Daily Stock Market Articles

Small Business Sentiment Mixed Under the Hood
Tue, Dec 12, 2023

The NFIB unveiled its latest look at small business sentiment early this morning. The headline number remains in the bottom decile of its historical range, falling 0.1 points to 90.6 in November. That is compared to expectations which called for the number to be unchanged last month.



Across the categories factoring into the index, breadth was mixed in November with four categories falling, four rising, and one unchanged. Like the headline number, many categories are also in the bottom few percentiles of their respective historical ranges, albeit with some exceptions like robust readings in plans to increase employment, current inventories, and job openings hard to fill.



As we discussed in our Morning Lineup, combining the report's readings on employment shows some rebounding conditions for labor markets over the past few months. Looking more closely, though, it is hard to say labor market conditions are materially accelerating. As shown, hiring plans have risen, but on net more companies are reporting negative employment changes. In a similar vein, compensation plans have risen sharply including a six point jump month over month in November (the largest one month increase since last October and the third largest on record), even though actual changes to compensation have been flat. Meanwhile, fewer businesses are reporting job openings are hard to fill. Small businesses are showing labor conditions have cooled over the past couple of years but are far from weak as any more recent improvements have been from plans rather than observed changes.



Similarly, sales expectations rebounded in November, contrary to a flat reading on actual sales and earnings changes. Perhaps most importantly, the share of businesses reporting higher prices has fallen down to 25, matching the July low. In combination with the higher reading on sales expectations, that likely helped the number of firms reporting now as a good time to expand.



Looking at the reverse, of those reporting now as not a good time to expand, the single biggest reason given for such sentiment was economic conditions. That is typically the most widely cited reason historically followed by political climate (the NFIB has a tendency to be sensitive to politics, namely which party holds the presidency), but for the first time in at least a decade, financial conditions and interest rates earned the number two spot. As shown below, the number of firms reporting that rates are holding them back from expanding has risen steadily since the current tightening cycle began.



As mentioned previously, actual earnings changes saw no improvement in November and are sitting near historically weak levels. As for the reasons given for lower earnings, increased costs remain a key reason, but November also saw a significant jump in those reporting sales volumes as a problem. In other words, inflation and weaker demand appear to be weighing on small business earnings.



Despite the burden of interest rates and expectations for credit conditions sitting at the lowest levels in over a decade, small businesses have actually increased capital expenditures dramatically to a new post-pandemic high. However, that is counter to capital expenditure plans, which have fallen in the past few months, and inventories showing drawdowns.

 

The Time To Get Back Into Bonds


Probably the top fixed income question we’ve received in 2023 is when it’s appropriate to begin moving bond allocations from ultra-short-maturity bonds and money market funds back into core bonds. Gauging by 2024 rate hike expectations, the answer is probably sometime around now.

The “perfect” time, assuming rates have peaked, was October 19 of this year, when the 10-year Treasury yield peaked at just under 5%, while the Bloomberg US Aggregate Bond Index (“Agg”) yield hit a high of 5.74%. The Agg still has a lot of ground to make up for 2021-2023 losses, but since October 19 it’s up 6.9% on a total return basis as of yesterday’s close.

While yields may have fallen a little too far too fast, the timing of the rally is entirely normal and we believe it’s likely to continue, even if there may be some volatility along the way. As shown in the table below, historically, in the period from 12 months to 6 months before the first rate cut, core bonds (the Bloomberg US Aggregate Bond Index) outperform short maturity Treasuries (the FTSE 1-month Treasury Bill Index) by 1.1%, on average. It gets even better as you get closer to the cut, core bonds outperforming bills by an average of 4.4%. Outperformance slows down a little after the cut but continues in the year following the first cut.

Right now, market-implied odds signal the first rate cut is most likely to come at the May 2024 regular Federal Reserve policy meeting, with expectations of 4-5 rate cuts in 2024 overall. If expectations are right, or even a little aggressive, we are in that historical sweet spot of the six-month period prior to the first cut now. We would take market-implied expectations with a grain of salt and believe they may be a little aggressive but are still right in principle. We’ll find out more when the Fed’s December policy meeting concludes tomorrow, when we expect the Fed to push back at current expectations but only causing a moderate shift.



Carson Investment Research recently extended the maturity profile of our fixed income recommendation, moving it closer to the duration (a measure of interest rate sensitivity) of the broad Bloomberg US Aggregate Bond Index, which is a market-capped weighted index of investment-grade US Treasuries, mortgage-backed securities, and corporates. We do continue to prefer stocks to bonds based on our positive outlook for the US economy in 2024. But as inflation continues to decline, we think core bonds will increasingly return to their traditional role as a portfolio diversifier and ballast against potential bond losses while still offering an attractive yield.

 

Inflation Still Moving in the Right Direction
Tue, Dec 12, 2023

This morning’s Consumer Price Index for November was mostly in line with expectations (although the headline reading was slightly higher than expected), and the lack of any meaningful surprises has allowed the market to continue with what has lately been the path of least resistance, which has been higher. The report also showed that the most rapid leg of disinflation is most likely behind us, and while that could lead some to believe that the road ahead will be a slog, that isn’t necessarily the case.

For starters, the focus of monthly inflation reports lately has been in Core CPI (ex-food and energy). After peaking at 6.6% in June 2022, the November year/year reading came in at 4.0% for the second month in a row.



The chart below shows the historical 12-month rate of change in the y/y core CPI. Over the last 12 months, that rate of increase has declined by two full percentage points, and outside of the prior two months, that is one of the sharpest declines since the early 1980s. In other words, the 12-month rate of change is still declining, but the pace of decline is slowing.



November’s streak also ended what has been a monumental streak of monthly declines in the y/y core CPI reading. At seven months in October, it was the second longest streak on record, trailing only the ten-month streak of declines ending in December 1975.



Understandably, the end of the streak of declines along with the slowing rate of decline in the y/y core CPI reading could lead one to think that inflation levels are plateauing at a higher level. However, a look at the trend of monthly prints in core CPI shows a potential tailwind in the months ahead. The chart below shows the monthly change in core CPI over the last 24 months. While it hasn’t exactly been linear, the trend is lower. In the twelve months from December 2021 through November 2022, eight out of twelve monthly prints were 0.5% or above, but in the last twelve months, only one print has been 0.5%.

Just looking at the last year (shaded area in chart) it’s a similar trend. From December 2022 through May 2022, every monthly print was 0.4% or above, but in the most recent six months, every print has been 0.3% or below. If just the trend of the last six months remains in place, for the next six months the y/y reading will be replacing monthly prints of 0.4% or more with prints of 0.3% or less which should help to keep the trend of disinflation going.

 

Moderating Inflation & Final Fed Meeting Clear Path for late-December Surge

This week’s CPI and PPI releases showed the moderating trend of inflation continues. Prices are still rising just at a slower pace and the rate of change could finally fall back before the Fed’s target of 2% next year. In response to and in anticipation of lower interest rates, the market has enjoyed above average gains in December.

As of the close on December 12, DJIA was up 1.74%, S&P 500 +1.66%, NASDAQ +2.16% and Russell 2000 up an impressive 3.99% (right side vertical axis of chart above). The market did experience some typical early December weakness this year after bucking the trend of weakness on the first trading day. Even though the market has already enjoyed above average gains this month, we still anticipate more to come with the potential for a new all-time closing high from DJIA before year end.

 

Claims Cooling Down
Thu, Dec 14, 2023

Economic data this morning broadly came in healthier than expected, including weekly jobless claims. Initial claims were expected to go unchanged at 220K. While that previous week's reading was revised up to 221K, this week's print fell all the way down to 202K. That is the lowest reading on jobless claims since the week of October 14th and September 16th before that. In all, that makes for one of the lowest readings on claims since January of last year.



Before seasonal adjustment, claims are largely following the usual seasonal pattern having been trending higher since the early fall. Currently at 248.3K, unadjusted claims are running at the lowest level for the comparable week of the year since 1969.



Continuing claims have gotten much more elevated than initial claims over the past few months. Currently totaling 1.876 million, continuing claims have risen meaningfully from the low of 1.658 million put in place just three months ago. However, the consistent pace of increases over that span (every week from September 16th through the first week of November saw a week over week increase) has slowed, having been more choppy in the past month. In fact, at 1.876 million, the current reading is still almost 50K below the recent high of 1.925 million set in mid-November.

 

This Is Likely the Best Investment Over the Next 5 Years


If you’re wondering what the investment is, I’m referring to stocks. More specifically, US stocks. At Carson Investment Research, we just moved our longer-term strategic asset allocations to their maximum equity overweight. Stocks may very likely gain 75-100% cumulatively over the next 5 years, which is 12-15% annualized.

If you look back at history, the average return over rolling five-year periods from 1923 through 2017 is about 11% (before inflation). However, in 49 out of the 96 five-year periods (51%), returns were higher than 12% annualized, i.e. greater than 75% overall for the entire 5-year period through the power of compounding. In fact, returns were under 8% in only 31 periods (32%).



However, that’s the past, and while it’s a reasonable guide for what could happen in the future, we believe there are few things that tilt the odds further towards above average returns in the future.


The 2020s – America Rising
It may sound weird to suggest that the 2020s will likely be the American decade, especially from the perspective of the stock market. U.S. stocks vastly outperformed international stocks over the prior decade, and as this chart from J.P. Morgan illustrates, these periods of outperformance tend to go back and forth. So, it wouldn’t be unusual to expect a reversion. But we’re going against the grain here.



Over the last year and a half, the economy has defied multiple forecasts of a recession, overcoming an aggressive Federal Reserve tightening cycle amid the highest inflation in 40+ years. Ryan and I have written a lot about this, with economic resilience coming on the back of strong household balance sheets and solid income growth.

The economy seems poised to grow around 2.5-3% in 2023 after adjusting for inflation, which would be above the trend we saw between 2010 and 2019. That is remarkable, especially given the massive headwind of surging interest rates. No wonder the consensus has shifted away from recession calls, though several outlooks from other shops suggest middling growth in 2024. The US has now raced ahead of other developed markets when looking at economic growth since the pandemic – the economy is 7% larger in real terms, versus 3% or less for its peers.



We remain in the camp that the economy will avoid a recession but take a different view on what the drivers of economic growth will be, emphasizing the upside from productivity growth. That view makes us optimistic on the expansion continuing in 2024, and even beyond. There’s been a lot of buzz around generative artificial intelligence (AI) this year. Our view is that the watershed moment for this technology is not about what it can do for us right now, even if it has the power to unlock enormous potential down the road, but the environment that allows generative AI and other transformative innovations to flourish. Part of this also involves a reshoring shift to the US, boosting domestic investment, which is why we believe America will outperform its developed market peers.

Productivity growth can’t be created on demand, and there are environments that foster it — for example, by incentivizing investment, encouraging competition, and protecting property rights. That’s what’s created the environment that has given us generative AI, which itself can then seed additional productivity growth in the future.

2023 was the year of normalization, and all the investment over the last couple of years (including labor, which is businesses’ largest investment) is bearing fruit, and productivity is accelerating. Over the last two quarters, productivity growth rose at an annual pace of over 4.4% — the fastest two-quarter pace since the late 1990s outside of recessions and immediate post-recession periods.

In a previous blog, I discussed why this is a big deal for the economy, inflation, and monetary policy. Long story short, if you have higher productivity, you can have strong wage growth with relatively low inflation. This can create a positive feedback loop between monetary policy and productivity. Strong productivity growth that is accompanied by low inflation could lead to more expansionary monetary policy. That could lead to greater investment and a “tighter” labor market with low unemployment and faster wage growth. This could in turn fuel further productivity growth, and signal to the central bank that it can keep rates low.



This is essentially what happened in 1995, with then Fed Chair Alan Greenspan choosing to reduce interest rates despite strong wage growth. He bet that productivity would increase due to technological breakthroughs and prior breakthroughs gaining traction, and he was right. Part of it was also because expansionary policy led to tight labor markets that boosted productivity further.

We could be in a similar situation right now, with tight labor markets leading to productivity gains rather than inflation. Increased business investment could also push profits higher, boosting equity market returns above the historical average.

What’s the Risk?
By no means do I want to suggest that stocks will go up in a straight line – we’ll continue to see volatility, with pullbacks and corrections along the way. As Carson’s Chief Market Strategist Ryan Detrick likes to say, volatility is the toll we pay to invest. Expect to see pullbacks, corrections, severe corrections, and perhaps even a bear market where stocks fall 20%.



But here’s some perspective: from December 31t, 2018, through December 12th, 2023 (just shy of 5 years), the S&P 500 has gained 102%. That includes 2 bear markets along the way, in 2020 and again in 2022. Yes, you’re reading that right — stocks have doubled over the last 5 years, amidst a worldwide pandemic, high inflation, an aggressive Fed, and surging interest rates.

The other big risk, which could upend our views, is that the Fed could keep rates too tight for too long, which in turn would lead to falling investment, more unemployment, and slower wage growth, and ultimately weaker productivity growth.

This is why we seek to control risk in our portfolios. As my colleague, Barry Gilbert, recently wrote, we also extended the maturity profile of our fixed income holdings. While we are overweight stocks versus bonds, we do think core bonds will increasingly return to their traditional role as a portfolio diversifier. At the same time, we’ve also chosen to diversify our diversifiers, with some allocation to managed futures, which is a hedge against inflation volatility.

The good news is that the Powell-led Fed now view the risk of not doing enough to fight inflation as balanced against the risk of doing too much, and potentially breaking the labor market. That’s a big deal, since it means we could see policy easing if inflation heads down in a sustainable way – which it could if productivity runs strong.

 

Bulls Take the Majority
Thu, Dec 14, 2023

More and more equity indices are hitting fresh record highs with the S&P 500 within 1.5% of doing the same. Understandably on these moves, investor sentiment has gotten a further boost. Per the latest AAII Investor Sentiment Survey, 51.3% of investors reported as bullish this week. And keep in mind, due to the timing of the survey, that would not have fully captured any investor response to yesterday's FOMC. That is the highest and first reading above 50% since July 20th of this year when bulls were only 0.1 percentage points higher. Outside of that week, it would be the highest bullish sentiment reading since April 2022.



Given the new high in bulls, bears have been nowhere to be found. A meager 19.3% of respondents reported as bearish this week. That surpasses the recent low of 19.6% from just two weeks ago for the lowest amount since the first week of January 2018 when only 15.56% of responses were bearish.



The overwhelmingly bullish sentiment can also be observed through the bull-bear spread. Currently, the share of bulls outnumber bears by 32 percentage points. That is the widest margin in favor of bulls since April 2021. Looked at another way, that is 2.1 standard deviations above the historical average of the spread meaning sentiment is extremely extended..



The cheery sentiment on the part of investors certainly means there is a warm and fuzzy feeling during this holiday season, but we would note that sentiment is historically a contrarian indicator. In other words, opposite to what investors are feeling, extremely bullish sentiment readings have historically been followed by more lackluster returns.

 

FAANG+ Leaving Newcomers in the Dust
Fri, Dec 15, 2023

Both the NYSE FAANG+ Index and Renaissance IPO ETF (IPO) have put in place fresh 52-week highs in the past couple of days, however, zooming out, those fresh highs are on different planets. The NYSE FAANG+ index—comprised of many mega cap Tech stocks—is not only at a 52-week high, but it's trading at record highs. Since the pre-COVID market high in February 2020, the FANG+ group is now up 120.1%. As for the IPO ETF, this week's 52-week high only leaves the group at the highest levels since April 2022. Contrary to the all-time high for FAANG+, IPO is still down 51.7% from its February 2021 high and is up a meager 4.7% since pre-COVID. As you can see below, these two traded closely inline with each other in the early days of the post-COVID rally, but FANG+ has left IPO in the dust since the start of 2022.

 

Wealth Effect Picks Up Into Christmas
Fri, Dec 15, 2023

With just two weekends left to shop before Christmas, US consumers have to be feeling a little more flush than they were just a couple months ago. Back in October, the stock market was in a 10%+ drawdown and interest rates looked like they might never stop going up. Less than two months later, though, the S&P 500 Total Return index is suddenly trading at all-time highs as Treasury yields have plummeted.



Maybe just as important for that "wealth effect" feeling is the huge drop in gas prices that we've seen since late September. Back on September 17th, AAA's national average gas price reading (the cost of a gallon of regular unleaded) hit a 52-week high of $3.88. In the three months since then, there has hardly been a day when gas prices haven't gone down, and just yesterday the price/gallon ticked down to $3.087. That drop took gas prices below the low of $3.096 seen last December 22nd to their lowest levels in more than two and a half years dating back to 6/24/21.



With the stock market at new highs again and gas prices suddenly approaching a "2-handle," Santa may have a little more room in his gift sack this year!

 

All About Dow New Highs


In the face of many worries, stocks have put together a historic year in ’23. To top things off, the Dow just hit a fresh new all-time high, its first new high since January 4, 2022.



New Highs Happen More Than You Think
Interestingly, this marked the 11th consecutive year that the Dow made a new high, the second longest streak ever! Of course, the previous two calendar years have had a total of only four new highs, but it still counts.

Since 1900 there have been nearly 1,400 new highs, which actually comes out to 4.5% of all days since 1900 closing at a new all-time high. That is probably much more than most people expect.



Stocks Lead the Economy
Since markets are forward looking, stocks tend to lead the economy. This can work on the way up and way down, so for us new highs right now is suggesting the economy is on firm footing heading into ’24 and a stronger economy (with no recession) could be the play next year.

Sure, there are always some examples of that ‘final new high’ right before trouble (1929, 2000, and 2007), but looking back at history, new highs rarely suggest impending doom right around the corner.

Since World War II, there were 227 months that saw at least one new high for the Dow. A recession started within a year of one of those months only 26 times, or 11.5% of the time. Compare this with the economy being in a recession 13.9% of the time since WWII and new highs could be a subtle positive sign for the economy next year.

The last new high for the Dow was nearly two years ago, so what happens after the Dow goes a long time without new high? I found 12 times since WWII it went at least a full year without a new high and then made one, and only twice did the economy fall into a recession within a year of that new high.

What stood out about those two times was both saw Middle East turmoil and a spike in crude oil, likely contributing to the recession. Given the US now produces more oil than anyone, does it makes sense to bet against history and treat this new high as an exception? Here’s a tweet I sent on this idea.



Now What?
Plain and simple, new highs aren’t bearish events. In fact, you tend to see new highs take place during bull markets, with more advances potentially ahead. We’ve been calling this a new bull market for over a year now. As far back as last November we said the lows were in and there would be no recession in 2023 (with many arguing with us the whole way up).

In fact, here’s an interview I did six months ago with Scott Wapner on CNBC’s Closing Bell. When he asked me what my biggest worry was, I said it was that too many people were bearish and weren’t embracing this bull market.

So what do new highs mean by the numbers? By itself, a new high doesn’t appear to signal any warnings. In fact, things look about average after new highs. There are the nearly 1,400 new highs since 1900 and a year later the Dow was up 7.8% on average and higher 70.2% of the time. Compare this with the average year since 1900, which was up 7.4% on average and higher 65% of the time.



But the Dow’s long break without a new high until now improves the outlook historically. Looking at those 12 times (since WWII) the Dow went at least one year without a new high and then finally made one, ol’ Papa Dow was higher a year later 10 times and up an average of 14.1% with a very solid median return of 16.4%.

 

Magnificent Seven Market Cap Round Trip
Fri, Dec 15, 2023

At the start of 2022, the seven largest S&P 500 stocks by market cap (which have begun to colloquially be called the Magnificent Seven) possessed a combined market cap of $11.78 trillion. However, severe losses throughout 2022 meant that by the end of the year these stocks were down 47.7% on average. In terms of the combined market cap, that dropped the total down to just $6.9 trillion. In 2023, those same seven stocks have averaged a gain of 106.6%. While not all of these stocks have fully recovered—for example, Telsa (TSLA), Alphabet (GOOGL), and Meta (META) all have lower market caps than at the start of 2022—the strong performance this year on the whole has meant the combined market cap has made a round trip. Now back to square one, what’s next?

 

The Inflation Problem Is Easing, and the Fed Expects to Cut Rates


Wednesday, December 13th, was important for two reasons:

• The Federal Reserve (Fed) acknowledged that inflation is easing quite rapidly, and they plan to respond with rate cuts.
• The November producer price index (PPI) indicated that core inflation is back at the Fed’s target.

Let’s start with the Fed meeting.

A Data Dependent Fed Bows to the Data
The Fed kept policy interest rates unchanged in the 5.25-5.0% range, but the big story really was that they officially acknowledged that inflation is easing. Their updated “summary of economic projections” saw their estimates of core inflation for 2023 revised down from 3.7% to 3.2%. The 2024 estimate was pulled down from 2.6% to 2.4%.

If you think inflation is going to be softer than you initially expected, what would you do? Well, if you’re a Fed official, you’d pull down your estimates for future interest rates, and that’s exactly what they did. They actually did a couple of things, both of which were quite dovish:

• They removed the extra rate hike for 2023 that they’d originally penciled in. In other words, they don’t think rates are going any higher.
• They moved the 2024 rate estimate from 5.1% to 4.6%. The current rate is 5.4%, and the updated estimate implies they’ll cut rates by around 0.8%-points (about three 0.25%-point cuts) in 2023.

Markets were off to the races after the Fed released their statement and projections – with bond yields falling, and equity markets rallying. Notably, Fed Chair Powell didn’t look to rain on the party in his press conference. Instead, he more or less reiterated the dovish outlook, noting that there has been progress on inflation, including in the categories they focus on. He once again emphasized that the risk of not doing enough to curb inflation was now balanced with the risk of holding rates too high for too long (and potentially breaking the economy in the process).

Inflation Is Back at the Fed’s Target
PPI data for November came in softer than expected, especially core PPI, which excludes the volatile food and energy components. The Fed’s preferred inflation metric is the personal consumption expenditures price index (PCE) and that takes several inputs from the PPI data, including for categories like health insurance and airfares.

Core PCE typically runs lower than its counterpart, the core consumer price index (CPI). That’s even more so now because 40% of core CPI is comprised of rents, versus 17% in core PCE, and the official rental data is running at an annual inflation rate of 6% now. Note that this is really outdated compared to what’s happening in rental markets right now, with private market indices like Apartment List showing rents falling compared to last year.

The good news is that the November CPI and PPI data indicate that core PCE was flat month over month in November. That means core inflation, using the Fed’s preferred metric, is running at an annual rate of 2.1% over the last three months, and 2% over the last six months.



In other words, the inflation problem appears to be over, at least for now. Even looking ahead, it’s likely that used car prices continue to fall and lagged data for rents catch up to reality, keeping downward pressure on core inflation.

Which means we expect the Fed is going to cut interest rates, as their own projections suggest. And it could come sooner rather than later.

A Big Day for Markets, and a Potentially Big Boost for the Economy
No surprise that markets liked everything that happened on Wednesday, including the prospect of a rate cut as early March (which investors estimate with a probability of almost 80%). Treasury yields headed even lower after Powell’s comments, with 1-year yields falling 0.22%-points to 4.91% and 2-year yields falling 0.3%-points to 4.43%. This was because markets are now estimating about 1.16%-points of cuts in 2024, more than Fed officials’ estimate of 0.80%-points.



Equities rallied on the back of lower interest rates, with the S&P 500 Index rising 1.4% on Wednesday and leaving it less than 2% off its all-time high. Rate-sensitive sectors like utilities and real estate, outperformed. Even small cap stocks, which have been weighed down by higher rates, saw huge gains, with the Russell 2000 Index rising 3.5%.

Lower interest rates also have potentially significant, and positive, effects on the economy. For one thing, it’ll immediately be reflected in mortgage rates. 30-year mortgage rates are now estimated to be close to 6.8%, down from around 8% in mid-October.



Lower mortgage rates could unlock activity in the housing market, especially in the existing homes market, where activity has ground to a near halt amid high rates. Additional sales of homes can lead to more consumer spending, including household appliances, furnishings, and other household goods. Lower rates could also boost auto sales, as loans for used and new vehicles become more affordable. Those are just a couple of direct, near-term boosts for the economy. In the medium term, a better outlook for inflation and interest rates could also results in a pickup in business investment.

In summary, the inflation tide has subsided quite decisively and that means a Fed pivot to interest rate cuts is on the horizon, which we expect to be very positive for markets and the economy. That’s very good news.

 

Small-Caps Have Historically Flourished Ahead of Christmas


For decades we have been tracking the market’s performance around holidays in the annual Stock Trader’s Almanac. In the 57th edition for 2024, data for DJIA, S&P 500, NASDAQ and Russell 2000 can be found on page 100. Of the eight holidays tracked, Christmas has been one of the most consistently bullish with respectable average gains occurring from 3 days before to the day before. Since 1988, the second day before Christmas, December 21 this year, has been most bullish over the past 35 years with greatest average gains and the highest frequency of advances. Small caps measured by Russell 2000 have enjoyed the most consistent strength on all three days. Volatility also tends to be subdued ahead of Christmas with significant declines occurring only in 2018, 2008, 2001 and 2000. 2018 was the only year to see declines on all three days by all four indexes.

 

Four More Reasons ’24 Should Be a Good One for the Bulls


“Investing is like dieting. It is simple, but not easy.” Warren Buffett, Chairperson at Berkshire Hathaway

It was a year ago this week that we moved to overweight equities and we’ve been there ever since. Obviously, this wasn’t a very popular call, as nearly everyone else on Wall Street was expecting a recession and the continuation of the bear market from ’22. Anytime you go against the crowd it will ruffle feathers, but we saw many reasons to do it then and we still see many reasons to expect continued good times in ’24.

We wrote Why We Think The Bull Market Should Continue In 2024 on November 9 (nearly six weeks ago) and all stocks have done since the publication of that blog is go up EVERY … SINGLE … WEEK.

In fact, the S&P 500 is up a very impressive seven weeks in a row currently, for the longest weekly win streak since eight in a row about six years ago. You might think that long weekly win streaks like this are bearish, but that isn’t true. In fact, you tend to see streaks like this in bull markets and continued strong price action is normal. Looking at all the seven week win streaks since 1950 showed that stocks were higher a year later 25 out of 29 times, or more than 86% of the time. That’s the first recent signal we’ve seen that suggests the next 12 months could provide another good year for the bulls.



Second, we’ve seen huge jumps in breadth, otherwise known as participation. For most of this year we heard the same bears on TV tell us (over and over) that only seven stocks were going up. We disagreed with this analysis the whole time, as many stocks were indeed going higher, but the blast of buying pressure we’ve seen the past few weeks further confirms there are way more than only seven stocks supporting markets now.

Last week saw more than 90% of the stocks in the S&P 500 above their 50-day moving average. This might mean we are near-term overbought, but you also tend to see this kind of strength at the beginning of bullish moves. Going back the past 20 years, previous times we saw such strong participation, the S&P 500 was higher a year later 14 out of 15 times and up 16.1% on average. Yet another clue stocks could be in a for a nice year in ’24.



Another rare, yet potentially bullish, signal is our third reason to expect higher prices in ’24. Recently more than 40% of the components in the S&P 500 saw an RSI of more than 70. We will keep this fairly simple, but the RSI (or relative strength Index) is an overbought/oversold indicator where the general guideline is above 70 is overbought and below 30 is oversold. You can read more about the RSI from our friends at Investopedia here.

The bottom line is when you see a large spike in the number of stocks in the S&P 500 that are overbought, it is very bullish. Thanks to data from Ned Davis Research we found there were only four other times since 1972 (as far back as NDR data goes) that also had above 40% of stocks at overbought levels. The average return a year later was an extremely impressive 25.7% and higher all four times. In fact, the worst return a year later was ‘only’ 17.6% after the signal in February 1991. I don’t know about you, but I could live with a 17% gain in 2024.



The last reason to be bullish in ’24 — when stocks have dropped more than 10% (like 2022), then jumped more than 10% (like this year), that following year tended to be quite solid, up six out of six times with an 11.7% gain on average, which would likely make most bulls smile in ’24.



As Uncle Warren told us in the quote at the top, investing can be very tough. There will always be reasons to worry and reasons to sell. Yet, some of the very best investors in history are those who simply used the scary times to add when others are selling.

Sure, it isn’t always that simple, but look at 2023. As we laid out all year, the overwhelming evidence suggested stocks would go higher, and they sure have. That’s why we invest based on facts, not feelings.

 

The AI Race is Closer Than It Seems
Thu, Dec 21, 2023

The keyword of the year in markets has been AI, and besides Nvidia (NVDA), whose chips power most of the AI-related applications, two of the most high-profile companies competing in the sector have been Alphabet (GOOGL) and Microsoft (MSFT). Most people forget, but it was back in 2016, six years before Chat-GPT even came out, that Alphabet CEO Sundar Pichai declared that Google was an “AI-first company.” Pichai may have been ahead of the game, but when Chat-GPT first launched late last year, it was MSFT that found itself in the pole position while the consensus quickly declared that Alphabet missed the boat on AI. This sentiment was reinforced throughout the year as there were numerous points where Alphabet made negative headlines due to its shortcomings in AI.

Given the headlines, you’d think that the amount of daylight between the performance of MSFT and GOOGL this year would be wide, but the charts say otherwise. As shown in the charts below, they’re both on pace to close out the year right near their highs, and it’s GOOGL that is closer to a new high. Not only that but on a YTD basis, it’s GOOGL (58.99%) that is outperforming MSFT (54.9%) rather than the other way around.





To be fair, since the launch of Chat-GPT on 11/30/22, MSFT is still outperforming GOOGL, but the gap between them has been narrowing. With MSFT up 45.5% and GOOGL up 38.8% since Chat-GPT introduced itself to the world, less than seven percentage points separates the two stocks. What’s notable about the performance of the two during this time is that while MSFT has been in the lead most of the time, there have been multiple periods where the lead shifted between the two. The AI race between GOOGL and MSFT has been a lot closer than this year’s headlines would have you believe.