We will all have to wait at least a little while longer for that new all-time record high in the S&P 500 index. Despite teasing us at times during what was a very subdued week, stock prices never quite got high enough to break the record closing level of 4796.56 achieved almost exactly two years ago on January 3rd 2022. This was the first time since 2012 that the S&P 500 had failed to close at a record high at least once during the year, but the index still earned a total return for 2023 of almost 27%.
Wall Street traders came back from the long weekend filled with Christmas cheer on Tuesday, pushing stocks higher again - albeit in a thin volume environment that allowed for prices to drift upwards without needing much conviction behind the move other than just continuing momentum fueled by the fumes of a very impressive last couple of months. The S&P 500 index got to within 25 points of its previous record high.
There was really nothing to report from Wednesday’s snoozer of a session. Stocks spent the day treading water, inching slightly higher but left us still waiting to launch the confetti for that new record high.
Thursday was not much different, a rock bottom-volume journey to nowhere (only two-thirds of the annual daily average number of shares changed hands) with the indexes finishing unchanged on the day and still short of that new all-time record territory.
Stocks sank on the final trading day of the year on Friday, led downwards by the brightest stars of the recent boom, tech and Small Caps. The S&P 500 briefly got to within nine points of its elusive magic number, but ended the day, month, quarter and year at around 4770. Santa Claus departed for another year and there are a few concerns that he may have taken his rally with him.
Typically, the price action in the week before Christmas and then the week between Christmas and New Year can be considered as just noise and not particularly instructive or predictive of anything that’ll move markets in the upcoming year. But I do think that this time we are seeing an excessive amount of complacency and giddy optimism over the festive period and a quickly developing very high-conviction view from Wall Street that corporate earnings are going to look really good in 2024. And really, what is the recent track record of the end of year narrative? It’s not good.
In December 2021, there was universal optimism for the year ahead. Then the S&P 500 hit a new all-time record high on the first trading day of 2022, but it was all downhill from there. The consensus for 2022 was entirely bullish .. and entirely wrong. The Fed was much more aggressive than expected on rate hikes, inflation exploded, growth slowed and the S&P 500 dropped 20%. The stock price of Amazon and Nvidia got cut in half over the course of the year, while Alphabet/Google fell 40% and Meta/Facebook crashed 65%. Meantime, unprofitable tech (the likes of Zoom, Peloton and others) got absolutely annihilated, with shareholders watching their investments lose 80-90% of their value in many cases.
Now, think back a year to December 2022. Investors were despondent and miserable. The S&P 500 was ending the worst year in over a decade and bonds had just experienced pretty much their worst year ever. Thoughtfully constructed, balanced portfolios had taken a beating like never before. The Fed was incessantly hiking interest rates at every meeting, inflation wasn’t breaking and everyone (and I mean, everyone) was convinced that we were facing an imminent recession. The consensus for 2023 was entirely bearish .. and once again entirely wrong. Growth and earnings remained resilient, inflation was broken and the Fed pivoted to a more accommodative stance. Those same stocks that had had the crap kicked out of them in 2022 led the way higher in 2023 which ended up being a bonanza year for the indexes.
Now, in December 2023, the consensus is universally bullish again. Investors seem to passionately believe that an economic soft landing in 2024 is all but assured. The Fed will cut interest rates six times next year, but not because of slowing growth and instead because inflation is about to go into some sort of free-fall. Despite there being numerous geopolitical hot spots, none of them will get materially worse. U.S. politics won’t be a problem (even though it’s an election year and there’s no debt ceiling solution in sight) and despite a potentially slowing economy and margin compression, companies in the S&P 500 will grow earnings by nearly 10% this year. The 5000 mark on the S&P 500 isn’t a matter of “if” , but “when”.
All of those things may well come true. It might be exactly how 2024 works out. It’s just that we need to watch for warning signs that it isn’t and probably brace ourselves for some volatility if that turns out to be the case, since so much of this good news is already baked into the current level of stock prices, leaving markets highly vulnerable to any disappointment.
The plain fact is that there are real, legitimate risks lurking out there in the new year. We can still have a growth slowdown and a recession. Earnings growth can falter as demand slows and margins compress. Geopolitics can easily worsen from here, providing negative surprises, sometimes seemingly out of nowhere. Inflation could bounce back. And around the world, but especially in the U.S., there are going to be elections in 2024 that will be highly consequential and maybe brutally contested (both before and after polling day).
We can expect markets to normalize this week and immediately get to work answering some of these pretty important questions about economic growth, actual vs. expected Fed policy and corporate earnings.
Stay with me in 2024 and I’ll try and make some sense of things for you as we go along. Meantime have a safe, healthy and happy New Year!
OTHER NEWS ..
In such a zzzzzzzzzzzz week, finding any interesting “other news” was pretty challenging. Normal service will be resumed next week.
On the plus side, my latest Quarterly Market Review looking back on financial markets in Q4 2023 should be completed and sent to subscribers by sometime in the middle of this coming week. Keep an eye on your email inbox.
UNDER THE HOOD ..
Five technical caution signals that I will be watching for in 2024 that could indicate a market top and act as warning signs for a possible reversal in stock prices (which could still be months or quarters away if they come about) ..
1) Market Breadth.
Participation is often one of the first things to fall away in an equity bull market so if the number of stocks trading above their long term moving average starts to meaningfully decline, that can be an early warning signal of a potential reversal. You can track this reading each week in this report, see % OF S&P 500 STOCKS TRADING ABOVE THEIR LONG TERM MOVING AVERAGE below.
2) Investor Sentiment.
Overly bullish or optimistic sentiment is consistent with a crowded long side of the market and typically precedes market peaks. So a divergence between the broader stock market (still moving higher) and sentiment (beginning to fall) would be a notable caution signal for stocks. You can track sentiment each week in this report, see both the WEEKLY US INVESTOR SENTIMENT and the FEAR & GREED INDEX below.
3) Treasury Bill Yields.
Futures are pricing in a March rate cut which is now less than three months away, however the 3-month Treasury Bill yield held steady at between 5.40% and 5.45% for all of December. If we do not see the 3-Month Bill yield begin to move down towards 5% in the coming days and weeks, that will be a negative development for stocks. You can track the state of the yield curve each week in this report, see US TREASURY INTEREST RATE YIELD CURVE below.
4) The CME’s Fed Watch Tool.
This is largely a continuation of the previous point, but if the Fed Watch Tool begins to show less rate cuts or rapidly fading odds of a March rate cut (currently 87%), that could be a major headwind for stocks. You can track this reading each week in this report, see FEDWATCH INTEREST RATE TOOL below.
5) The U.S. Dollar.
The dollar index retreating to multi-month lows in recent weeks has been another tailwind for stocks, so a rebound towards a reading of 103-105 could put some downward pressure on equities.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Stock and bond markets will be closed on Monday for New Year’s Day, with trading for 2024 kicking off on Tuesday morning.
The year gets off to an interesting start with Jobs Week. The latest Job Openings and Labor Turnover Survey (JOLTS) comes out on Wednesday and is expected to show 8.75 million job openings, which would be a slight increase from a month prior.
Then on Friday comes the Jobs Report for December. Estimates are for a gain of 155k payrolls, versus 199k in November. The unemployment rate is expected to move up fractionally from 3.7% to 3.8%.
This week will also see the release the minutes from the Fed’s mid-December monetary-policy meeting.
ARTICLE OF THE WEEK ..
“It was hard to f*** up too badly in 2023. If you did, you had to go out of your way to do so. Here are some of the ways in which you might have blown the year .. “ Josh Brown nails it again.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Costco) - up 1.9% for the week.
Last week’s worst performing U.S. sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - down 1.1% for the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest U.S. companies. It rose 0.4% last week, is up 26.6% for all of 2023 (total return) and is now just 0.7% below its all-time closing high (01/03/2022).
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. It rose 0.1% last week, is up 18.8% for all of 2023 (total return) and is now 17.2% below its all-time closing high (11/05/2021).
The proprietary Lowry's measure for US stock market Buying Power rose by 2 points last week to 173 and that of US stock market Selling Pressure fell by 6 points to 108 over the course of the week.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.61 %
One week ago: 6.67%, one month ago: 7.22%, one year ago: 6.42%
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 different indicators that measure some aspect of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call options, 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 LONG TERM MOVING AVERAGE (LTMA) ..
75% (374 of the 500 largest stocks in the U.S. ended last week above their LTMA and 126 were below)
One week ago: 74%, one month ago: 58%, one year ago: 48%
A closely-watched measure 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 the 200-day moving average which is among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market, with 50% considered to be a key pivot point.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 46% (53% a week ago)
⬌ Neutral: 29% (26% a week ago)
↓Bearish: 25% (21% a week ago)
Net Bull-Bear spread: ↑Bullish by 21 (Bullish by 32 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 after the Fed’s next meeting (January 31st)?
Yes .. 17% probability
No .. 83% probability
Will interest rates be lower than they are now after the Fed’s following meeting (March 20th)?
Yes .. 87% probability
No .. 13% probability
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 (5.60%) is being paid for the 1-month duration and the lowest rate (3.84%) 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 fell last week from 0.41% to 0.35%, indicating a flattening 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 deemed 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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