Daily Stock Market Articles

Official Santa Claus Rally Starts Tomorrow!

It is not a trading strategy; it is an indicator. To wit: “If Santa Claus should fail to call, bears may come to Broad and Wall.” Yesterday’s selloff was a great setup. Just what the Santa Claus Rally needed. The Street has been buzzing about the Santa Claus Rally for three months now. Most still get it wrong. It’s not the yearend rally, the Q4 rally that runs from Halloween through January. Yes, November, December and January are the best three months of the year, but they are not the Santa Claus Rally.

Santa Claus Rally was devised by Yale Hirsch in 1972 and published in the 1973 Stock Trader’s Almanac. The “Santa Claus Rally” is the last 5 trading days of the year plus the first 2 of New Year. This year it begins on the open on December 22 and lasts until the second trading day of 2024, January 3. Average S&P 500 gains over this seven trading-day range since 1969 are a respectable 1.3%.

It is not a trading strategy; it is an indicator. Failure to have a Santa Claus Rally tends to precede bear markets or times when stocks could be purchased at lower prices later in the year. Down SCRs were followed by flat years in 1994, 2005 and 2015, two nasty bear markets in 2000 and 2008 and a mild bear that ended in February 2016.

As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”

Stay tuned for more on the rest of my January Indicator Trifecta and sign up for my newsletter to get my official readings and analysis. And get the 2024 Stock Trader’s Almanac as a free bonus. https://stocktradersalmanac.com/LandingPages/get-Almanac-for-free.aspx

 

Here Comes the Santa Claus Rally


“If Santa should fail to call, bears may come to Broad and Wall.”

—Yale Hirsh

One of the little-known facts about the Santa Claus Rally (SCR) is that it isn’t the entire month of December; it’s actually only seven days. Discovered in 1972 by Yale Hirsch, creator of the Stock Trader’s Almanac (carried on now by his son Jeff Hirsch), the real SCR is the final five trading days of the year and first two trading days of the following year. In other words, the official SCR is set to begin tomorrow, Friday, December 22, 2023.

Historically, it turns out these seven days indeed have been quite jolly, as no seven-day combo is more likely to be higher (up 79.5% of the time), and only two combos have a better average return for the S&P 500 than the 1.32% average return during the official Santa Claus Rally period.



Here’s a chart we shared at the start of the month, showing that the latter half of December is when most of the seasonally strong gains occur. Of course, this year is anything but normal, with huge gains the first part of the month.



These seven days tend to be in the green, so that is expected. But fun trivia stat, the SCR has been higher the past seven years and hasn’t been higher eight years in a row since the ‘70s. The all-time record was an incredible 10-year winning streak in the ‘50s and ‘60s. Here we show all the SCR periods since the tech bubble and how the S&P 500 does after each.



The bottom line is that what really matters to investors is when Santa doesn’t come, as Mr. Hirsch noted in the quote at the start of this blog.

Here we show some recent times investors were given coal during these seven days, and the results after aren’t very good at all. The past five times (going back 30 years) that the SCR was negative saw January down as well. Notably, there was no SCR in 2000 and 2008, not the best times for investors, and potentially some major warnings that something wasn’t right. Lastly, the full year was negative in 1994 and 2015 after no Santa. We like to say in the Carson Investment Research team that hope isn’t a strategy, but I’m hoping for some green during the SCR!



Finally, the average gains each year for the S&P 500 is 9.1% and the index is higher 71.2% of the time. But when there is an SCR, those numbers jump to 10.2% and 72.4%, falling to only 5.0% and 66.7% when there is no Santa. Sure, this is only one indicator, and we suggest following many more indicators to base your investment decisions, but this is clearly something we wouldn’t ignore either.



The bottom line is stocks are at or near all-time highs, we’ve been quite vocal about why stocks would do well this year, and we don’t see any major reasons not to expect Santa to come once again in 2023.

 

Overbought Breadth Not Going Away
Fri, Dec 22, 2023

A small number of (mega-cap) names have done the bulk of the heavy lifting for market-cap-weighted S&P 500 performance this year, but that does not steal from the fact that breadth has been solid. As shown below, the S&P 500's 10-day advance decline line—which essentially measures the ten-day average of the daily net percentage of stocks in the index trading higher/lower—has shown positive readings 57.9% of the time in 2023 and is right in line with the annual average dating back to 1990.



Within this year's respectable breadth readings has been a particularly strong run over the past couple of months which we first highlighted in yesterday's Sector Snapshot. As shown below, the 10-day advance-decline (A/D) line has pretty consistently sat at least one standard deviation above its historical average throughout November and December. In other words, the past couple of months have consistently seen historically large swathes of the market trading higher.



Looking at the past 50 trading days, two-thirds of the time have seen the 10-day A/D line sit in overbought territory. Of all rolling 50-day periods, there have only been two other times when breadth by this measure has been overbought on such a consistent basis. The most recent of these was in early 2019 when it was overbought 70% of the time. Before that, you'd need to go back to 2010 to find a reading as high.

 

NASDAQ & Russell 2000 Up 71.4% Of Time Day After Christmas

Click here to view table full size…

Santa Claus Rally starts today. The Santa Claus Rally was discovered and named by Yale Hirsch in 1972 and published in our 1973 Stock Trader’s Almanacas the last five trading days of the year and the first two trading days of the New Year. This short, sweet rally is usually good for about 1.3% on the S&P 500, but the real significance of the SCR is as an indicator.

It is our first seasonal indicator of the year ahead. Years when there was no Santa Claus Rally tended to precede bear markets or times when stocks hit significantly lower prices later in the year. As Yale’s famous line states (2024 Almanac page 118): “If Santa Claus Should Fail To Call, Bears May Come to Broad and Wall.”

NASDAQ and Russell 2000 have logged the greatest frequency and magnitude of gains on the day after Christmas. Since 1988, NASDAQ has advanced 73.5% of the time with an average move of +0.37%. R2K has also advanced 71.4% of the time with an average advance of +0.37%. DJIA and S&P 500 have slightly softer records, but bullish, nonetheless.

Two days after Christmas, the market is less bullish with NASDAQ down more often than up. Three days after Christmas R2K small caps take the lead advancing 65.7% of the time with an average gain of +0.52%.

Looking further out, from 1950-1985 last 5 trading days of the year S&P 500 up 34 of 36 years, average gain 1.24%. 1986-2022 up 20 of 37, average gain 0.40%.

 

JP Morgan [Performance] Chase
Wed, Dec 27, 2023

Just about every price chart lately looks like a one-way move higher, but in scanning through various charts earlier, we were struck by how steep and one-directional the move in JP Morgan Chase (JPM) has been over the last two months. Besides a handful of days with red bars, the stock has seemingly done nothing but go higher each day.



Just how impressive has the move over the last two months been? In the last 40 trading days, JPM has finished the day higher 30 times. While we don't have price data going back to the days of J.P. Morgan himself, going back to 1980, the current frequency of positive days over a 40 trading day period has never been seen.

 

Claims Characteristics Check Up
Thu, Dec 28, 2023

This morning's release of initial jobless claims disappointed relative to expectations as they climbed up to 218K versus expectations for an increase to only 210K from last week's reading of 206K. At current levels, jobless claims are rounding out 2023 in the middle of the past couple of years' range: not as strong as the late 2022 low of 182K, but not as high as the peak earlier this year.



Before the seasonal adjustment, claims are trending higher as could be expected given the time of year. Claims jumped this week to 272.6K which is the highest level for the comparable week of the year since 2019. Based on seasonal patterns, claims tend to peak right around New Year or the first couple of weeks in January meaning that the headwinds are likely to fade soon.



Continuing claims have risen significantly since late Q3, but more recently that increase has begun to plateau right around levels from the spring peak. Currently, continuing claims stand at 1.875K, a 14K increase week over week.



In addition to weekly claims, below we show the latest data on unemployment claimant characteristics through November. As shown below, some industries that received a lot of attention for layoffs earlier this year and observed actual increases in claims, like tech, real estate, and finance, have more recently seen pivots lower in claims. Although that marks some improvements (potentially as a result of expirations of benefits), overall those industries do not account for the largest shares of claims. Instead, industries like construction or manufacturing account for greater burdens on claims.

 

Top Charts of 2023


What a year it has been! The economy surprised, the consumer remained resilient, stocks soared to new highs, and even bonds are looking at a nice year thanks to a late innings rally. Just like everyone called it

As you are reading this I’m hopefully enjoying a nice break the final week of the year. As we wind down 2023 and look ahead to 2024, we want to share with you some of our team’s favorite charts on the year.

We’ll kick it off with two of my favorites followed by some picks from across the team.

The Year Played Out as Expected
You might not believe it, but this year actually played out just like it was expected to. Pre-election years are usually strong, but they are even better under a first-term President, up more than 20% on average (something we should hit this year).

Breaking the four-year presidential cycle down by quarters, stocks tend to do quite well the first half of a pre-election year (like 2023), catch their breath in Q3, and then gain into year end. Does that sound familiar? Below is a chart I’ve probably shared 100 times this year, but I’m still amazed how well it all played out.



Inflation Was Expected to Come Back to Earth
Here’s my other favorite chart of the year. We started sharing this chart late last year and it was one of the main reasons we expected to see inflation come back down, likely opening the door for a Fed pivot away from their hawkish stance.

In the chart below we look at private data from Apartment List showing that rent prices collapsed well ahead of the government’s data. I won’t get into all the reasons why now, but the government’s data lags by many, many months and this was a subtle clue that shelter (40% of the core Consumer Price Index) was likely going to crack eventually. Sure enough, late this year we started to see shelter inflation slow and this opened the door for the Fed to pivot (exactly what they did on December 13).



The Manufacturing Renaissance is Here
Below is Sonu Varghese, VP, Global Macro Strategist’s favorite chart of ’23:

I’ve never seen an economic chart like this, especially one related to factory construction of all things. This is a massively underrated story of what’s happening in America right now, and brings together several key themes that center around a renaissance for American manufacturing:

• Reshoring
• Business investment into high-tech equipment like semiconductors (a lot of it driven by AI hardware needs) and EV batteries
• Significant incentives from the Federal government to spur private investment in transformational technology

The good news is that this is not just a 2023 story. There’s going to be more coming, and the “fruits” of these investments will be seen over the next decade in America.



AI YAI YAI!
And from Jake Bleicher, Portfolio Manager, a stock chart candidate for top chart of the year:

To me, the narrative of 2023 is captured by a chart of NVIDIA, the maker of high-end computer chips that have become the bedrock of artificial intelligence. Emerging from the depths of the 2022 bear market, the introduction of ChatGPT illuminated the potential of AI for the layman, igniting a remarkable surge in related tech stocks. Despite higher interest rates, mega-cap technology companies roared higher. As we approach 2024, the AI theme appears enduring, but investors are now recognizing its broader implications as this transformative technology permeates businesses of all shapes and sizes, not just mega cap tech.



Source: FactSet 12/18/2023

Yields Back Where They Started
And here is Barry Gilbert, VP, Asset Allocation Strategist’s top chart from ’23.

For me, nothing tells the story of markets in 2023 like yields, and the 10-year Treasury yield is a great reference point. We can read off its movements all the big stories of 2023: accelerating disinflation; an aggressive Fed; and a thriving U.S. economy despite all the skeptics.

The 10-year Treasury yield entered the year at 3.88% and it looked like rates might be starting to stabilize after peaking near 4.2% in October 2022 and causing a heap of pain going back to the summer of 2020. But the Fed was determined in its fight against inflation as the economy continued to defy expectations. By mid-October, the 10-year Treasury yield was just short of 5% and at a level not seen since before the Great Financial Crisis.

But then a funny thing happened. The disinflation expected by many accelerated, economic growth went from great to just pretty good with a few downside economic surprises, and a tough-talking Fed began to use more balanced language. The flood gates of bond demand opened and we saw the 10-year Treasury yield plummet more than a full percentage point in about two months, taking it back to just a little higher than where it started the year.

With the yield curve flat, no movement in the 10-year yield for the year left returns for short-term Treasuries and intermediate bonds about the same. But if you were willing to still shy away from rate-sensitive bonds early in the year and add rate sensitivity aggressively late (consistent with Carson Investment Team recommendations), it was a pretty good round trip.

We often connect our “no recession in 2023” call to our equity overweight, but where it may have had a more profound impact, especially in bond-heavy allocations, was on the fixed income side, another reason why the 10-year Treasury yield is my candidate for 2023 Chart of the Year.



Value and Growth Also Back Where They Started
And here is Grant Engelbart, VP, Investment Strategist’s top chart from ’23:

The decision to invest in value stocks or growth stocks is one of the most impactful an equity investor or manager can make, and something I keep a close eye on. 2022 was a painful year across asset classes (sorry to bring it up!), but on a relative basis, value investors did quite well. Now relative performance doesn’t pay the bills in a down year, but value did provide some help in 2022 by outperforming growth stocks by the most since the tech bubble burst in 2000!

As we know, the stock market has a tendency to react in ways that go against the expectations of the crowd. And sure enough, in 2023 growth stocks began to outperform value stocks, and did so in dramatic fashion. Thus far in 2023, growth is outperforming value by the second most since the inception of the widely followed Russell style indices (1979).

My chart of the year is the returns of value and growth stocks relative to the broad Russell 1000, which encompasses both. When you look at the picture from the beginning of 2022, all of the outperformance of value stocks has now been washed away by the growth rebound in 2023. The game is tied 0-0, right back where we started! If these massive divergences don’t beg for a balanced investing approach with highly research-driven decisions around portfolio adjustments, I don’t know what does.



What a year is has been. We are honored you’ve been with us on this ride and we will continue to do all we can to be the most trusted and transparent research shop out there.

 

DJIA and NASDAQ Best on First Trading Day of New Year



Over the past 21 years, DJIA and NASDAQ have enjoyed the greatest frequency of gains on the first trading day of the New Year, both up 66.7% of the time (up 14, down 7), with average gains of 0.49% and 0.70% respectively. S&P 500 and Russell 2000 have been up 57.1% (up 12, down 9) also with solid average gains of 0.53% and 0.40%. On the second and third trading days of the New Year, performance has been weaker with a modest bearish bias. Average performance turns negative across the board on the second day and is mixed on the third.

 

The Triple Play Kings of 2023
Mon, Jan 1, 2024

Another earnings season is on the horizon, and throughout the reporting period, as we do each quarter, we'll be on the lookout for opportunities from companies reporting earnings triple plays. While we're waiting for the fresh batch of reports, we wanted to provide a quick update on triple-play trends from 2023. As a reminder, an earnings triple play is a company that reports earnings and manages to 1) beat analyst EPS estimates, 2) beat analyst sales estimates, and 3) raise forward guidance.

In 2023, there were a total of 560 earnings triple plays during the year, and the average one-day performance of the companies reporting them was a gain of 6.10%. Within those 560 reports, 32 companies managed to report three or more triple-plays, six of which had four triple-play reports in the calendar year. Below is a complete list of all the companies that fit the bill of at least three triple plays in 2023. It’s important to note that just because a company beats estimates and raises guidance doesn’t necessarily mean its stock will rally. As shown, several names in this list are down on the year, regardless of their strong earnings relative to expectations. In total, 130 of the 560 triple plays were accompanied by negative returns on the stock's earnings reaction day.

Tech stocks had the biggest turnout on the list, accounting for over 40% of the names listed. Consumer Discretionary followed but had only half as many names as Technology (7) followed by Health Care (4), Consumer Staples (3), Industrials (3), and Financials with one. Of the fourteen tech stocks listed, four had triple plays every earnings season this year.

Two notable names on this list include DraftKings (DKNG) and Duolingo (DUOL). Both stocks were up more than 200% in 2023, and both beat EPS and revenue estimates in every earnings report of the year. If not for inline guidance once each, they’d both be joining the club of four 2023 triple plays too.



Zooming in on the six companies to report triple plays every earnings season in 2023, the triple play kings, all but one significantly outperformed the S&P 500 in 2023. Excluding Clear Secure (YOU), each of the five others at least doubled the performance of the S&P. The most impressive of course has been NVIDIA (NVDA) which ripped 239% in 2023, followed by e.l.f Beauty (ELF) which also doubled. Collectively, on an equal-weighted basis, the six stocks were up just over 100% on the year.

The chart below features points to mark each earnings report of the six triple play kings, and below that we have included a table showing each stock's earnings reaction day performance to their report. The second quarter was particularly strong in terms of earnings day reactions as triple plays from NVDA and ELF led to gains of 24.4% and 20.5%, respectively on 5/25. Again, it’s worth mentioning that strong earnings don’t necessarily guarantee share price gains. Zscaler (ZS), although more than doubling in 2023, reported a triple play in March that resulted in an 11% pullback. On a broader scale, YOU fell more than 20% on the year despite reporting four triple plays. Not even NDVA could avoid a negative reaction to a triple play when it fell 2.46% following its last earnings report. In fact, besides ELF every one of the ‘triple play kings’ listed had at least one down day in reaction to a triple play earnings report this year.

Those were the triple-play kings of 2023. Will they retain their crowns in 2024? Or will a new crop of earnings royalty emerge to form a new empire? We'll start to find out in the next few weeks. Happy New Year!

 

2023 Russell 1,000 Average Stock Performance by Sector
Tue, Jan 2, 2024

2023 turned out to be a fantastic year for stocks after a horrible 2022. Below we show the average total return of all stocks in each sector of the Russell 1,000 in 2023. While most areas of the market moved higher during the year, the one area of equity markets that actually provided a negative return was Utilities. That sector's stocks lost an average of 4.1% compared to a 20.5% average gain for the whole of the Russell 1,000. As a reminder, Utilities has the highest dividend yield of any sector, but even after factoring in those relatively high dividend yields, the average stock in the sector posted a negative total return in 2023. Consumer Staples just barely netted out an average gain, while Health Care, Energy, Real Estate, and Materials all also underperformed the broader index. That leaves Communication Services, Financials, Consumer Discretionary, Industrials, and Technology each with the average stock gaining more than 20% on the year. Given the emergence of AI in 2023, Tech was the top performer. In fact, the average Tech stock was up 43.8%, which was more than twice that of the average Russell 1,000 stock.

 

2023's Biggest Winners in the Russell 1,000
Tue, Jan 2, 2024

In last Wednesday's Closer, we noted how there was a somewhat elevated share of the S&P 500 experiencing gains of over 100%. Expanding to the Russell 1,000, there were 34 stocks with total returns of more than 100%. Two members of the Financials sector topped the list, Affirm (AFRM) and Coinbase (COIN), with gains of 408% and 391%, respectively. Two mega caps also found their ways into the top of the list in the five and seven spots: NVIDIA (NVDA) and Meta Platforms (META). One of NVIDIA's largest competitors Advanced Micro (AMD) was also an over 100% gainer, though it falls a bit further down the list with a 127.8% gain. Other large caps like Broadcom (AVG) and Tesla (TSLA) also posted 100%+ gains.

Those semi conductor names were certainly boosted by the emergence of AI during the year, but other themes were also present among the year's biggest gainers. For starters, cruise liners like Royal Caribbean (RCL) and Carnival (CCL) put big dents in their post pandemic recoveries with RCL even closing in on pre-pandemic highs. In spite of high rates tamping down demand, housing inventories are historically tight meaning there is an increasing importance on new inventories hitting the market. As we showed in our Annual Report, like AI, housing was also a major theme across earnings calls last year. That offers a potential boon to the homebuilders and it showed in stock performance in 2023. The homebuilder industry had strong representation with names like Builders FirstSource (BLDR), Top Build (BLD), PulteGroup (PHM), and Toll Brothers (TOL) posting over 100% gains.

 

2023's Biggest Losers in the Russell 1,000
Tue, Jan 2, 2024

While broad swathes of the equity market rose in 2023, that is not to say there were not areas of weakness. Of course there were some major spotlight stocks that investors would have completely lost their shirt on like Silicon Valley Bank had they been invested in the beginning of the year, but for those stocks still standing, below we show the 35 Russell 1,000 members that fell by at least 30% during the year. 2021 short squeeze and meme stock darling AMC Entertainment (AMC) was the worst performer on the year in 2023. Price action in the stock was actually pretty flat throughout the year up until the summer. That's when prices plunged on news that the company would be approved to convert its one year old preferred shares to common stock and a 1-for-10 reverse split. Ultimately, AMC would go on to finish the year with an 85% loss.

One theme popping up in the biggest losers is clean energy. As EV sales decelerated last year, prices of stocks like ChargePoint (CHPT) and Lucid (LCID) hit major speedbumps, falling by 75.55 and 38.36%, respectively. Other clean energy names like Enphase (ENPH) also faced large losses.

A handful of various retailers also made the list like Petco (WOOF), Advanced Auto Parts (AAP), and Dollar General (DG). Dollar General possesses the largest market cap of those stocks, but of all the biggest losers, the vaccine makers were the largest in size. Both Pfizer (PFE) and Moderna (MRNA) fell by over 40%. In the case of PFE, the stock is now below pre-pandemic levels.

 

4 Takeaways from 2023 Market Superlatives


2023 is now in the books. It was a year that no-one expected, but to the upside, which is the way we would all have it. The anticipated recession that didn’t come was overpriced into the market with 2022’s S&P 500 decline of 18%. Those declines helped the index power ahead to a 26.3% gain on a total return basis in 2023. That left the S&P 500 with a modest 3.5% gain over the last two years and an annualized growth rate of 11.9% over the last 10 years, which is good but not scary good compared to the 50-year annualized growth rate of 11.1%. In fact, it ranks as only the 41st best of the 87 10-year rolling periods going back to 1937. (For the curious, the best 10-year period was 1947-1958 with an annualized 20.1% gain.)



Bonds came roaring back in the fourth quarter, giving the Bloomberg U.S. Aggregate Bond Index (“Agg”) a return of 5.5% for the year, just ahead of the Bloomberg US Short Treasury (1-3 month) Index at 5.1%. This was the first year of gains for the broad U.S. benchmark after two years of declines, which had marked only the fourth and fifth year of declines in the index’s history.

But if you only paid attention to full year returns, you missed the story. The Agg was down for the year through three quarters and then posted its best quarter in over 20 years, with a gain of 6.8%, providing solid benefits for those who had lengthened the maturity of bond holdings over the year. The Bloomberg US Aggregate Securitized – MBS Index and the Bloomberg Municipal Bond Index also both had their best quarter in over 20 years, finishing the year with total returns of 5.0% and 6.4% respectively. The broad decline in yields was so sharp in the fourth quarter it likely pulled forward some potential 2024 gains, but we expect bonds to have another solid if unspectacular year ahead as the Federal Reserve starts to lower interest rates, while also continuing to return to their traditional role of portfolio diversifiers as inflation continues to move towards the Fed’s target 2%.

One of the biggest stories of the year was the run for large cap growth stocks, anchored by the technology-oriented mega caps and the chipmakers most closely associated with artificial intelligence. The Russell 1000 Growth Index climbed 42.7%, its best year on record (going back to 1979), surpassing even the best years of the “dot com” bubble. Some of this was make-up for underperformance in 2022 when the index lost 29.1%. After such strong separation from value, we expect performance between growth and value to be more aligned in 2024.

Finally, the fourth quarter saw the Russell 2000 Index of small cap stocks outpace the Russell 1000 Index for only the second time since the first quarter of 2020. Small caps were hit hard by the regional banking crisis early in the year, compounded by their greater sensitivity to higher interest rates due to funding costs. Those losses had pushed valuations to historical extremes compared to large caps. Small caps have come very far very fast, with one of their best rallies ever since bottoming compared to the Russell 1000 on November 10. Nevertheless, the Russell 2000 only returned 16.9% for the year compared to 26.5% for the Russell 1000.

Small cap valuations have moved more in line with historical averages with the recent rally, but the Russell 1000 still trades at a substantial premium to history so the separation between them is historically meaningful. It may require some patience, since valuations are a poor timing mechanism, but we believe there is still scope for small cap outperformance over a strategic time frame.

There you have it. A surprisingly strong year for stocks and a solid year for bonds, considering where they were after three quarters. Growth stocks had a stellar performance with a boost from the AI frenzy. Small caps were spectacular late in the year but still lagged behind large caps over the year by a wide margin. All setting up an interesting 2024, with recession calls somewhat lighter than a year ago, but still quite a bit of gloom out there with some large shops still holding onto their recession call. (Stick to a call long enough and you’ll never be wrong, only early.)

 

January 2024 Almanac: Historically Solid, But Weaker in Election Years

January has quite a reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations has historically propelled stocks higher. January ranks #1 for NASDAQ (since 1971), but sixth on the S&P 500 and DJIA since 1950. January is the last month of the best three-consecutive-month span and holds a full docket of indicators and seasonalities, our Santa Claus Rally ends on the close on January 3, the First Five Days early warning system reports on the close on January 8 and the full-month January Barometer at month’s end.

DJIA and S&P January rankings slipped from 2000 to 2022 as both indices suffered losses in 13 of those 24 Januarys with three in a row in: 2008 to 2010, 2014 to 2016 and then again from 2020 to 2022. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1930 respectively. Covid-19 spoiled January in 2020 & 2021 as DJIA, S&P 500, Russell 1000, and Russell 2000 all suffered declines in 2020. In 2021, DJIA, S&P 500 and Russell 1000 declined. In 2022 surging inflation, that reached multi-decade highs, stoked fears of higher interest rates. Fears were ultimately validated as a bear market ensued.

In election years, Januarys have been weaker. DJIA and S&P 500 slip to number #8 and DJIA average performance dips negative. NASDAQ slips to #4, but average performance remains respectable at 1.7%. Russell 2000’s average performance of 0.8% is the result of all five advancing Januarys gaining over 4% which offsets the losses in six other election-year Januarys.

 

A Whole Lot of Nothing at the Surface
Wed, Jan 3, 2024

The S&P 500 is still within 2% of its record closing high reached exactly two years ago today, but beneath the surface, there have been some big moves. The chart below shows a distribution of two-year returns for every S&P 500 stock that is currently in the index, and while there have been some big winners and losers over this period, the average component’s move has been just a modest decline of 0.54%. So while the S&P 500 is down 1.9% from its high, over that same period, the ‘average’ stock in the index is down even less. For all the talk over the last year about how narrow the market has been, over the last two years that hasn’t been the case.



In the tables below, we show the 25 best and worst-performing stocks in the S&P 500 over the last two years. Starting with the winners, all of the stocks listed have rallied at least 63%, and there are another 14 stocks that are up over 50% that didn’t make the list. Perhaps what stands out most about the list of biggest winners is what stocks aren’t on it. As shown, only three Technology sector stocks (and no Communication Services sector stocks) made the list, and of those three, not even one has a market cap of more than $30 billion. The only mega-cap stock on the list is Eli Lilly (LLY), showing again how while mega-cap tech had a great 2023, on a ‘two-year stack,’ their performance has been unremarkable. While tech stocks weren’t well-represented on the list, Energy and Industrials filled the void with eight and six stocks, respectively.



Among the list of biggest losers over the last two years, 18 are down over 50% led lower by VF Corp (VFC) and Match Group (MTCH) which have both plummeted more than 70%. Both of these stocks now have market caps of less than $10 billion, and of the 25 names shown, only three (Paypal-PYPL, Estee Lauder-EL, and Pfizer-PFE) have market caps above $50 billion.

 

Santa Didn’t Come, What Now?


“Plans are useless, but planning is everything.” President Dwight D. Eisenhower

First things first, stocks fell during the historically bullish Santa Claus Rally (SCR) period. You can read all about the SCR in Here Comes The Santa Claus Rally. The absence of an SCR may be a minor warning sign stocks are due for a break. But seriously, after a nine-week win streak for the S&P 500 (longest since 2004), some weakness shouldn’t be overly surprising.

Nonetheless, looking at the past six times Santa didn’t come (going back 30 years), January has been lower the past five in a row and the first quarter was higher only three times, with modest returns overall. I’d like to stress this isn’t an end-of-the-world signal, but we shouldn’t ignore the clues markets give us when ‘stocks don’t go up when they should.’



We remain optimistic stocks will do well this year, but maybe stocks are due for a break?

Here’s a chart I shared many times last year. It shows how stocks do on average each quarter of the four-year Presidential cycle. Sure enough, this cycle stocks rallied big time at the end of the mid-term year (2022) and then the first half of the pre-election year (2023), saw a break in Q3 of the pre-election year, before rallying hard to end the pre-election year. Now as we move into an election year, take note that Q1 tends to be a weak part of the calendar. The good news is the rest of an election year tends to be strong.



I’ve heard a lot from people asking how stocks could possibly do well in 2024 after their huge year in 2023. Well, we don’t officially release our Outlook for ’24 until next week, but I’ll just give a little bit away now. We still think this bull market has plenty of life left in it.

What happens after a 20% year you ask?

• I found there were 20 previous times the S&P 500 gained at least 20% and it was higher the following year 16 times (80%) and up a very solid median return of 12.1%.
• Last time we saw a 20% gain (’21) stocks moved into a bear market the next year (’22), but the nine years before that (and 10 of the last 11) saw gains after a 20% year.
• It would be extremely rare for stocks to actually gain more in ’24 than they did in ’23, as only once in history (’97) did the S&P 500 follow up a year that was up more than 20% with a bigger gain.
• Lastly, another 20% gain is possible, as it happened four previous years.

The bottom line is a big up year by itself isn’t a reason to become bearish, as history says it is likely to see continued strong gains.

I will leave you with two charts that I think are must-knows for investors as we start the new year. First off, a balanced portfolio (60% stocks and 40% bonds) had a historically bad year in ’22, but came roaring back last year. We are optimistic that both stock and bonds should do well this year, but you’ll have to wait one more week to get our official targets.



Lastly, on average stocks have seen a 14.2% peak-to-trough correction during a calendar year since 1980. Even last year, as great as it was, saw a 10.3% correction into late October. In fact, a lot of really good years have seen some scary pullbacks amid alarming headlines, so as the quote above stresses, start planning now for when you see red on the screen. Will you panic? Or use it as an opportunity?

 

Sentiment Signals Mixed
Thu, Jan 4, 2024

The S&P 500 has gotten off to a rocky start to the new year, but it hasn't knocked down bullish sentiment yet. This week's bullish sentiment reading from the American Association of Individual Investors (AAII) rose from 46.3% in the final week of 2023 up to 48.6% this week. That edges bullish sentiment back towards the multi-year high of 52.9% put in place two weeks ago and still leaves bullish sentiment over a full standard deviation above its historical average.



As for bearish sentiment, things are not as extended, though at 23.5%, the share of bears is still several percentage points lower than the historical average (31%).



That means the bull-bear spread is also still historically in favor of bulls with a 25 percentage point gap between the two.



Including other weekly sentiment surveys, the picture is a bit more muddled albeit still showing a bias towards bullishness. For starters, after its holiday hiatus, the Investors Intelligence survey posted its highest reading on bullish sentiment since November 2021. Conversely, this week's reading in the NAAIM Exposure index tracking active managers' equity exposure plummeted from a reading above 100 (meaning managers reported they were fully invested long) all the way down to 71. That is the lowest reading in the index since early November.