“The truth is the Super Bowl long ago became more than just a football game. It's part of our culture like turkey at Thanksgiving and lights at Christmas, and like those holidays beyond their meaning, a factor in our economy.” ~ Bob Schieffer

Good evening,

The S&P 500 momentarily broke 5,000 for the first time on Thursday (5,000.40, to be precise) only to fall back slightly at closing bell. Then on Friday, the index breached that level more assertively, perhaps in part due to the Bureau of Labor Statistics (BLS) revising its December Headline CPI reading downward. (The Core CPI reading from December remained unchanged.)

While Fundstrat Head of Research Tom Lee was not unhappy about this development, in the nearer term, what will be interesting to see is “how equities behave after reaching 5,000,” he said. Furthermore, he told us that from a long-term perspective, “this is only a round number and it does not bear true significance."

Aside from the S&P 500, Nasdaq and the Russell 3000 are also in new all-time high territories, as Head of Technical Strategy Mark Newton pointed out in our weekly huddle. “Now a lot of people like to make excuses as to markets having thin breadth, which is true – this rally has largely been carried by only a few stocks. But it’s still very, very difficult to fade markets when they are at new highs. In my view, the trends are simply robust – and it's very, very difficult to fight ongoing trends,” he said. 

Adding to Newton’s brightening view of the market, “There are now other sectors starting to reignite and hit new highs.” One example? “Healthcare is the second largest sector within the S&P, and it is now back into all-time high territory after almost a two-year period of sideways chop, so this certainly is a bullish sign and one reason why I went to Overweight on healthcare, joining Tom – at least for now.” In fact, Newton suggested, “if you're looking to diversify outside of Technology, Healthcare and Industrials would be my picks – both sectors look phenomenal.” In his view, “this ultimately is going to be resolved higher this year, where we are going to have a broad-based rally. It’s only a matter of time now.”

As followers of his work know, Lee is also constructive for the year. Part of his argument for strong gains this year rests on the extent of flows out of equities since October 2022. The extent of these outflows can be seen in our Chart of the Week. 

Stocks have risen despite those outflows due to other factors such as corporate stock buybacks, hedge fund changes to gross leverage, and dividend reinvestment plans, all of which act as demand. (This can explain why large-caps have done better – it is frequently large-cap companies that buy back stocks and pay dividends, and hedge funds tend to buy large caps.)

However, for the first time in 2024, weekly equity flows were positive at $5.6 billion this week. As these inflows broaden this year – as Lee expects them to – small caps should benefit.

We passed the midpoint of earnings season this week, and thus far, Lee sees it as being “stronger than it looks.” In fact, he describes it as being “very strong.” He acknowledges that the increase in earnings estimates is more modest than it has been compared to earnings seasons from the past 15 years (S&P 500 4Q23 EPS is tracking towards $54.00, up +0.70% from the beginning of 2023). Still, the current rise was blunted by the impact on large banks’ earnings after they were assessed a $23 billion fee by the Federal Deposit Insurance Corporation (FDIC) to cover the costs of the 2023 regional bank bailout. Excluding Financials, EPS is tracking 3.6% higher than it was at the beginning of the year, Lee’s team found – above the 3.2% long-term average.

Lunar (Chinese) New Year

On Saturday, February 10, the Year of the Dragon commences. Historically, the Year of the Dragon has been the second-strongest of the years on the 12-animal cycle for the S&P 500, with an average return of 12.0%, a median of 12.7%, and a win ratio of 75%. Only the Year of the Rabbit, which we are about to exit, has a stronger history for the S&P 500.

Lee pointed out that a median 12.7% in Dragon years implies that the S&P 500 could reach 5,350-5,400, an upside to his 5,200 base case. He also noted that in Dragon years, small-caps (IWM -0.59% ), have an 88% win ratio and median outperformance against the S&P 500 of 6.1%. 

Elsewhere 

China has a new securities regulator, as Wu Qing replaces Yi Huiman as head of the China Securities Regulatory Commission (CSRC). Wu, formerly chair of the Shanghai Stock Exchange, was known as the “Broker Butcher” due to the many enforcement actions he took against firms alleged to have violated securities regulations. 

A mining startup using AI technology has reported Zambia’s largest copper deposit discovery in a century. KoBold Minerals, backed by the likes of Bill Gates, Jeff Bezos, Richard Branson, and Ray Dalio, used AI to analyze satellite imagery and drilling results. The company estimates that extraction of the essential metal from the new Mingomba deposit could begin as early as 2027.

Mexico topped China the leading source of U.S. imports in 2023, the first time our neighbor to the south has done so since 2002. The Commerce Department reported that the value of goods imported from Mexico to the United States topped $475 billion last year, up about 5% YoY. Chinese imports fell 20% YoY to $427 billion. Economists attributed this partly to rising tensions between the U.S. and China and partly to a desire to shift the U.S. supply chain closer to home. 

The New York Fed reported that credit-card delinquency surged 50% in 2023, while total consumer debt rose to $17.5 trillion. In the fourth quarter of 2023, total consumer debt rose 1.2% QoQ and 3.6% YoY. Perhaps more troubling, the amount of credit-card debt in “serious delinquency” (at least 90 days past due) rose at an annualized 8.5% in 4Q2023.

A South Korean construction company announced it would pay employees a KRW 100 million (~USD $75,000) bonus each time they have a child. Booyoung Group’s announcement also includes a retroactive payment to any employees who have had children since 2021. Booyoung CEO Lee Joong-Kuen cited “[his] country’s future” as the reason behind the policy. South Korea has the world’s lowest fertility rate, 0.78, and the country, like many others, is seeking to address the challenges of its negative population growth.

Japan has relaxed its visa policy in an effort to attract digital nomads. With a launch date tentatively scheduled for March 2024, the six-month visa is open to those who can furnish proof of steady employment, annual income of at least JPY 10 million (~ USD $68,000), and health insurance. 

And finally: To those who celebrate the Lunar New Year, we say: 恭喜發財 – Gong Xi Fa Cai or Gung Hei Fat Choy (depending on whether one speaks Mandarin or Cantonese). The phrase roughly translates as "wishes for happiness and wealth in the New Year!"