my wallet tightening.

February’s Consumer Price Index (CPI) showed a 0.4% monthly increase and a 3.2% year-over-year climb.

Remember the talk of imminent rate cuts that sent stocks soaring? Well, they are starting to sound more like wishful thinking.

Inflation is playing hard to get, and the market is already moderating its expectations. The odds of a year-end Fed Funds Rate have dipped a quarter percent to the 4.25%-4.5% range.

However, the Fed wants to see core inflation below 2% to begin cutting rates. With current rates at 5.25%-5.5%, the market is still pricing in 4 quarter-point cuts this year – presumably across the 5 FOMC meetings from June to December.

Now I’m just an armchair economist, but… that’s beginning to look optimistic. These last bits of inflation have been hard to kill.

Can the Fed play hero and tame the inflation beast without derailing the growth train? Can they deliver this knockout punch by June? If not, what impact will delaying rate cuts have?

It’s hard to say with much confidence. But if there are two things markets hate, it’s uncertainty and underperformance.

3. Americans Pay Record Amount Of Interest 🚀

Americans are now shelling out nearly as much on non-mortgage debts (think credit cards, student loans, etc.) as they are on their home loans.

In January, non-mortgage interest payments surged to an annual rate of $573.4 billion, a record high that's nearly on par with the $578.3 billion spent on mortgages.

What's behind this spike?

A mix of historically low mortgage rates for those who locked in pre-March 2022 and the recent Fed rate hikes that have driven up the cost of other forms of debt.

The average American now spends 28% more per month on debt than just 4 years ago. While mortgages still consume the lion's share, the rapid ascent of auto loans, personal loans, and, yes, those pesky credit card bills, cannot be ignored.

Yet, by historical standards, the overall debt payment burden remains manageable.

Currently, U.S. households allocate about 5% of their income to interest payments. While this is the highest since 2011, it's a decrease from the roughly 8% seen in the late '80s.

However, aggregate measurements may not paint the full picture.

Lower-income households, often relying on credit cards to bridge financial gaps, are disproportionately impacted by these increases.

4. Non-GAAP Reporting Is On The Rise 🤨

If GAAP and EPS sound like the alphabet soup of finance, you’re not alone. Let’s decode a couple of the more important acronyms in the world of investing. 🕵️‍♂️💼

GAAP vs. Non-GAAP EPS: A Tale of Two Earnings

GAAP, or Generally Accepted Accounting Principles, is the U.S. accounting standard. It’s like the rulebook for financial reporting and the "no filter" selfie of a company's financial performance.

Non-GAAP EPS (Earnings Per Share), on the other hand, is like a Kardashian Instagram post: highly curated and possibly misleading.

It excludes items considered "one-time events" or "nonoperating" in nature. But here's the catch: there's no industry-standard definition for what gets left out.

The Dow's Earnings Snapshot

In Q4 2023, a whopping 80% of DJIA companies reported non-GAAP EPS. That's a lot of filters!

According to Factset, 83% of these companies had non-GAAP earnings that exceeded their GAAP figures, with a median difference of 31%. That’s the fourth-highest “gap” since 2016.

Why Should Investors Care?

Watching both GAAP and non-GAAP EPS is helpful because it shows us the full picture. While GAAP gives the unvarnished truth, non-GAAP can offer insights into a company's ongoing performance, minus the noise.

However, the recent uptick in non-GAAP reporting is worth keeping an eye on.

Of course, companies are incentivized to steer our gaze towards the more flattering numbers. But it raises yet another question: Are these adjusted earnings an innocent dab of financial makeup, or artificially inflating the market?

Ready to elevate your investing journey to new heights?

Unlock the power of informed decision-making with our daily newsletter, tailored to empower investors like you. The Early Bird delivers crucial insights that keep you ahead in the stock market, ensuring you make profitable decisions. Sign up today.

5. Asset Classes: Volume 4 - Real Estate 🏘️

Real estate can provide reliable income, value appreciation, and tax advantages.

It’s a tangible asset class that, unlike stocks or bonds, you can touch and see. Many investors find that this provides a sense of security and control.

Plus, real estate offers portfolio diversification.

While no investment is recession-proof, some real estate sectors (like affordable housing) tend to be more resilient. Even sectors that are susceptible to market factors have a relatively low correlation with stocks and bonds.

Investing Actively vs. Passively

You can get your hands dirty (literally) by buying properties directly, or you can keep them clean by investing in Real Estate Investment Trusts (REITs).

Direct ownership lets you influence the outcome of your investment, but it comes with the headaches of management.

REITs, on the other hand, offer a hands-off approach, allowing you to reap most of the benefits without dealing with tenants or toilets.

Residential vs. Commercial

There are many ways to invest in real estate.

Residential properties offer an easier entry point and steady income through rent. Commercial real estate (think office buildings and retail spaces) may provide higher yields but come with greater financing challenges and vacancy risks.

Value-Add Angle

Many real estate deals involve "forcing" appreciation through improvements.

This might mean renovating the kitchen, installing a washer and dryer, or simply adding a fresh coat of paint. The value-add strategy can significantly increase a property's worth and, subsequently, its income potential.

Debt-Financed vs. Cash-Financed

While paying in cash is safer, leveraging your real estate investment can lead to much higher returns. 

A mortgage allows you to control a property (and its income) for a fraction of the total price. However, this leverage magnifies both gains and losses, making it a double-edged sword.

In general, unleveraged real estate underperforms the stock market. Leveraged real estate, on the other hand, often outperforms the stock market.

For a much deeper dive, check out my blog post on real estate investing. Otherwise, we’re onto commodities next week!

Thanks for tuning in to this week's edition! If you enjoy 5 Fact Friday, follow me on Instagram and Twitter to stay in touch.

Also, check out TheMoneyManiac.com for more resources on earning, planning, and investing!

Until next time,
Daniel

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.