We are entering the year of the dragon on the Chinese calendar which it appears traditionally signifies good luck, prosperity, strength and abundance. Although the Chinese stock market is not really the place to look for much in the way of prosperity or abundance right now, U.S. stock markets are hot, hot, hot and that didn’t change as we saw yet another week of gains across the board with a significant new milestone reached by the S&P 500.
Federal Reserve chairman Jerome Powell reiterated in an interview with CBS’s 60 Minutes that aired last Sunday evening that the Fed likely won't be ready to cut interest rates at its next meeting in March, stating that “the danger of moving too soon is that the job’s not quite done”.
There was absolutely nothing new here, this was no more than an exact echo of what he had told us all a few days earlier at his press conference, but Treasury bond yields still jumped and stocks opened lower on Monday, with Small Caps leading the downward charge and the decline accelerated later in the day when two of Powell’s influential Fed colleagues came out and said exactly the same thing. Fed-speak is clearly getting organized and in synch.
This continued on Tuesday when Fed officials were once more out in force, reiterating the “higher for longer” company line that it would be a mistake to cut interest rates too soon. If this Fed-Speak was intended to take some more froth out of stock markets, it worked for a while and Monday’s decline resumed. Later in the day, however, the dip buyers jumped back in and both the Large and Small Cap indexes actually closed the day with small gains.
Concerns about the viability of embattled New York Community Bancorp (NYCB) intensified as it was cut to junk by the Moody’s credit rating agency on Wednesday. Equivalent lending institutions around the world, heavily exposed to their own mostly toxic commercial real estate markets and not helped by contagion from the implosion of the Evergrande Group in China, are clearly experiencing problems too.
There was also a continued drumbeat of Fed-Speak throughout the day from even more central bank officials expressing satisfaction with inflation trends but playing down the likelihood of imminent interest rate cuts. Even so, driven by steadier market interest rates and some more decent earnings reports, Large Cap and tech stocks shrugged it all off and started to become magnetically drawn towards “S&P 5k”, the crowded option strike price and psychologically important 5,000 level for the S&P 500 index, getting to within five points of the symbolic milestone.
But like a teenager who is too nervous to approach their crush at the high school dance, the S&P 500 spent Thursday frequently getting up close to the 5k level and then backing away before finally managing to land a brief kiss a minute or so before the closing bell. It couldn’t quite hold on to close above the line but still managed its ninth all-time record high of 2024. Interestingly, this session saw the Russell 2K Small Cap index suddenly bounce spectacularly from recent under-performance, up by over 1.5%.
S&P 5k was breached again on Friday morning and this time the index held above that level for the rest of the session, recording its first ever >5k close at 5,027 and obviously a tenth new all-time high of the year - and it’s only early February. The mood was cheered by the release of the annual audit and report card on the accuracy of the last twelve months’-worth of retail inflation data which confirmed the strong downward trajectory that we’ve been seeing for many months now.
The Russell 2K Small Cap index followed through on its strong showing from the day before and was by far the best-performing corner of the market again. This is very positive for stocks in general as it demonstrates a widening of the breadth of stocks participating in the rally and a closing of the gap between Large and Small Caps by means of the little guys moving higher rather than by the big guys moving lower.
Oh, and by the way, Microsoft became the largest company in history by market value, closing the day with a market capitalization of $3.125 trillion, surpassing the previous biggest which was Apple at a mere $3.09 trillion.
2024 has started out with lots of noise .. mixed messages from the first Fed meeting (yes to rate cuts - but not yet), its officials publicly taking to the airwaves, conflicting earnings reports from tech giants, bizarre jobs data, all-time high records tumbling all over the place, Elon being Elon, a return of small bank concerns amid what is clearly becoming a commercial real estate crisis around the world, China’s situation going from bad to worse, Putin chatting cozily with U.S. media and so on and so forth.
For all the noise and strange nuance that we are seeing, this bullish mantra is still intact: No hard landing, Fed cutting rates sooner rather than later, inflation declining, earnings growth holding up. For this rally to reverse meaningfully, one of those four statements must be proved false and despite some rather head-scratching recent data, none of it was enough to even begin to do so, and as such, the S&P 500 continues to reach fresh all-time highs, pulling all the other indexes higher with it.
But we may be approaching an inflection point and it’s very important to cut through the noise right now and focus solidly on what matters, the four core drivers of stock prices at the moment:
solid economic growth
a Fed embracing the idea of interest rate cuts
falling inflation
growing corporate earnings
Again, until one of those drivers is shown to be broken (and they will be at some point, they always are) then momentum can easily carry this market even higher. And yes, stocks are ripe for a 10%+ correction as and when one or more of the factors are disproved, but we are certainly not there yet.
The burden of proof lies entirely with the bears and so far they’re not accumulating enough evidence to stop this rally, aside from a few overbought pullbacks from time to time. The risks are plentiful, but momentum can be a hard trend to fight.
OTHER NEWS ..
In Other Words .. Job cuts have hit Big Tech and other sectors, and while it’s hard to sugar-coat a job loss if you’re on the receiving end, companies are tying themselves in linguistic knots trying to come up with cringe-worthy corporate-speak around the subject. Examples of phrases being used to describe layoffs are: “right-sizing”, “org changes”, “a simplified operating model”, “fitting our organization to our strategy" and my personal favorite, the vomit-inducing “an involuntary career event”.
For some reason that is beyond the comprehension of anyone with the intellect of a jellyfish or higher, executives and HR professionals at these firms still somehow seem to believe that if they use language like this, people won’t get as upset. I wonder how that’s working out? I know what effect even just writing this had on me.
USA! USA! USA! .. New Jersey’s MetLife Stadium will become the first arena in history to have staged both a Wrestlemania and a World Cup Final when it hosts by far the biggest sporting event in the world (think over 70x the number of Superbowl viewers) in 2026 following the announcement last week from soccer’s world governing body, FIFA, of the location schedule. The Azteca Stadium in Mexico City is to host the opening game of the U.S.-Canada-Mexico-hosted tournament.
Despite its supposed three nation format, however, it’s going to be very U.S.-centric. All the games at the business end of the month-long competition (quarter-finals and beyond) will take place in the States and there are actually just as many games taking place in Texas as there are in Canada.
Moving Lower .. Israel received its first-ever sovereign downgrade as Moody’s Investors Service lowered its credit rating, citing the impact of its ongoing military operation in the region on the nation’s finances. The country was cut to A2, the sixth-highest investment grade and on a par with Poland and Chile. Moody’s also changed the outlook on Israel to negative.
Damned If They Do .. Respiratory illnesses have lingered above the national baseline since November, according to the CDC. Far from staying home to halt the spread of germs, American workers are now reporting to their desks at the highest rates in almost four years. In kind of a no-win situation, workers who are ill are being shamed by bosses for calling in sick or by colleagues if they show up contagious.
UNDER THE HOOD ..
The 5,000 level in the S&P 500 had always been seen as a potential ceiling, a resistance level that could slow down or even halt any rally. Now that the level has been breached, however, it could well become a potential floor, a support level that can pause or even reverse a decline in the index while it is >5k. That’s how these “big number” milestone levels work.
But if the index rolls over and quickly falls back meaningfully below 5,000, its power as a resistance level the next time to block the index as it tries to break back above it is massively enhanced as we will have already witnessed a “failure” at this key point and the task will become harder with every subsequent failure to maintain >5k. For the bulls, staying above the 5,000 watermark for the next few weeks at least is important.
The next two or three weeks are critical from a technical standpoint for other reasons too. Since 1945, the S&P 500 has risen in price in both January and February just 29 times. Historically, every single time this happened, the S&P 500 recorded a positive full-year, rising an average of 24% in those years vs. the typical average increase per year of 10%.
But history also says that stocks are now in one of the seasonally weakest months of the year, with an even weaker February often seen in election years. And we are sitting on a monster rally and history also suggests that we should not be surprised if there is a period of digestion.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
The wave of earnings reports continues this week, with more than 60 S&P 500 companies scheduled to report Q4 2023 results including some biggies like Coca-Cola, Cisco Systems, Applied Materials and Deere. We more than halfway done with this earnings season, with about 60% of S&P 500 index companies having already announced their results.
The economic highlight of the week comes on Tuesday with the release of January’s Consumer Price Index (CPI) measure of retail inflation. Expectations are for a 2.9% year-over-year rise, which would be half a percentage point less than in December.
ARTICLE OF THE WEEK ..
Everyone is looking for the best funds, but what about the other end of the spectrum? Which fund investments have been the top wealth-destroyers?
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) - up 2.9% for the week.
Last week’s worst performing U.S. sector: Utilities (two biggest holdings: NextEra Energy. Southern Co.) - down 2.0% 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 1.4% last week, is up 5.5% so far this year and ended the week at a new all-time closing record high (02/09/2024)
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 rose 2.5% last week, is down 0.7% so far this year and is 17.8% 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 rose 0.1% last week, is up 2.7% so far this year and is up 15.0% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.64%
One week ago: 6.63%, one month ago: 6.66%, one year ago: 6.12%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
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 possibly too-frothy prices and a sense of “FOMO” with 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 ..
62% (309 of the 500 largest stocks in the U.S. ended last week above their 50D MA and 191 were below)
One week ago: 65%, one month ago: 81%, 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: 70%, one month ago: 73%, one year ago: 69%
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: for example, a new technical uptrend is considered to be in place when the 50-day percentage crosses above that of the 200-day.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 49% (49% a week ago)
⬌ Neutral: 28% (26% a week ago)
↓Bearish: 23% (25% a week ago)
Net Bull-Bear spread: ↑Bullish by 26 (Bullish by 24 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 March 20th?
Yes .. 16% probability (20% a week ago)
No .. 84% probability (80% a week ago)
Will interest rates be lower than they are now following the Fed’s following meeting on May 1st?
Yes .. 61% probability (71% a week ago)
No .. 39% probability (29% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.125% (1.25% lower than where we are now, implying five rate cuts of 0.25% each in 2024)
One week ago: 4.125% (implying five rate cuts), one month ago: 3.875% (implying seven rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.51%) is being paid for the 2-month duration and the lowest rate (4.14%) is for the 5-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year fell from 0.33% to 0.31%, 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 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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