Two weeks later, the first act of the year is pretty close to the bull market script. After a nine-week bull run to end 2023, both bulls and bears pointed out that the tape was overheated and stretched, and it duly cooled with a two-week pause that kept the S&P 500 just a half-step below its level. . record from two years ago. There has been some recovery from the November-December subsurface tearing. The small-cap Russell 2000 has fallen about 4% versus a fractional gain in the S&P 500 so far this year. ARK Invest, a lower quality high beta technology indicator, is more than 12% from its late December high. This was necessary, predictable and most likely unfinished. What we know about the kind of unusual breadth and momentum scores achieved by the rally from the October lows is this: The forward return implications extending over several months or a year are quite positive based on history, however , the short term often features some setbacks. and careless profit taking. This chart from Ned Davis Research shows that the entire rally through the end of 2023 was a global affair, taking 92% of all domestic stock markets above their 50-day average, and during the recent market pause "it has barely appeared a dent in the breadth figures that began the year indicate a decisive improvement in global participation," says NDR chief global strategist Tim Hayes. The world index of all countries, equally weighted, has appreciated at an annualized rate of 24% since 1998, when this indicator is above 75%. As Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, said late last week: "The situation is neither all good nor all bad," with the economy resilient but stocks much less depressed and hated that a year ago. He believes we are operating in โsome sort of bull market,โ so it is fair to expect further bullish progress, although โ2024 will bring a lot of ups and downs and a lot less velocity than we saw around 2019-2023.โ Broadly speaking, the S&P 500 could pull back to around 4,600 points (about 4% lower than here) and remain in a routine technical review until its latest release point in early December. Pause of the New Year's Rally The negative performance of the S&P 500 during the first five trading days of the year is not meaningless, but it is not a strong alarm either; History shows that it has essentially reduced the odds of a positive calendar year from about 70% to about 50%. The January monthly options expiration week, which is next week, also tends to be weaker for stocks. Given these tactical risks and potential indigestion, a broader framework sees stocks having made a two-year round trip during which they absorbed 500 basis points of Federal Reserve tightening, a slight retreat from gains. and constant recession predictions to emerge in 2024 with a mild trend. The economic landing thesis is intact (if not proven) and disinflation is developing as expected. .SPX mountain 2022-01-10 S&P 500, 2 years Henry McVey, head of global macro at KKR, relies on the fact that October 2022 was a bear market and after such a low, the Stocks tend to deliver above-average returns in the coming years. "We believe too many investors remain trapped in the paradigm that the S&P 500 is trading at lofty valuations and the U.S. economy is peaking and heading for a hard landing," McVey says. "We don't see things this way." While he doesn't foresee eye-catching index-level gains this year or that U.S. GDP growth will be rapid, McVey notes that reasonably valued stocks are far from the anointed glamorous mega-caps and, more importantly, notes that none of the top 25 central banks are tightening their policies by comparison. to 85% in 2022. Meanwhile, the mix of M&A, IPO and high-yield debt issuance relative to GDP is at the lowest level since 2009. Mergers and IPOs are lacking Morgan Stanley maintains a leading indicator of Mergers and acquisitions activity, which has recently increased, suggesting that deals (a recent plot hole in the bull market script) should revive before long. Is a bull market likely to end before animal spirits drive mergers and IPOs, with the average Wall Street strategist predicting the S&P 500 won't rise this year and the index failing to advance for two years? It is not yet clear whether the recent anecdotal uptick in acquisition activity (visible in biotech, energy and software) picks up and helps smaller-cap companies resume their catch-up move against growth giants. Much celebration greeted the late 2023 ramp into small caps from multi-decade relative depths. And, of course, greater confidence that the economy will avoid a recession with rates falling should be supportive. A lot of money betting on an expansion. But in two weeks the Russell 2000 has already given up about half of its outperformance to the Nasdaq 100 accumulated over the previous two months. And I can't help but point out again that if this market starts favoring most stocks over the Magnificent Seven names, it would represent the consensus getting exactly what it wants, something markets don't tend to deliver when told to. Strategas' Todd Sohn notes that the Invesco S&P 500 Equal Weight ETF (RSP) saw inflows rise vertically last year to $13.5 billion, 30% above its previous 12-month high. The fund's total assets now stand at $49 billion, so new money betting on an expansion tape represents a sizable portion of the total. It may make sense to expect less dominance from the index's seven biggest leaders, but markets don't have to be zero-sum. None of the Mag7s have a higher forward P/E than they did two years ago. And fortunately, they're not moving in unison, with Apple and Tesla diverging lower lately. Betting on Fed cuts in 'peacetime' Right or wrong, the market debate right now can never get very far before devolving into a discussion about the Fed's policy trajectory. CPI and PPI data last week added to the market's collective conviction that the downward momentum in inflation is strong, opening the way for "peacetime" rate cuts by the Federal Reserve. We know that Federal Reserve Chair Jerome Powell has acknowledged that there would be easing well before the 2% PCE inflation target is reached, to ensure that policy does not become too restrictive with a current funds rate of the Federal Reserve of 5.25-5.5%. We know that the Federal Reserve considers the 2.5-3% federal funds rate "neutral," and that the median of its members forecast three quarter-point rate cuts this year, although they did not foresee the goal being met. of 2% until at least 2025. All this points to a more relaxed advance. Now, the Fed funds futures market is fairly certain that it will begin in March and is now pricing in a total of 150 basis points of cuts by the end of 2024 (1 basis point equals 0.01%). .-market expectations that the most cautious or hard-to-please observers cite as a potential major source of market disruption. But beyond a couple of months, fed funds futures prices are quite unreliable, as they capture a wide range of possible speculative and hedging scenarios that are priced along a spectrum, and the market will trend to extrapolate excessively at times. For now, however, the reassuring trend persists that inflation is declining more quickly and convincingly than the labor market and consumption. The Fed's stated willingness to try to accommodate a soft landing (as in 1995 with only a couple of rate cuts as the economy reaccelerated) is also a psychic endorsement. Many things can go wrong, including further consumer fatigue (discretionary stocks have traded poorly for three weeks) or a rising wave of layoffs that jeopardizes the growth side of the soft landing thesis. But just because the S&P is now trading near 4800 again and the Fed funds futures market is eyeing six rate cuts this year, doesn't mean the former happened because of the latter.
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The stock market has cooled off to start 2024, but itโs still checking most of the bull market boxes