Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.
Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.
Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

VIDEO: We discuss how inflation remains arguably the single most important macro variable in next few months.  And once Fed sees the outsized role of auto insurance, will likely cut faster” (Duration: 6:15).

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

It may be hard to believe, but the S&P 500 is actually slightly positive YTD (+0.20%). The Nasdaq 100 is up modestly (+0.8%) and the Russell 2000 is down -5%. Given the rough start to 2024, the last 2 days have brought on modest improvements.

  • Many things have buffeted markets in the first days of 2024, but to me, the most important dynamic variable centers around the Fed and what framework is in place for cuts — timing, etc. And the leading variable to that is the trajectory of inflation. Earlier this week, Fed Governor Waller poured cold water on the timing of cuts, saying he felt March was too soon. Others similarly chimed in. They simply are not convinced inflation is falling fast enough to warrant cuts and the bond market has since pushed interest rates higher.
  • Our view remains that inflation is falling faster than many realize. And at the core is that housing and autos remain the primary driver of inflation. Last week, we highlighted that auto insurance accounted for nearly half of the rise in core CPI and core services inflation. This has been the case for the past few months actually:
    – excess core CPI +1.52%
    – vs 20-yr trend is this is to get to 2.4%
    – housing +1.38%
    – auto insurance +0.50%
    – combined +1.88%
  • All the excess inflation is auto insurance and housing. And as the chart below makes clear, auto insurance’s contribution to excess inflation has been in place for several months. The reason for elevated auto insurance remains the higher loss severities due to surge in car prices plus supply chains raising cost of parts. Thus, does tight monetary policy stop auto insurance rates from rising?
  • But we also wonder whether economists broadly appreciate the outsized role from auto insurance. And if those experts are not aware, is the Fed itself aware of this? The simple observation is that an insurance expert can probably tell us when auto insurance rates will stop rising. And this will inform us when core CPI will start to roll over.
  • This all matters because this affects the rationale for rate cuts. If auto insurance was generally viewed as the last residual for higher CPI, the Fed would likely cut sooner and faster. After all, why keep monetary rates at 5.5% if inflation is running at 3%.
    – the current high policy rates are punishing regional banks
    – causing funding issues for commercial real estate
    – make money costs expensive for consumers

BOTTOM LINE: CPI still the key variable to watch, but case for falling inflation intact

The bottom line remains that we believe inflation is tracking softer than many appreciate. And when this becomes more broadly accepted, we see this as leading to the Fed to cut sooner and potentially faster than expected. As for markets, our general roadmap remains the same:

  • we see high probability of new highs by late January, but then followed by a larger correction due to the above unknown (Fed cut timing). Then a rally from there into YE.
  • There are a lot of moving parts but this is the general framework.
  • We favor into YE
  • Small-caps IWM 0.23% KRE -0.21% based on relative valuation at 25-yr lows vs large-caps (P/B)
  • Financials XLF 0.50% due to the potential for faster Fed rate cuts
  • Industrials XLI 0.53% from the bottoming of PMIs
  • Technology/ FAANG XLK -0.23% QQQ -0.53% from AI, global labor shortage and cybersecurity
  • Our core stock lists remain Granny Shots (34 names) and SMID Granny Shots (46 names).

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

Key incoming data January:

  • 1/02 9:45am ET S&P Global Manufacturing PMI December FinalMixed
  • 1/03 10am ET December ISM ManufacturingTame
  • 1/03 10am ET JOLTS Job Openings NovemberTame
  • 1/03 2pm ET December FOMC Meeting MinutesTame
  • 1/04 9:45am ET S&P Global Services & Composite PMI December FinalTame
  • 1/05 8:30am ET December Jobs ReportMixed
  • 1/05 10am ET December ISM ServicesTame
  • 1/08 9am ET Manheim Used Vehicle Index December FinalTame
  • 1/11 8:30am ET December CPIDetails Suggest Tame
  • 1/12 8:30am ET December PPITame
  • 1/16 8:30am ET January Empire Manufacturing SurveyTame
  • 1/17 8:30am ET January New York Fed Business Activity SurveyTame
  • 1/17 8:30am ET December Retail Sales DataStrong
  • 1/17 9am ET Manheim Used Vehicle Index January Mid-MonthTame
  • 1/17 10am EST January NAHB Housing Market IndexMixed
  • 1/19 8:30am ET January Philly Fed Business Outlook Survey
  • 1/19 10am ET U. Mich. Sentiment and Inflation Expectation January Prelim
  • 1/24 9:45am ET S&P Global PMI January Prelim
  • 1/25 8:30am ET 4QA 2023 GDP
  • 1/26 8:30am ET December PCE
  • 1/29 9:30am ET Dallas Fed January Manufacturing Activity Survey
  • 1/30 9am ET January S&P CoreLogic CS home price
  • 1/30 10am ET January Conference Board Consumer Confidence
  • 1/30 10am ET JOLTS Job Openings December
  • 1/31 2pm ET FOMC Rate Decision

Key incoming data December

  • 12/01 9:45am ET S&P Global Manufacturing PMI November FinalTame
  • 12/01 10am ET November ISM ManufacturingStrong
  • 12/05 9:45am ET S&P Global Services & Composite PMI November FinalStrong
  • 12/05 10am ET JOLTS Job Openings OctoberTame
  • 12/05 10am ET November ISM ServicesStrong
  • 12/06 8:30am ET 3QF 2023 Nonfarm ProductivityStrong
  • 12/07 9am ET Manheim Used Vehicle Index November FinalTame
  • 12/08 8:30am ET November Jobs ReportTame
  • 12/08 10am ET U. Mich. Sentiment and Inflation Expectation December PrelimTame
  • 12/12 8:30am ET November CPITame
  • 12/13 8:30am ET November PPITame
  • 12/13 2pm ET FOMC Rate DecisionDovish
  • 12/14 8:30am ET November Retail Sales DataTame
  • 12/15 8:30am ET December Empire Manufacturing SurveyTame
  • 12/15 9:45am ET S&P Global PMI December PrelimTame
  • 12/18 8:30am ET December New York Fed Business Activity SurveyTame
  • 12/18 10am ET December NAHB Housing Market IndexTame
  • 12/19 9am ET Manheim Used Vehicle Index December Mid-MonthTame
  • 12/20 10am ET December Conference Board Consumer ConfidenceTame
  • 12/21 8:30am ET 3QT 2023 GDPMixed
  • 12/21 8:30am ET December Philly Fed Business Outlook SurveyMixed
  • 12/22 8:30am ET November PCE Tame
  • 12/22 10am ET: U. Mich. Sentiment and Inflation Expectation December FinalTame
  • 12/26 9am ET December S&P CoreLogic CS home priceTame
  • 12/26 10:30am ET Dallas Fed December Manufacturing Activity Survey Tame
  • 12/29 9:45am ET December Chicago PMI

Key incoming data November

  • 11/01 9:45am ET S&P Global PMI October FinalTame
  • 11/01 10am ET JOLTS Job Openings SeptemberMixed
  • 11/01 10am ET October ISM ManufacturingTame
  • 11/01 10am ET Treasury 4Q23 Quarterly Refunding Press ConferenceTame
  • 11/01 2pm ET FOMC Rate DecisionDovish
  • 11/02 8:30am ET: 3Q23 Nonfarm ProductivityTame
  • 11/03 8:30am ET October Jobs ReportTame
  • 11/03 10am ET October ISM ServicesMixed
  • 11/07 9am ET Manheim Used Vehicle Index October FinalTame
  • 11/10 10am ET U. Mich. November prelim Sentiment and Inflation Expectation Hot
  • 11/14 8:30am ET October CPI Tame
  • 11/15 8:30am ET October PPI Tame
  • 11/15 8:30am ET November Empire Manufacturing Survey Resilient
  • 11/15 8:30am ET October Retail Sales DataResilient
  • 11/16 8:30am ET November New York Fed Business Activity SurveyTame
  • 11/16 8:30am ET November Philly Fed Business Outlook Survey Tame
  • 11/16 10am ET November NAHB Housing Market Index Tame
  • 11/17 9am ET Manheim Used Vehicle Index November Mid-MonthTame
  • 11/21 2pm ET Nov FOMC Meeting MinutesTame
  • 11/22 10am ET: U. Mich. November final Sentiment and Inflation ExpectationTame
  • 11/24 9:45am ET S&P Global PMI November PrelimMixed
  • 11/27 10:30am ET Dallas Fed November Manufacturing Activity SurveyTame
  • 11/28 9am ET November S&P CoreLogic CS home price Tame
  • 11/28 10am ET November Conference Board Consumer ConfidenceTame
  • 11/29 8:30am ET 3QS 2023 GDPStrong
  • 11/29 2pm ET Fed Releases Beige BookTame
  • 11/30 8:30am ET October PCETame

Key incoming data October

  • 10/2 10am ET September ISM ManufacturingTame
  • 10/3 10am ET JOLTS Job Openings AugustHot
  • 10/4 10am ET September ISM ServicesTame
  • 10/6 8:30am ET September Jobs ReportMixed
  • 10/6 9am ET Manheim Used Vehicle Index September FinalTame
  • 10/10 11am NY Fed Inflation ExpectationsMixed
  • 10/11 8:30am ET September PPIMixed
  • 10/11 2pm ET Sep FOMC Meeting MinutesTame
  • 10/12 8:30am ET September CPIMixed
  • 10/13 10am ET U. Mich. September prelim 1-yr inflationMixed
  • 10/16 8:30am ET October Empire Manufacturing SurveyTame
  • 10/17 8:30am ET October New York Fed Business Activity SurveyTame
  • 10/17 8:30am ET September Retail Sales DataHot
  • 10/17 9am ET Manheim October Mid-Month Used Vehicle Value IndexTame
  • 10/17 10am ET October NAHB Housing Market IndexTame
  • 10/18 8:30am ET September Housing StartsTame
  • 10/18 2pm ET Fed releases Beige BookTame
  • 10/19 8:30am ET October Philly Fed Business Outlook SurveyTame
  • 10/19 10am ET Existing Home SalesTame
  • 10/19 12pm ET Fed (including Powell) at Economic Club of New York
  • 10/24 9:45am ET S&P Global PMI October PrelimTame
  • 10/26 8:30am ET 3Q 2023 GDP AdvanceStrong
  • 10/27 8:30am ET September PCETame
  • 10/27 10am ET Oct F UMich Sentiment and Inflation expectationTame
  • 10/30 10:30am ET Dallas Fed September Manufacturing Activity SurveyTame
  • 10/31 8:30am ET 3Q23 Employment Cost IndexMixed
  • 10/31 9am ET August S&P CoreLogic CS home priceMixed
  • 10/31 10am ET October Conference Board Consumer ConfidenceTame

Key incoming data September

  • 9/1 8:30am ET August Jobs ReportTame
  • 9/1 10am ET August ISM ManufacturingTame
  • 9/6 10am ET August ISM ServicesMixed
  • 9/6 2pm ET Fed releases Beige BookTame
  • 9/8 9am ET Manheim Used Vehicle Index August FinalTame
  • 9/8 2Q23 Fed Flow of Funds ReportTame
  • 9/13 8:30am ET August CPIMixed
  • 9/14 8:30am ET August PPITame
  • 9/15 8:30am ET September Empire Manufacturing SurveyTame
  • 9/15 10am ET U. Mich. September prelim 1-yr inflationTame
  • 9/18 8:30am ET September New York Fed Business Activity SurveyTame
  • 9/18 10am ET September NAHB Housing Market IndexTame
  • 9/19 9am ET Manheim September Mid-Month Used Vehicle Value IndexMixed
  • 9/20 2pm ET September FOMC rates decisionMarket saw Hawkish
  • 9/21 8:30am ET September Philly Fed Business Outlook SurveyMixed
  • 9/22 9:45am ET S&P Global PMI September Prelim
  • 9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
  • 9/26 9am ET July S&P CoreLogic CS home price
  • 9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

  • 8/1 10am ET July ISM ManufacturingTame
  • 8/1 10am ET JOLTS Job Openings JunTame
  • 8/2 8:15am ADP National Employment ReportHot
  • 8/3 10am ET July ISM ServicesTame
  • 8/4 8:30am ET July Jobs reportTame
  • 8/7 11am ET Manheim Used Vehicle Index July FinalTame
  • 8/10 8:30am ET July CPITame
  • 8/11 8:30am ET July PPITame
  • 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
  • 8/11 Atlanta Fed Wage Tracker JulyTame
  • 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed
  • 8/15 10am ET Aug NAHB Housing Market IndexTame
  • 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
  • 8/16 2pm ET FOMC MinutesMixed
  • 8/17 8:30am ET Aug Philly Fed Business Outlook SurveyPositive
  • 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
  • 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
  • 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
  • 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity SurveyTame
  • 8/29 9am ET June S&P CoreLogic CS home priceTame
  • 8/29 10am ET Aug Conference Board Consumer ConfidenceTame
  • 8/29 10 am ET Jul JOLTSTame
  • 8/31 8:30am ET July PCETame

Key incoming data July

  • 7/3 10am ET June ISM ManufacturingTame
  • 7/6 8:15am ADP National Employment Report Hot
  • 7/6 10am ET June ISM ServicesTame
  • 7/6 10 am ET May JOLTSTame
  • 7/7 8:30am ET June Jobs reportMixed
  • 7/10 11am ET Manheim Used Vehicle Index June FinalTame
  • 7/12 8:30am ET June CPITame
  • 7/13 8:30am ET June PPITame
  • 7/13 Atlanta Fed Wage Tracker JuneTame
  • 7/14 10am ET U. Mich. June prelim 1-yr inflationMixed
  • 7/17 8:30am July Empire Manufacturing Survey
  • 7/18 8:30am July New York Fed Business Activity Survey
  • 7/18 10am July NAHB Housing Market Indexin-line
  • 7/18 Manheim July Mid-Month Used Vehicle Value IndexTame
  • 7/25 9am ET May S&P CoreLogic CS home priceTame
  • 7/25 10am ET July Conference Board Consumer ConfidenceTame
  • 7/26 2pm ET July FOMC rates decisionTame
  • 7/28 8:30am ET June PCE Tame
  • 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
  • 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

  • 6/1 10am ET May ISM ManufacturingTame
  • 6/2 8:30am ET May Jobs reportTame
  • 6/5 10am ET May ISM ServicesTame
  • 6/7 Manheim Used Vehicle Value Index MayTame
  • 6/9 Atlanta Fed Wage Tracker AprilTame
  • 6/13 8:30am ET May CPITame
  • 6/14 8:30am ET May PPITame
  • 6/14 2pm ET April FOMC rates decisionTame
  • 6/16 10am ET U. Mich. May prelim 1-yr inflationTame
  • 6/27 9am ET April S&P CoreLogic CS home priceTame
  • 6/27 10am ET June Conference Board Consumer ConfidenceTame
  • 6/30 8:30am ET May PCETame
  • 6/30 10am ET June Final U Mich 1-yr inflationTame

Key data from May

  • 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
  • 5/2 10am ET Mar JOLTSSofter than consensus
  • 5/3 10am ET April ISM ServicesTame
  • 5/3 2pm Fed May FOMC rates decisionDovish
  • 5/5 8:30am ET April Jobs reportTame
  • 5/5 Manheim Used Vehicle Value Index AprilTame
  • 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
  • 5/10 8:30am ET April CPITame
  • 5/11 8:30am ET April PPITame
  • 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
  • 5/12 Atlanta Fed Wage Tracker April Tame
  • 5/24 2pm ET May FOMC minutesDovish
  • 5/26 8:30am ET PCE April Tame
  • 5/26 10am ET U. Mich. April final 1-yr inflation Tame
  • 5/31 10am ET JOLTS April job openings

_____________________________

36 Granny Shot Ideas and 46 SMID Granny Shot Ideas: We performed our quarterly rebalance on 1/17. Full stock list here -> Click here

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Equities manage to claw back to flat YTD, and we still expect new highs by late-Jan. This, however, is not a risk-on signal.

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