Daily Stock Market Articles

January Barometer: Why It’s Important & Why It Works

As the S&P 500 goes in January, so goes the year 74.4% of the since 1938. The next 11 months follow January 67.4% of the time. The January Barometer was devised by Yale Hirsch in 1972. With a negative Santa Claus Rally and First Five Days JB holds the key. When January is up after a down SCR and FFD, S&P 500 advanced three times over the remaining eleven months and the full year with average gains of 15.1% and 19.9% respectively.

It all started with the 20th “Lame Duck” Amendment to the Constitution in 1934 where newly elected Senators and Representatives take office in the first week of January and new Presidents are inaugurated on January 20. Prior to that, new members of Congress were not seated until December of the new year. Presidents were not inaugurated until March 4.

Being the first month of the year, it is the time when people readjust their portfolios and try to make a fresh start. Financial analysts rethink their outlook for the coming year. There is also an increase in cash that flows into the market in January, making market direction even more important. Then there is all the information to digest: federal budgets, national goals and priorities, FOMC meetings, 4th quarter GDP data, earnings, and a plethora of other economic data.

 

Do Stocks Want the 49ers or Chiefs to Win?


“Baseball is 90% mental, the other half physical.” -Yogi Berra

First things first, don’t ever invest based on who wins the Super Bowl. Or what color #87 Taylor Swift will wear at the big game, or the coin toss, or how bad the refs will be. With that out of the way, it is Super Bowl season, and that means it is time to talk about the always popular Super Bowl Indicator!

The Super Bowl Indicator suggests stocks rise for the full year when the Super Bowl winner has come from the original National Football League (now the NFC), but when an original American Football League (now the AFC) team has won, stocks fall. Of course, this is totally random, but it turns out that when looking at the previous 57 Super Bowls, stocks do better when an NFC team wins the big game. But as Yogi playfully told us in the quote above, sometimes things don’t always add up, and investing based on this won’t.

This fun indicator was originally discovered in 1978 by Leonard Kopett, a sportswriter for the New York Times. Up until that point, the indicator had never been wrong.

We like to make it a little simpler and break it down by how stocks do when the NFC wins versus the AFC, ignoring the history of the franchises. As our first table shows, the S&P 500 gained 10% on average during the full year when an NFC team won versus 7.5% with an AFC team won.



So, it is clearcut that investors want the 49ers to ground the Chiefs and win, right? Maybe not, as stocks have gained the full year 11 of the past 12 times when a team from the AFC won the championship going back 20 years. In fact, the only time stocks were lower was in 2015, when the full year ended down -0.7%, so virtually flat.



By my math, there have been 57 Super Bowls and 22 different winners. I broke things up by franchise and city. For instance, Baltimore has won three championships, with one for the Colts and two for the Ravens. So I differentiated the two. Then the Colts won one in Indy, so I broke that out as well. Either way, I still don’t see my Bengals on here, but I expect that to change next year after Joe Burrow heals up! Remember, he is the only man who owns Patrick Mahomes and Josh Allen with a 5-1 record against them combined, but I digress.

Getting to the two teams in it this year, the Chiefs have won it all three times and stocks gained 13.5%, while the 49ers have won it all five times and stocks soared 19.2% on average.



It might not matter who wins, but by how much they win. That’s right, the larger the size of the win, the better stocks do. (Let’s have another disclosure that nearly everything I’m saying here isn’t in any way, shape, or form related to what stocks actually do, and you shouldn’t use it as such.)

That’s right, when it is a single digit win in the Super Bowl, the S&P 500 is up less than 6% on average and higher about 60% of the time. A double-digit win? Things jump to about 11% and 79%. And wouldn’t you know it, when the final score is three touchdowns or more, the S&P 500 gained 13.6% for the year and is higher about 85% of the time.



Here’s a list of all the big blowouts and what happened to stocks those years. Not too bad, huh?



Here are ten other takeaways I noticed while slicing and dicing the data:

• The NFC has won 29 Super Bowls and the AFC 28.
• The Steelers and Pats have won the most at six, but the 49ers sit at five and could match them with a win.
• As great as Peyton Manning was, he only won two Super Bowls. His brother also won two. Odds are their kids will win a few more. Omaha, Omaha!
• The Lions, Browns, Jags, and Texans have still never made the Super Bowl.
• The NFC won 13 in a row from 1985 (Bears) until 1997 (Packers).
• The Bills made the Super Bowl four consecutive years, losing each time.
• The highest scoring game was 75 total points in 1995 between the 49ers and Chargers.
• The lowest scoring game was only 16 points in 2019 when the Pats beat the Rams.
• The closest ever was a one-point win for the Giants over the Bills in 1993 (the Scott Norwood game).
• In 1990 the 49ers beat the Broncos by 45 for the largest win ever.

So, there you have it, your complete breakdown for the big game. I’m saying the 49ers, as they have the better offensive and defensive lines. But Mahomes, Swift and Kelce, and the Chiefs are awesome, and it’ll likely be a great game. In the end, I just hope the refs aren’t the story like they have been so many times in big games!

 

Down at Noon on a Fed Day
Wed, Jan 31, 2024

The first Fed day of the year has arrived. While there's widespread agreement that rates will be held steady today, according to the CME's FedWatch tool, markets are pricing higher probabilities of cuts at other meetings this year. Looking six months out shows the market is giving a greater than 50% chance of rates being cut by at least a full percentage point from the current range of 5.25-5.50%. While time will tell what Powell and company decide, we would note that price action of the S&P 500 intraday on all Fed days since 1994 (when the FOMC first began announcing its decision on the same days as the meeting) when the FOMC holds rates steady has historically been less volatile, particularly post-decision, than when rates are cut or raised.



We would also note that the S&P 500 is currently trading lower by 0.86% as of this writing today in the wake of poorly received mega-cap earnings of Alphabet (GOOGL) and Microsoft (MSFT). While those drags on the market are independent of the Fed, that negative tone could lead to the first decline on a Fed day since the September meeting. As shown below, the meetings of the past couple of months have offered a positive change in tone after the S&P 500 largely fell on Fed days throughout late 2022 and 2023.



Not only have the past couple of meetings seen a more positive response from the S&P 500 but the moves have been particularly pronounced in afternoon trading. Below we show the intraday path of the S&P 500 on recent Fed days. The past two meetings (November and December) have resulted in gains of over 1% by the end of the day. However, in a stark difference to other recent meetings, the bulk of those gains have come from strong afternoon rallies in the wake of the decision. As shown by the red line below, the average if the prior ten meetings (those occurring from July 2022 through this past September) saw the S&P 500 trade higher throughout the session up until the final hour of trading when it gave up the ghost and closed at the lows of the day.



Looking back through all Fed days since 1994 when the FOMC began to announce its decisions on the same day of the meeting, there have been 14 times in which the S&P 500 was down by 0.5% or more by noon. Below we have constructed an intraday composite of those days. While the S&P has tended towards weakness throughout most of the session, it has experienced a rally, eating into those losses post-decision. That being said, the gains were not enough to erase all of the pre-announcement declines and the rally tended to be short-lived. Of those 14 days when the S&P 500 was down 0.5% or more by noon, it only closed higher on the day five times.

 

January 2024 Key ETF Performance
Wed, Jan 31, 2024

The first month of 2024 is already complete, and below is a look at the performance of various asset classes during January using key ETFs that we track closely. The S&P 500 (SPY) finished the month up 1.59% even though the average stock in the index was down 0.84%. While large-cap ETFs like SPY and QQQ finished the month higher, the small-cap Russell 2,000 (IWM) was down 3.9%.

At the sector level, Real Estate (XLRE) and Consumer Discretionary (XLY) both fell 4%+, while Communication Services (XLC) saw the biggest move to the upside at 4.4%. International equity ETFs were all over the place in January with India (PIN) and Japan (EWJ) solidly higher and China (ASHR) and Hong Kong (EWH) sharply lower. Oil (USO) was actually the best performing area of the entire matrix in January with a gain of 6.4%. On the flip side, natural gas (UNG) and silver (SLV) both fell 3%+.

 

High Share Prices vs. Low Share Prices
Thu, Feb 1, 2024

It shouldn't matter, but we saw a huge disparity in the performance of stocks with high versus low share prices in January. Here are the numbers:

As shown below, in the large-cap Russell 1,000, the 100 stocks that began 2024 with the lowest share prices fell an average of 7.4% in January, while the 100 stocks that began the year with the highest share prices rose an average of 2%.



There are 25 stocks in the Russell 1,000 that began 2024 with a sub-$10 share price, and these stocks fell an average of 11% in January. Conversely, the 41 stocks in the Russell 1,000 that began the year with a share price of more than $500 rose an average of 3.2% during the month.

What gives?

 

Bullish Sentiment Can Stay Bullish

Concern over frothy bullish sentiment has some of the biggest bulls concerned. But Bullish sentiment can stay high for quite a while. Just look at the two Investors Intelligence Bullish and Bearish readings. Both the difference and ratio of bulls & bears were at and above these levels in 2021 as the market ripped higher all year. Contrary sentiment indicators are more effective at extremes and at calling bottoms not tops.

Yesterday’s selloff as the market came to grips with the fact that a March rate cut is unlikely suggests we may be due for some further weakness. Which is not out of the ordinary for February even into March. February is the weak link of the Best Six Months so expect some pullback.

 

As Goes January, So Goes the Year? The Bulls Hope So.


An effect widely known as the January Barometer looks at how January does and what it may mean for the next 11 months. It is known by the saying, ‘So goes January, goes the year’ in the media. The late Yale Hirsch of Almanac Trader 1972 discovered this indicator. Today the Almanac is carried on by Yale’s son Jeff. I’ve known Jeff for years, and I must say, he is great, and I believe the work they do is some of the best in the industry on market seasonality, calendar effects, and many other indicators.

Let’s look at the January Barometer. For starters, two years ago saw stocks lower in January and it led to a vicious bear market. Then last year, stocks soared more than 6% the first month of the year and ended up having one of the better years ever. Maybe there is something here?

Historically speaking, when the first month was positive for stocks, the rest of the year was up 12% on average and higher 86.4% of the time. And when that first month was lower? It was up about 2.1% on average and higher only 60% of the time. Compare this with your average year’s final 11 months, up 8.0% and higher 75.7% of the time, and clearly the solid start to ’24 could be a positive for the bulls.



Here’s another way of showing what tends to happen based on whether January was higher or lower. Sure enough, a good first month tends to see better times, while a weak first month can be trouble.



Now, stocks were lower during the historically bullish Santa Claus rally period and first five days of 2024. We wrote about those things more in detail in Some Bad News, and Some Good News, but what does it mean when Santa doesn’t come, the first five days are red, but January is higher? Interestingly, this combo has happened only three other times in history, so we are dealing with a very small sample size. The good news is stocks were higher for the full year each time and up nearly 20% on average.



The huge end-of-year rally last year (remember, the S&P 500 was up 14% in November and December) did suggest some weakness in late December and early January would be perfectly normal. But the bottom line is looking forward, the gains we’ve seen in January matter more.

Another feather in the cap of the bulls is we are officially three calendar months off the October 27, 2023 correction lows. Turns out, stocks gained 19.6% during those three months, for one of the best three-month returns ever. I looked at all the times the index gained at least 17% in three months and once again, the future returns after those huge three-month stretches were quite normal for a bull market: higher six months later 84% of the time and higher a median of 16.2% a year later and up 80% of the time.



In short, the strength we’ve seen the past three months isn’t consistent with the end of a bull market or this being ‘just a bear market rally’ like many claim. In fact, it suggests we’ve been in a strong bull market that’s likely to a continue.

 

Up January vs. Down January Beats All Months

• Largest Improvement over next 11 months and next 12 months
• Next 11 months after Up January: +11.6%
• Next 11 month after Down January: +1.2%

Up January has much more outperformance versus when it’s down than any other month in the year on the following 11-months or 12-months return. Since 1938, when the S&P 500 was up in January the next 11-months average a gain of 11.6%. When January is down, the next 11-months average plummets to just 1.2%. Years with a positive January have historically outperformed a down January by 10.4%. Over the following 12 months, the outperformance grows to 11.2%. No other month comes close to these levels.

Hallelujah! The January Barometer is positive.

S&P 500 was up 1.6% this January which avoids the historically worst combination for the January Indicator Trifecta where all three are negative. Devised by Yale Hirsch in 1972, the January Barometer has registered 12 major errors since 1950 for an 83.8% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the 12 major errors, nine have occurred since 2001. Including the eight flat years yields a .730 batting average.

Our January Indicator Trifecta combines the Santa Claus Rally (SCR), the First Five Days Early Warning System (FFD) and our full-month January Barometer (JB). The predicative power of the three is considerably greater than any of them alone; we have been rather impressed by its forecasting prowess. It was certainly on the mark last year when all three were positive and S&P 500 gained 24.2%. However, this year is just the fourth time that the SCR and FFD were down, and the JB was positive.

As you can see from the table above, a positive JB has significantly improved the performance over the next 11 months and for the full year compared to when all three January indicators were down. In the prior three years when the SCR and FFD were down, but the JB was positive, next 11-month and full year gains averaged 15.1% and 19.9% respectively. This compares quite favorably to when all three January indicators were down as the next 11-months averaged just 0.2% and full year averaged a loss of 3.6%.

All Election Years Up When January Barometer Up

S&P 500 gained 1.6% in January and thus our January Barometer is positive for 2024. Full years followed January’s direction in 12 of the last 18 presidential election years. But 9 Election Years since 1950 with an up January Barometer are up 100% of the time with an average 15.6% S&P 500 gain.

JB is not a stand-alone indicator. Use in conjunction with other data and indicators to confirm or question your assessment of the market. Since 1938 when JB was positive, full year was positive 86.5% of the time & when it’s down the year was up 44.1% of the time. Every down January since 1950 was followed by a new or continuing bear market, a 10% correction or a flat year. Down Januarys were followed by substantial declines averaging -13.3%. See page 24 in the 2024 Stock Trader’s Almanac.

 

Taylor Swift Isn’t the Only One Feeling Good, More Americans Are Too


Consumer confidence has been rising recently. Maybe it’s Taylor Swift, and her weekly Sunday appearances. Or maybe it’s rising stock prices, rising home prices, and falling gas prices. Ultimately, perhaps the best signal to draw from rising confidence is that the labor market is strong. Keep in mind that the close to 70% of the US economy is made up of consumer spending, and since consumption is driven by incomes, a strong labor market holds the cards when it comes to the economy.

The Conference Board’s Consumer Confidence Index jumped by 6.8 points to 114.8 in January, taking it to the highest level since December 2021. Consumer confidence remains below levels we saw in 2018-2019, but the recent surge is welcome, after almost two years of depressed sentiment.



The big driver of the jump was how consumers feel about present conditions, specifically job availability and business conditions. The Present Situation Index jumped 14.1 points to 161.30, the highest level since the pandemic hit in March 2020. In contrast, Americans are still relatively concerned about the future, with the Expectations Index – measuring expectations of future household income, job availability, and business conditions – still hovering well below levels we saw before the pandemic. It has risen over the last three months, which is positive, but we have quite a ways to go. The good news is that consumers’ perceived likelihood of a recession over the next 12 months continued to fall, hitting the lowest level since August 2022 at 66%.



Consumers Are Telling Us the Labor Market Is Strong
Later this week, we’ll get the December payroll report, which is the most comprehensive early look into the status of the labor market. However, the fact that consumer’s appraisal of the present situation surged in January suggests that the labor market is in a very healthy place.

In fact, the number of survey respondents saying “jobs are plentiful” rose by 5.1%-points to 45.5%, the highest level since April 2023. At the same time, respondents saying “jobs are hard to get” fell 3.3%-points to 9.8%, the lowest since March 2022.

The difference between the two is called the “Labor Differential Index,” and as you can probably guess, that jumped as a result. It surged 8.4 points to 35.7, which puts it above the 2019 average of 33.3. Outside of the pandemic recovery in 2020-2021, the increase in January is the largest we’ve seen in the history of this index (since the late 1970s). Historically, it correlates strongly with the unemployment rate, a large value corresponding to a low unemployment rate and vice versa.



What consumers are telling us also corroborates with other “hard” data we got this week. Layoffs continue to run relatively low. In December, the level of layoffs was around 1.62 million, well below the 1.8 million we saw before the pandemic. Keep in mind that the workforce is also larger now. If we normalize for that, the “layoff rate,” or layoffs as a percent of the workforce, is running at a historically low 1.0%. For perspective, it was running around 1.2-1.3% in 2018-2019. (Note: I’ve truncated the y-axis in the chart below, to provide more clarity, since layoffs surged in March – April 2020 and overwhelms everything else.)



Big picture, the economy is in a good place, especially the all-important labor market, and consumers are starting to perceive it as such. Strong incomes are what pushes consumption higher, and that’s good for economic growth, as well as company revenues and profits.

Another huge benefit of a strong labor market and strong incomes, along with falling inflation, is that the economy is less dependent on credit as a driver of growth, for households, but also for businesses. It allows businesses to fund expansion with profits, as opposed to solely debt financing. This is a big reason why we saw economic growth run above trend in 2023, even as bank lending eased to 2% year over year, well below the historical run rate of around 5%. That’s another way in which we may be in a different sort of economic environment than what we’ve experienced since the 1980s – one that is fueled by incomes rather than credit.

That’s a big reason to feel good.

 

AI Craze Closing In On Crypto Craze
Mon, Feb 5, 2024

Last Friday's Bespoke Report was our quarterly Equity Market Pros and Cons edition. In it, we noted the boom of artificial intelligence both in terms of search interest (measured by Google Trends data) and mentions of the term in the earnings calls of mega caps. Google Trends data measures how much a given term(s) is being searched for on Google's search engine. That interest is indexed with 100 being the peak in searches. Thus a reading of 75 would be when search interest is 75% of said peak, 50 would be 50% of the peak, and so on. Google Trends also allows for comparisons across multiple terms to evaluate relative search interest.

Given the topic of AI is extremely in vogue, we wanted to compare how search interest stands up to bitcoin, which before AI was the last tech craze among investors and the general public. Bitcoin, and crypto more broadly, came into the mainstream as the next big thing in tech in late 2017. As shown below, December 2017 would mark the height of Google searches for "Bitcoin". A few years later in early 2021 when meme stocks were all the rage, search interest for Bitcoin again spiked, but that has been the closest it has come since to returning to 2017 levels of interest. Meanwhile, AI has come to the forefront.

As shown below, searches for "artificial intelligence" or the abbreviation "AI" began to explode higher a little over a year ago with the launch of ChatGPT. Search interest for each of those terms has not ceased rising, and all three just hit record highs last week. As for the actual index values versus Bitcoin, the Trends score for "artificial intelligence" has climbed to 56 and the index for "AI" has gone even higher to 65. That means that search volumes for "AI" are currently around two-thirds as high as search volumes for "Bitcoin" were at the peak in late 2017. That is to say that (as if it wasn't obvious) AI is the buzzword of the time, but it's not quite as buzzy (yet) as Bitcoin was several years ago.



While AI-related searches have quickly risen in popularity, the pace hasn't been as rapid as it was for Bitcoin. In the chart below we show Google Trends scores for the same terms as above, but for each one, we show the two years before their respective peaks. While the bulk of the increase to peak searches for Bitcoin in 2017 occurred in just a few months, the more recent growth in AI searches appears to have been much more steady. That offers at least one counterpoint to assuage concerns over AI being a fad.

 

Not All Rate Cuts Are the Same


“The Fed’s job is to take away the punchbowl, just as the party is getting good.” William McChesney Martin Jr., the ninth Chair of the Federal Reserve of the United States (Fed)

Rate cuts are coming, but after last week’s Fed meeting and then Chairperson Powell’s appearance on 60 Minutes on Sunday, the expectations are the first cut will probably be in May, not March. The odds were in the March camp this time a few weeks ago, but stronger economic data and direct comments from Powell have pushed market expectations to May.

We’ve long been in the camp that the first cut would be May and pushed back against March. Think about it like this: The Fed was very wrong when they told anyone and everyone that inflation was ‘transitory.’ That didn’t go so well, so now we think they’ll want to be extra careful on the other side before cutting, as the biggest worry is they cut too soon and inflation comes roaring back, especially in an election year. Of course, the Fed and Washington politicians are totally separate and no one would ever think like that .

The bottom line is the Fed probably wants to see a few more months of data that indeed confirms inflation isn’t an issue. Our take for many months now has been that inflation is last year’s problem and the door is wide open for cuts, with annualized core PCE (the Fed’s preferred measure of inflation) running sub 2% the past 3 and 6 months. Yes, over the past year it is still above the Fed’s mandate of 2% inflation, but the more recent tame inflation numbers are what matters more in our opinion, not what was happened a year ago.



Let’s talk more about rate cuts, as there are greatly varying opinions out there. Here’s the thing—many think the Fed cutting rates is a sign we’re in or near a recession. It is true that some rate cuts have come during times of economic weakness, even recessions. Many immediately think about 2001, 2007, and 2020 as times the Fed cut to stimulate the economy amid troubles. Here’s the truth: Not all rate cuts are the same, as some take place during what we would call periods of normalization.

A normalizing first cut is a cut that takes place likely after the Fed hiked to slow things down, the economy wobbled but didn’t fall into a recession, and then began to expand again amid lower inflation. Think of this like the first cuts in 1984, 1995, and 2019. Then of course there are what we’d classify as panic cuts. Think times like after the 1987 crash, the fall of 1998 during the Russian ruble and Long-term Capital Management crises, and of course March 2020.

Breaking it down by these three types of cuts shows very interesting results. When the Fed cut during a recession, the S&P 500 has been down an average of more than 14% only three months later and down nearly 12% a year later! Compare that with a cut to normalize and stocks are up nicely across the board and higher 13.2% on average a year later. Panic cuts see the best performance, up 17.4% a year later. That makes sense, as times of panic and pure fear are historically great buying opportunities. As Sonu Varghese, our VP, Global Macro Strategist, has noted time and time again, we simply aren’t seeing any signs of a recession on the horizon and believe any cuts now would be to normalize.



Another way to look at this is the Fed hiked rates more than 5%, from virtually 0% after the pandemic to 5.50% in order to slow down the generational inflation we were seeing. Well, now that inflation is no longer an issue, the door is wide open for a few cuts this year. We think four total cuts (0.25% each) starting in May makes a lot of sense.

But will the Fed really cut with the stock market at an all-time high? Let’s remember their dual mandate, which is full employment and stable prices. Nowhere does it say how stocks are doing should matter, but the world isn’t so black and white. Still, I looked back and found 20 other times they cut when the S&P 500 was within 2% of an all-time high (based on the day before the cut) and wouldn’t you know it, stocks were higher a year later EVERY. SINGLE. TIME.



2019 was the last time we saw this. You have to go back to the mid-‘90s before that. We’ve said many times we see many similarities between the mid-‘90s and now. Both periods saw an aggressive Fed amid an economy that avoided a recession, inflation tame, strong wages, and high productivity. We think we are going to see additional productivity strength, which is the key to all of it. High productivity allows the Fed to cut rates and not worry about higher inflation, while wages stay strong. Bottom line, the Fed has cut near all-time highs before and usually it has been a bullish development.

For fun, did you know that Jerome Powell took over at the Fed six years ago? That’s right, on February 5, 2018 he was sworn into office. Turned out the Dow fell 4.6% that day for the worst first day ever out of 16 total Fed chairs. Was it due to him? Not at all, as this was the first day of the trade war with China.

How have stocks done under his leadership? The Dow is up 51% since he took charge, right in the middle of the pack, so after a rough start it clearly came back nicely. The best return ever? Alan Greenspan, with Volcker coming in second. Only once did stocks fall over any Fed Chairman’s tenure and that was Eugene Meyer during the Great Depression, highlighting that the path for stocks is usually higher.



Of course, Greenspan was in charge a very long time, second only to Martin and his 19 years, so they should have higher returns all things considered. Below I annualized things. Janet Yellen might go down as the shortest leader at the Fed ever, but she was quite mighty in terms of market performance. I was rather surprised to see the annualized return for Volcker coming in so high, as when you think of his leadership, you also think of higher inflation and higher rates. Guess it isn’t that simple. Then poor Meyer checks in with an annualized loss of more than 30%. Ouch.

 

Will the (year of the) Dragon slay the Bear in China

This Saturday, February 10, is Lunar New Year or Chinese New Year and it will usher in the year of the dragon. Traditionally, the dragon has been a symbol of good luck, strength, and health. All of which have been lacking for China’s Shanghai Comp and Hong Kong’s Hang Seng indexes as both have languished since peaking in late 2021. Some signs of a possible turnaround have begun to materialize with both indexes rebounding off their respective 2024 lows.

Historically, trading ahead of the Lunar New Year has been bullish on average with the Hang Seng index solidly advancing during the 30-trading days before the holiday. The Shanghai Comp has also tended to rise, but gains were in the final few trading days before the holiday. After the holiday passes and trading resumes, Shanghai Comp has taken the advantage over the following 60-trading days with gains continuing. Hang Seng has tended to drift into a sideways trading pattern but still produced a modest gain.

 

Welcome to the Year of the Dragon and Why We Remain Cautious on China


“Bulls make money, bears make money, and pigs get slaughtered.” -Old Wall Street saying

We already had our New Year here in the United States, but the Chinese New Year begins on February 10th and with it the Year of the Dragon. The Dragon is very important in Chinese culture and it will be quite the celebration. Although we would never suggest investing based on the zodiac signs, it is fun to note that the Year of the Dragon has historically been fairly strong for stocks, although stocks really did like the current Year of the Rabbit, which is set to end soon.

There are 12 Zodiac signs in the following order: Rat, Ox, Tiger, Rabbit, Dragon, Snake, Horse, Goat, Monkey, Rooster, Dog, and Pig. Each sign is named after an animal, and each animal has its own unique characteristics. Someone born during the Year of the Dragon tends to partner well with an Ox or Rooster and tends to be philosophical, organized, intelligent, intuitive, elegant, attentive, and decisive.

Since the Chinese New Year typically starts between late January and mid-February, we looked at the 12-month return of the S&P 500 Index starting at the end of January dating back to 1950. And wouldn’t you know it? The Year of the Dragon has been up five out of six times and up a median of 11.5%. But if you look closer below, you’ll notice that stocks see double digit returns only every other appearance of the Year of the Dragon, which could mean this time it’s due for a breather.



Here’s how all 12 signs have done since 1950. Turns out the Year of the Goat has the strongest returns, but you’ll have to wait till 2027 to see that one again. More bad news—the Year of the Snake is the worst performer and that takes place after the Dragon next year. Lastly, we found it amusing that animals with horns saw some of the best returns, while a slimy reptile like the snake or a dirty little rat saw the worst. Given Dragons have horns, maybe this will be a nice year for the bulls?



Similar to the Super Bowl Indicator, we would NEVER suggest you invest based on things like who wins the Super Bowl, signs of the Zodiac, how many times they show Taylor Swift on Sunday, or whether Travis Kelce proposes to her after the game. Still, it is fun to look at once a year!

Regarding China, we have been underweight emerging markets (EM) for more than a year now, mainly due to our overall concerns about China, which currently makes up about 25% of the MSCI EM Index.

China’s economic growth has been slowing and incredibly, US nominal GDP grew more (5.8%) last year than China’s (5.0%). Virtually no one had that on their bingo card this time a year ago. Much of China’s economy is based on investment spending (43% of GDP) compared with the US, which is mainly consumer based (nearly 70% of GDP is consumer spending). Given much of China’s investment is based on real estate and debt, the ongoing property investment crash in China will continue to hinder any recovery. In fact, property investment was down 10% last year, compared with up 10% in 2018 and 2019 before the pandemic.

Here are some stats from Sonu Varghese, Global Macro Strategist, on China’s real estate issues:

• In March 2021, China was building residential property at a rate of 1.71 billion square meters per year.
• That was cut in half, to ~ 881 million square meters, by December 2022.
• As of October 2023, it’s been cut by another 20%, to 699 million square meters.

Additionally, China has a lot of debt (so does the US), but most of their debt is private debt, which can be a much bigger issue than public debt (like the $34 trillion our government has racked up).

More from Sonu on this:

• Significant amounts of private debt are actually more detrimental than public debt, and a big risk factor, for an economy.
• Private debt is serviced with revenues from business operations.
  • If there’s a slowdown, private sector revenues contract.
  • The contraction is even more severe if there is leverage.
  • That is what happened in the US in 2008 (high household debt) and in 2001 (high corporate debt).

 

There’re Reasons to Be Optimistic About Productivity


Productivity growth surged at an annual rate of 3.9% over the last three quarters of 2023, which is the largest non-recessionary gain we’ve seen since the late 1990s, and more than double the pace of productivity growth between 2005 and 2019.



As we wrote in our 2024 Outlook, “Seeing Eye to Eye” (download here), productivity growth is a game-changer for the economy. Higher productivity means workers can have strong income gains without putting upward pressure on inflation. This in turn allows the Federal Reserve to back off from running interest rates at a very high level. Easier rates and the promise of higher demand, thanks to stronger incomes, can spur business investment – into labor, technological equipment, and structures – all of which can further boost productivity. That’s the virtuous productivity cycle, pictured below, which we last experienced in the late 1990s.



The good news is that we could be poised for another resurgence in productivity, at least above the low levels we experienced over the last decade and half.

A Strong Labor Market Is Key
There was a lot of hiring in 2021 and 2022, with the economy more than recovering all the jobs lost in 2020. However, newly hired workers are not immediately productive – businesses have to invest in training them. Also, businesses have an incentive to invest more when labor markets are tight. If a worker can get higher pay by switching jobs, which is what we saw in 2021-2022, employers may have to pony up more to keep them. At the time, it looked like productivity was falling. However, all this investment in labor bore fruit in 2023, and productivity started to surge.

Hiring did ease in 2023, but it was more normalization than a slowdown. The economy still created over 3.0 million jobs in 2023. As I wrote a week ago after the January payroll report was released, most indicators suggest the labor market is as strong as it was back in 2019. Wage growth is running above the pre-pandemic pace. Despite this, annual inflation fell from 5.4% at the end of 2022 to 2.6% at the end of 2023 (using the Fed’s preferred measure, the personal consumption expenditure price index). Why did strong wage growth not lead to upward pressure on inflation? Productivity growth, amid supply chain improvements. Consumption actually ran above trend in 2023, but a more productive workforce was able to produce more goods and services to keep inflation at bay.

All of which is why the Fed was able to stop hiking rates by July 2023, and is now potentially eyeing rate cuts, which gets us to what could drive productivity gains going forward.

Artificial Intelligence (AI) Is Not a Big Driver, but It’s Early Days Yet
There’s been a lot of focus on generative artificial intelligence (AI) and its prospects to boost productivity. The reality is that we haven’t seen the impact of AI yet on a broad economic level. After adjusting for inflation, investment in information processing equipment is running below the 2017-2019 trend. It did pick up in the fourth quarter, but clearly we have some ways to go.



The productivity surge in the late 1990’s came on the back of a boom in business investment, and notably, investment in computer equipment. As Preston Mui, an economist at Employ America, points out, investment in computer equipment made a significant contribution to GDP growth between 1995 and 1999 (side note: I highly recommend their series on productivity “The Dream of the 90’s”). Investment in software is actually calculated as part of “intellectual property products investment” within GDP, and even this played a big role, as you can see in this chart from the folks at Employ America.



Coming to today, the good news is that we just got a surge in productivity growth without much of a contribution from AI. But going forward, over the next several years, AI could turn out to be a significant driver. Companies are increasingly investing in AI, and it’s going to take time for that to turn into increased productivity.

The key is that we need investment to rise above the recent trend, and that’s going to get a boost if the Federal Reserve pulls back on their aggressive interest rate stance. We believe they are going to start that process in a few months, especially as inflation continues to ease. Lower inflation combined with income growth that is propelled by a relatively strong labor market will keep consumption (and the economy) humming. That’s another key factor that will push businesses to invest. In contrast, if companies believe economic growth is going to ease to the relatively low levels we saw last decade, there’s going to be less incentive to invest.

The good news is that the latest earnings season shows forward expectations of capital expenditures (capex) for companies in the S&P 500 continuing to push higher. Over the 6 years from 2014 to 2019, forward capex rose 22%. Since the end of 2021, through January 2024 (2 years and 1 month), forward capex has grown 21%.



We believe the economy may have turned the page on the last decade of lackluster economic growth and low productivity, which is also why we’re overweight equities in our strategic Carson House View portfolios, and overweight U.S. equities in particular. As we wrote in our 2024 Outlook, “seeing eye to AI” on productivity, it is not so much about the immediate impact of AI on economic growth, but rather the forces that create and foster it. AI itself is a strategic play that can support the long-term growth of corporate profits. And in the near term, it’s about continued innovation that investment makes possible.

 

Bitcoin Reclaiming $50,000
Mon, Feb 12, 2024

Although it has pulled back as of this writing, at its highs today, Bitcoin reclaimed the $50,000 level. That was the first time the world's largest crypto currency has traded above that threshold (on an intraday or closing basis) since December 28, 2021. As shown below, following the record high set in November 2021, Bitcoin cratered 76.5% over the next year. Since its bottom in November 2022, the crypto has managed to rally 214%. A significant portion of those gains have come since last summer with steep increases in the price of Bitcoin from October through December and another sharp push higher in the past few weeks. In fact, as recently as January 25th, it was trading below $40,000. But nearly three weeks and $10,000 later, Bitcoin is looking to join the 5.5% of days in which it has formerly traded above $50,000.