December 24, 2023
Weekly Market Outlook
By Donn Goodman
Happy holidays and Merry Christmas to our loyal subscribers, friends, and periodic Market Outlook readers. We wish you and your families an enjoyable holiday and a relaxing end of the year, and we send our heartfelt wishes for all things good in 2024.
I recall this same period last year and the downbeat feeling many investors had about the capital markets, interest rates, the economy, and what was in store, given the Federal Reserve’s aggressive plan to raise rates to stem rising inflationary pressures.
Oh, how fast the investment landscape changes. Many of our Market Outlooks along the way in 2023 painted a more optimistic picture than the one we were all living through. Much of our positive and optimistic outlook has come to reality, especially since the end of October.
Looking back at the end of 2022 and the start of 2023.
The S&P 500 dropped 20% in 2022. Bonds had one of the worst years on record, with the average fixed income fund dropping double digits. Most investors did not feel much hope for the year ahead last January. Contrary to this belief, the year started quite strongly. Technology and the advent of artificial intelligence kicked the year and the markets into high gear.
After so many years of hearing about the technology revolution's next phase, November 2022 changed so much. ChatGPT was introduced, and investors began to speculate how AI could be incorporated into businesses and create efficiencies and productivity previously only imagined. That provided more ammunition and leverage for investors to be invested in the tech space throughout 2023.
(We also began to fiddle with AI in 2023, noticing that by utilizing it, we could improve upon some of our algorithms as well as in manufacturing and optimizing our All-Weather Portfolio Blends. While we have just begun to integrate these tools into our investment constructs, we have noticed the incredible benefits already)
Given this new optimism about technology, the NASDAQ rose quickly beginning in early January and was up almost 20% in the six weeks of the year. The S&P 500 also followed and, given the market cap strength of the Magnificent Seven, was up almost 10% during that same period.
The gifts kept on giving until March and a few regional banks were caught in trouble as a direct result of higher interest rates. Concerns about another banking crisis hit the market and wiped out a large portion of the early year’s gains.
Thankfully, the potential for a widespread banking crisis was contained to just a few regional banks, and stocks picked back up again and rallied into the summer months and hit new 52-week highs across most indices in July.
But the Fed’s aggressive interest rate hiking campaign continued into the fall, accompanied by geopolitical turmoil in the Middle East, and the S&P 500 saw another 10% drawdown before bottoming on cooling inflation numbers in October. This marked the top in interest rates at 5%, and they have since rallied into year-end.
This past week, CPI came in below expectations and is now showing a monthly print below the Federal Reserve’s targeted 2%. We suspect the Fed knew this in advance which is why they recently broadcasted three rate cuts in 2024 at their December meeting. See the inflation chart below:
The cooling inflation rhetoric has been welcome news. Since November, interest rates have come down over 100 bp’s on the 10-year Treasury, and stocks have rallied 8 straight weeks. See chart below on just how fast interest rates have declined. (the 10-year has made a complete round trip over the past 11+ months). See chart below:
10-year Treasury rates are now sitting close to their long-term average. See chart below:
As we near the end of this volatile economic year, the markets are in full rally mode, and each index has recently hit a new 52-week high, and several (Dow, NASDAQ 100) are now sitting at new all-time highs. The S&P will have a better than 20% return in 2023, and the tech-heavy NASDAQ is up over 50%. See market charts below:
Part of the reason that stocks have taken off during much of 2023 has been continuous huge new money inflows to stocks and ETFs throughout the year. The chart below shows that retail investors have been piling in. Part of the reason is that there is (and remains) an abundance of cash sitting on the sidelines in money market funds. As rates have plunged down the past few months, retail investors have rotated into stocks. See long-term chart below:
Active money managers were way underinvested at the end of October and are now firmly in the bullish camp. See chart below:
A big beneficiary of this trend change has been small and mid-cap stocks. Heavily influenced by borrowing costs, these smaller companies benefit greatly when interest rates come down. Only up a few percent through October, when large cap stocks were up double digits, small cap stocks have rallied the most these last 8 weeks and are now up 15% year-to-date.
Since October 27 when the trend changed, small cap stocks (IWM) are up 24.2%, mid-cap stocks (MDY) are up 19.6%, the NASDAQ QQQ is up 18.2% and the S&P 500 is trailing only up 15.3%. The past 8 weeks have been an investor’s gift as we bring this year to a conclusion.
Here are a few charts that show the strength of small and midcap stocks as we enter 2024:
(As of this writing, our Small-Midcap Earnings Growth investment strategy is up over 50% year-to-date. If you would like to receive a fact sheet about the model or would like more information on following the strategy or having it traded for you, please reach out to [email protected], and he will forward you the information)
Will it continue?
We have no idea what the future holds. Our indicators are still bullish and suggest that there is more upside to come. (more on that in a minute). However, the following chart shows what might occur after an 8-week winning streak for the S&P 500.
Room to run.
Throughout the year we have written about the Magnificent 7 and the effect these 7 mega caps have had on the S&P 500 (and QQQ as well). Now comprising over 30% of the S&P market cap, there is no doubt that these companies, which are technology-focused, have all benefited from the euphoria surrounding their use of AI as part of their business structures.
However, this group of stocks is selling at 22 times their forward P/E’s. The rest of the 493 stocks, however, are selling at a 17.5 multiple of forward earnings. The median stock in the S&P is up only 8% this year as compared to the 24% for the S&P 500 index.
There is reason to believe that many of the other stocks that make up the S&P 500 have plenty of room to appreciate. The following chart and explanation illustrates the disparity between the median S&P stock and the index average during 2023:
We are now in the Santa Claus Rally.
Many investors believe the Santa Claus rally takes place during most of December. It actually starts on the day right before the Christmas holiday. This 7-day period outperforms every other 7-day period during the year. This period between Christmas and New Year’s is usually marked with light volume and an upward bias. See chart below:
What’s in store for 24’? (Part 1).
We now provide a list of some investment predictions that we believe may occur in 2024. We provide this list as a preview of a more extensive writing about these things in next week’s Market Outlook.
We now turn it over to Keith and his team and the BIG VIEW bullets, which will give you a more comprehensive view of the market internals.
Thank you for reading, and have a good weekend.
Risk-On
Neutral
Every week you'll gain actionable insight with:
