It took just over two years, but we finally have ourselves another new all-time record closing high for the S&P 500 which was reached on Friday when the index closed at 4839.81. The U.S. stock market really is an incredible piece of work. Never in history has it ever once failed to recover from all of its losses, no matter how huge, and then go on to set yet another new record high. If you are investing for the long term, you need to bottle this moment and remember it the next time stocks are down large and everything seems hopeless.
After yet another long weekend, during which geopolitical tensions around the world continued to escalate and Trump won big in Iowa, Wall Street traders returned to the battlefield on Tuesday morning and were soon confronted by Fed Governor Christopher Waller saying that, while the state of the U.S. economy was “almost as good as it gets”, he was unconvinced that higher inflation had been killed and that fact could impede progress towards the frequent and extensive interest rate cuts that the market expects the Fed to provide, starting as early as March. Stocks glided lower, especially when officials from the European Central Bank (ECB) started making similar noises.
We learned on Wednesday that U.S. consumers in December kept on spending like drunken sailors. The Retail Sales data came in hot, up 0.6% from November’s spending and 5.6% higher than a year ago, providing more signs that the economy is continuing to grow and just adding to the “inflation is not dead” side of the ledger.
The probability of a Fed interest rate cut by March, which had been as high as over 80% as recently as the previous week and was basically a 100% certainty at the beginning of January, reacted by collapsing to pretty much that of a coin-flip.
Stocks dropped further in response and it’s not hard to figure out why. The high probability of at least one interest rate cut by March this year was a major contributor to the December melt-up and we’re seeing some of those gains being given back now that that particular probability is deemed to be much lower.
The skies brightened on Thursday, however, and all the stock indexes moved in a northerly direction, helped partly by a very optimistic outlook from Taiwan Semiconductor Manufacturing (TSM), which supplies chips to Apple and Nvidia. Also, the Senate passed yet another Continuing Resolution, a temporary spending bill to avert a partial U.S. government shutdown this weekend, which once again just kicks the can down the road, this time to March 1st (partial shutdown) and March 8th (lights out).
A calmer mood settled over markets on Friday with the sense that, yes, recent hot economic data readings might well defer interest rate cuts beyond initial expectations, but they also imply that whatever meaningful recession fears remain for 2024 may be unfounded and that can only be good for future corporate earnings.
After a sluggish start, stocks ripped higher after lunch on the back of this new interpretation of the Retail Sales numbers and also a buoyant-again tech sector which is helping to offset some of the growing caution elsewhere with a new burst of AI optimism following TSM’s earnings report, to erase the week’s losses and we finally reached a new all-time record closing high for the S&P 500. Hurrah!
Asset prices in the U.S. are priced for perfection in what is a very crowded trade and that’s a concern. Markets are still assuming that even if the Fed doesn’t cut on January 31st or March 20th, it will definitely cut on May 1st and that the current expectation of a total of at least six rate cuts in 2024 will, more or less, stay intact.
But we are getting closer to the wire whereby if the Fed doesn’t signal at least one interest rate cut either before or at the May meeting then markets could well freak out. No rate cuts through May will mean that Wall Street will have to accept that it is wrong about its aggressive expectations for Fed easing that underpinned the entire Q4 rally. Pull that punch bowl away and you could be looking at a 10-15% decline in stock prices or more.
From a market standpoint it doesn’t matter so much when the rate cuts start, as long as the expectation for a lot of policy easing (let’s call it > four interest rate cuts) remains intact. Ironically, a real risk for this market is that the Fed does exactly what it currently says it will do and only cuts two or, at a real stretch, three times.
So far, there is no budging on the expectations of a rate cut before or at the May meeting as they remain intact at a 100% probability. However, where that number goes, stocks also will go and, in some ways, this is the most important data point to keep track of right now. As long this probability remains at or very close to around 100%, stocks will be able to continue to move higher. But if doubt sets in and we see the reading fall to like 75% and continuing lower, then look out below.
Consequently, I am now adding tracking for the May meeting probability to this report each week (see FEDWATCH INTEREST RATE TOOL below).
OTHER NEWS ..
Home Sales Have Collapsed .. Sales of existing homes crashed last year to the lowest level in nearly three decades, after elevated mortgage rates and a lack of homes for sale shut out buyers. The number of existing home sales tumbled 19% in 2023 from the prior year to 4.09 million, the National Association of Realtors said on Friday. That total was lower than during the sub-prime crisis of 2007-08 and the lowest full-year level since Montell Jordan told us that this is how we do it in 1995.
After two years of soaring home sales that started during the pandemic as people sought more space and new locations, the housing market skidded to a halt in mid-2022 as rates began to rise again and the supply of homes for sale stalled at very low levels. But there are some signs of life as mortgage rates ease to their lowest levels since last May and it’s possible that last year represented a bottom for sales activity.
Recession Indicator? .. I don’t normally take too much notice of regional economic activity readings, but the New York Fed Manufacturing Index is prized by some as an early tip-off each month on where the manufacturing sector in the country as a whole is heading. The sight of this index dropping deep into negative terrain for January – a truly horrible reading and the lowest since the COVID was raging in the Spring of 2020 – convinced some observers to warn that the jig is up and a US recession is now near. Maybe, but it’s hard to make a high-confidence call based on one indicator, especially when it is one regional manufacturing indicator that draws only on survey data from manufacturing executives in the NY Fed’s district.
Remember When Chinese Stocks Were Supposed To Be The Future? .. Chinese shares sank to the lowest in nearly five years after another bout of weak economic data. The largest brokerage in China is said to have suspended short selling for some clients in mainland markets following the rout in Chinese stocks at the start of the year. State-owned Citic Securities made the move after so-called window guidance from regulators. A Hong Kong gauge of Chinese stocks has notched up its worst week since March, while global passive funds are adding to the pressure by joining in with the selloff in another sign of deteriorating investor confidence.
UNDER THE HOOD ..
The market’s primary uptrend appears intact, although recent increased selectivity in Demand favoring Large Caps makes markets increasingly vulnerable to another short-term dip in prices. This phenomenon should not perhaps be unexpected as it was Small Caps that led the charge in those turbo-charged final weeks of 2023.
The number of S&P 500 stocks trading above their 50-day and 200-day moving averages declined modestly last week (see below) despite the continued gains and a new record in the index at the same time. At this time, this is not an alarming drop in the measures of market breadth, however if we were to see the number of stocks trading above their 50-day MA cross below the number of stocks trading above their 200-day MA, that could be a warning sign that breadth is deteriorating which typically precedes market pullbacks.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
While it is doubtless comforting to know that the collective economic genius of the likes of will.i.am, Mick Jagger, Idris Elba, Yo-Yo Ma, Nas Daily, Chieftess Puttany and Jared Kushner were all able to attend the pointless circle jerk and expense account-fueled journalist jolly-up that is The World Economic Forum in Davos and get to self-importantly lecture the rest of us little people on how we should live our puny lives, we can all get back to some actually relevant business news content this week now that a massive fleet of private jets has flown all the hypocritical, self-aggrandizing narcissists back home to their out-of-touch bubbles.
Q4 earnings season heats up, as more than 70 S&P 500 firms report their results including Netflix, Tesla, Visa, IBM, Proctor and Gamble, Johnson and Johnson, Verizon, GE, Intel, AT&T, American Express, Comcast, Lockheed Martin, United Airlines and American Airlines.
The most-watched economic data release this week will be the one used by the Fed to determine its inflation assumption and thereby its interest rate policy; the Personal Consumption Expenditures (PCE) Price Index for December and more importantly, the Core PCE Price Index, which excludes volatile food and energy prices, which will come out on Friday. The core number is expected to show this measure of inflation at 3.0% annualized.
Also out this week will be the first of three estimates for Gross Domestic Product (GDP) growth in Q4 2023.
The European Central Bank (ECB) will publish its monetary policy decision on Thursday and is expected to keep interest rates in the Eurozone unchanged.
ARTICLE OF THE WEEK ..
What did the stock market teach us in 2023? Quite a lot, it seems.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Technology (two biggest holdings: Microsoft, Apple) for the second week in a row - up 4.3% for the week.
Last week’s worst performing U.S. sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - down 3.4% for the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest U.S. companies. Its price rose 1.3% last week, is up 1.5% so far this year and ended the week at a new all-time closing record high
IWM, the Russell 2000 Small Cap ETF, is made up of the bottom two-thirds in terms of company size of the group of the 3,000 largest U.S. stocks. Its price fell 0.2% last week, is down 4.1% so far this year and is 20.7% below its all-time closing record high (11/05/2021)
DXY, the U.S. Dollar index, is an index that measures the value of the U.S. Dollar against a weighted basket of six other major currencies (the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krone and the Swiss Franc). It fell 0.1% last week, is up 1.8% so far this year and is up 14.2% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.60 %
One week ago: 6.66%, one month ago: 6.67%, one year ago: 6.16%
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with a sense of “FOMO” and investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
The “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE ..
74% (370 of the 500 largest stocks in the U.S. ended last week above their 50D MA and 130 were below)
One week ago: 82%, one month ago: 88%, one year ago: 69%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
69% (345 of the 500 largest stocks in the U.S. ended last week above their 200D MA and 155 were below)
One week ago: 73%, one month ago: 73%, one year ago: 64%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the largest 500 publicly-traded stocks in the U.S. are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
Crossovers between the 50-day and the 200-day are also considered to be significant - in a positive sense when the 50-day percentage moves above that of the 200-day and in a negative sense when it crosses the other way.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 40% (49% a week ago)
⬌ Neutral: 33% (27% a week ago)
↓Bearish: 27% (24% a week ago)
Net Bull-Bear spread: ↑Bullish by 13 (Bullish by 25 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now following the Fed’s next meeting on January 31st?
Yes .. 3% probability (5% a week ago)
No .. 97% probability (95% a week ago)
Will interest rates be lower than they are now following the Fed’s meeting on March 20th?
Yes .. 49% probability (81% a week ago)
No .. 51% probability (19% a week ago)
Will interest rates be lower than they are now following the Fed’s meeting on May 1st?
Yes .. 100% probability (100% a week ago)
No .. 0% probability (0% a week ago)
Based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of Friday. Data courtesy of CME FedWatch Tool.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.54%) is being paid for the 1-month duration and the lowest rate (4.08%) is for the 5-year.
The most closely-watched and commonly-used comparative measure of the spread between the 2-year and the 10-year rose from 0.18% to 0.24%, indicating a steepening in the inversion of the curve.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. Lightly shaded area on the chart shows the current Federal Funds rate range.
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