As always, there are reasons to be bullish and optimistic - mostly momentum. And there are reasons to be bearish - pretty much every fundamental measure I can think of.
I remain fundamentally bearish but aggressively long the stock market (yes, I can be both at the same time). If the momentum continues, we will do well and if the rally fades our stops will get us out before the market drops too far, at least in our active strategies.
“On average, everyone who marries will end up with a marginally attractive spouse of normal intelligence. Therefore, you're probably wasting your time trying to find a beautiful and intelligent person to marry you. In theory, that might be good advice. But was that your dating strategy? If you had dated any dog that would have you, would you have married the spouse you wanted?
In short... when it comes to a lot of important things in our lives, getting better-than-average results is a worthy goal…”
"For the past year or more, the so-called Magnificent Seven stocks have driven the vast majority of the S&P 500’s return.
That said, Tesla has started the year down about 25% and the talking heads have begun referring to the rest of the group as… wait for it… The Magnificent Six… I couldn’t make it up if I tried.
What changed for Tesla? Nothing, really. I think the market has just gradually noticed how overpriced the stock was and from there market “gravity” took care of the rest, as it always eventually does.
Of course, this could never happen to the other members of the “Mag 7…” That was sarcasm if you didn’t pick it up…"
Happy New Year and welcome to 2024!
As one more trip around the sun has been completed, the markets seem to be laser focused on the Fed cutting interest rates this year. What the markets seemingly fail to realize is that when beg for rate cuts what they are implicitly asking for is a big drop in the markets along with a big spike in unemployment. That’s normally what brings about those rate cuts.
The Fed wouldn’t be cutting rates and thereby punishing savers in a strong economy. It wouldn’t need to.
Warren Buffet is still probably the best investor alive and perhaps the best who ever lived. He is 93 years old now, and has uttered countless quotable phrases, the most famous of which is probably to “be fearful when others are greedy and be greedy when others are fearful.”
So, what if I told you that after closing positions in some pretty big and well-known companies like United Parcel Service (UPS), Proctor & Gamble (PG), Johnson & Johnson (JNJ), and General Motors (GM), Mr. Buffet is sitting on more cash than ever before… and as they say, “ever” is a long time.
The S&P 500 was down 5.08% in September and down 6.96% from the intraday high at the end of July. In October, the index has bounced back a little, but I am seeing a series of lower highs develop. For now, the index has bounced off its 200-day moving average, which is to be expected. But if it bounces to another lower high, we could be in for a period of sideways consolidation for a while, or an outright drop below the 200-day moving average, which would be a very bearish signal that could send markets back to the lows for the year. There is also always a chance that the market will breakout to a new high and rally into the end of the year even in the face of higher interest rates, all-time high credit card balances, dwindling savings, high inflation, etc…
There was a time when nobody cared about monthly Consumer Price Index (CPI) data. In fact, that time covered the vast majority of my career in the financial services industry. I look forward to the day that people go back to not caring. For now, CPI data is promoted as the “big data release” of the week by basically every financial outlet on the planet, and those promotions continue to generate clicks. Since we are stuck with it, let’s look at what’s important rather than what grabs the public’s attention.
If I told you in my last commentary that two of the three largest bank failures in the history of the United States (plus the failure of a relatively small crypto bank and a Global Systemically Important Bank or G-SIB) would happen in March, and then asked you to guess whether the market would be up, down or flat for the month – what would you have guessed?
My bet is that you would have guessed “down.” Perhaps you (like me) would have said, “down by A LOT.”
It would have been a smart bet. And you (and I) would have both been wrong.
As we all know, inflation has had everyone’s attention for the past year. For better or worse it still does. I remember a time not so long ago when I didn’t ever need to look at the date that the Bureau of Labor Statistics released its Consumer Price Index (CPI) data for the month… it was mostly a non-event. These days, you can plan on major volatility every month when the numbers come out. The higher the reported number the more likely the FED is to hike rates and the market plunges, and vice versa.
Projected Real FED Funds Rate = FED Funds - Y/Y CPI
Click Image to Enlarge
My projections are currently unchanged assuming only one more 0.25% rate hike in the March 22-23 meeting. Depending on CPI the next couple months the Real FED Funds Rate could go positive in May without further increases. That said, I think it is reasonably possible that the FED could hike by 0.50% in the March meeting, and then continue to hike after that.
My opinion is that CPI is yesterday’s news and the primary driver of the market over the next several months and quarters will be the impending recession.
The markets just finished their best January since 2001 with the S&P 500 up over 6% and the Nasdaq up over 10%… what could possibly go wrong?
Some of you might remember 2001. For those of us who don’t remember 20+ years ago that clearly, let me help you out. January 2001 was about the midway point of the stock market meltdown that followed “DotCom” bubble. That January, I was just about 5 months from graduating high school!
Leading up to that January, the S&P 500 was down about 20% from March of 2000 through its low in December 2000 and the Nasdaq was down over 50% over the same timeframe.
Sound familiar? If not, let me point out that the S&P 500 was down more than 20% last year at its low point while the Nasdaq was down 37% from its peak to its low in 2022.
So, what happened after that January rally over 20 years ago?
The S&P 500 Index* finished the month of December down 6.19%, more than erasing the gains from November. Despite at least three bear market rallies that saw the market rise 12%, 19% and 17%, respectively, the index finished the year 2022 down 19.48%. At its low, it was down 26.71% mid-day October 13th.
There isn’t really a better way to say… it was a brutal year. For many, the bear market rallies were particularly demoralizing as is often the case.
The S&P 500 continued to claw back some losses in November, finishing the month up 5.56%. This was the 5th calendar month of the year with a positive return, but the index was still down 14.17% for 2022 when the month ended.
A little more than halfway through December the market has given back all of its gains from last month and is presently down 19.30% for the year. The SPY ETF that tracks the S&P 500 index was down 6.63% in the past four days alone despite “Wall Street” getting exactly what it wanted as an early Christmas gift –CPI (inflation) came in lower than expected and the Federal Reserve Bank (FED) slowed the pace of its rate hikes…
The S&P 500 put in a fresh low for the year on October 13th (the day after we sent last month’s commentary) before rallying for the balance of the month to finish October up 8.13% (using the SPY ETF as a proxy). That left the market down 18.69% for the year.
Yesterday, the S&P 500 was up over 5% for the day, because the Consumer Price Index (CPI) was reported at 7.7% vs. an expected 8.0%. The Nasdaq was up over 7%!
For most people (including professional investors and portfolio managers), this creates an emotional response. It shouldn’t.
Remember, from June to August of this year, the S&P 500 rose nearly 20%, only to drop to fresh lows in last month.
A one-day 5% rally in stocks is signature bear market behavior. In fact, for perspective:
During the 2008 bear market there were 19 days where the S&P 500 went up by more than 3% in a day (12% was the highest daily move).
During the bull market of 2020, there were 0 days that the S&P 500 went up more than 3% in a day (2.6% was the highest daily move).
Could this turn into more than a one-day rally?
