“The worst thing you can do is say to yourself, ‘I want to be just like somebody else.’ You have to absorb knowledge from someone else, but ultimately you have to find your own voice.” ~ Yo-Yo Ma

’Tis the season for holiday parties, and this week Fundstrat Head of Research Tom Lee related his anecdotal experience at the parties this season: “In my conversations, I’ve found that most institutional investors remain cautious,” he observed. “It seems that this is mainly because for many, the takeaway from the December FOMC meeting is that ‘the Fed sees something that we don’t, and that explains their dovish pivot.’”

Lee suggested that “those with a bearish take on December FOMC are retaining an anchoring bias” – this despite many data points showing that inflation has fallen “like a rock” this year. Friday gave us yet more evidence of this, with Nov. Core PCE Deflator released and coming in at +0.06% MoM. This was in line with the forecast of our Head of Data Science, “Tireless” Ken Xuan, and well below Street consensus expectations of +0.20%.

Some bears are also citing valuation as a concern, but Lee discounts this. Although equities are indeed up by about 25% YTD, he points out that PE for the S&P 500 ex-FAANG is now around 15.3x, compared to 14.5x at the beginning of the year. In his opinion, “that’s barely any increase.” The PE for the S&P 500 is significantly lower now (17.1x) than it was at the beginning of 2022 (21.7x). Lee’s view on current stock valuation is seen in our Chart of the Week:

Lee said, “To me, this is a great launching point for stocks heading into 2024, especially given our expectations for >10% EPS growth in 2024 and 2025.” This is based on historic PEs for the S&P 500 when the U.S. 10-year yield is between 3% and 5% (as of this writing it was just under 3.9%). Fundstrat analysts found that under such circumstances, the PE of the S&P 500 is >18x 65% of the time, which means equities have ample room to expand, in our view. 

As we enter the Santa Claus rally period, Lee said, “We are buyers of dips into year-end,” and that’s a view with which Mark Newton, Head of Technical Strategy, agrees. Earlier in the week, he said, “Pullbacks into Friday of this week and/or next Tuesday (December 26) likely should prove buyable for an S&P 500 move back to exceed 4,818.” 

Newton also pointed out that “it’s certainly a positive to see broad-based participation from multiple sectors as markets moved higher in the last month.” While he saw signs of equities being overbought, he also noted that they showed no evidence of giving way just yet. The same goes for Treasuries, in Newton’s view: “Trends have proven resilient in recent weeks, with little to no evidence of any deterioration.”

Yet Newton cautions that “it remains difficult to say with any certainty that markets should push immediately back to new highs,” adding that “if a pullback fails to materialize until January, then a larger-than-normal correction likely will occur heading into February 2024.” 

Elsewhere 

President Biden moved to crack down on financial institutions that help Russia evade sanctions on its purchase of weapons and military technology, signing an executive order that would immediately authorize the Treasury Department to penalize banks and financial institutions that facilitate such transactions. 

The Department of Transportation imposed its largest fine on an airline, penalizing  Southwest Airlines (LUV 0.13% ) $140 million for a meltdown during the 2022 holiday season that disrupted travel for roughly 2 million travelers. The penalty, for violating consumer protection laws, dwarfs the previous record for a fine against an airline – $4.5 million against Air Canada in 2021.

Shipping and energy costs rose after attacks by Iran-backed Houthi terrorists forced energy companies and major cargo haulers Evergreen Line, Hapag-Lloyd, and Maersk to avoid the Red Sea and take a significantly longer route around the Horn of Africa. Analysts estimated that 15% of imports to Europe, the Middle East, and North Africa are transported via the Red Sea. 

Toyota issued a recall of roughly 1 million vehicles after admitting that its Daihatsu subsidiary had rigged safety tests, specifically those testing side-collision safety. Toyota (TM) shares were down roughly 2.6% this week. (A list of models recalled in the U.S. can be found here.)

Tesla’s EV charging platform is now the official charging standard in the United States, as designated by the Society of Automotive Engineers. Tesla’s (TSLA 2.57% ) North American Charging Standard (NACS) had in the past year been adopted by General Motors (GM -0.73% ), Ford (F 0.53% ), and other automakers, but the official designation makes it easier and incentivizes businesses to install EV charging stations that will work with a wide range of EVs. The adoption of the standard also makes it possible to install chargers in lampposts, eventually making EV charging a more feasible option for city drivers who park on the street rather than in a private garage. 

Angola announced its decision to leave OPEC, of which it had been a part since 2007. The decision was not entirely a surprise, as the country had been unhappy over the organization’s recent decision to lower its production quota to 1.11 million barrels per day (bpd), which, though still above Angola’s production capacity, was seen as detrimental to the country’s ability to attract new investment. The western African country produces about 1.1 million bpd.

And finally: Cardinal Giovanni Angelo Becciu, once chief of staff to Pope Francis, was sentenced to five and half years in prison for crimes related to his involvement in a EUR 350 million (USD $385.2 million) real-estate deal that Vatican prosecutors allege was fraudulent. Not only is Cardinal Becciu the most senior Vatican official to ever be tried for financial crimes, but also the first cardinal to be tried by lay judges under a 2021 decree by Pope Francis. Previously, accused cardinals could only be judged by a jury of Church officials at bishop-level seniority or higher.

Markets and Fundstrat offices will be closed in observance of the Christmas holiday on Monday, December 25. We wish you and your family a happy and safe celebration.

Our publishing schedule for the rest of 2023 can be found here.