“In my whole life, I have known no wise people who didn't read all the time – none, zero.” ~ Charlie Munger (January 1, 1924 - November 28, 2023)

Good evening,

November turned out to be the best month of the year for stock markets. The S&P 500 ended up 9% for the month, while the Nasdaq gained 10.7%. 

As we headed into December, revisions to U.S. 3Q GDP supported our longstanding thesis of a resilient economy accompanied by weakening inflation. Although growth was revised upwards, Fundstrat Head of Research Tom Lee observed that “this was mainly infrastructure investment. Consumer spending was revised softer at 3.6% vs 4%.” 

We believe this should help give FOMC members room for dovishness going forward, and others seem to agree. In public remarks on Friday, Fed Chair Powell warned that hikes were still on the table if the FOMC deems it necessary. Yet afterwards, Fed-funds futures traders remained largely unanimous in believing that the Fed is done with hikes for this cycle, continuing to view it as likely that rate cuts could begin as soon as March 2024. 

Our Washington Policy Strategist Tom Block suggested that Powell’s remarks were aimed at trying to kep FOMC policy votes unanimous. In his view, “to achieve that, he needs the hawks to believe he is still willing to hike if data points in that direction.” 

Although Lee maintains his constructive view on equities, he believes we could see markets “zig-zag” into the end of the year as various macro data points provide conflicting messages about inflation and economic growth. “The bond markets (10-year) are still hyperreactive to the opposing forces of falling goods and housing inflation pitted against resilient labor markets (aka ‘future inflation risk’),” he said.

The Fed released its Beige Book on Wednesday. At our weekly huddle, Head of Data Science Ken Xuan noted that it suggests that “of the 12 districts or regions, four are still growing, but at a slower speed. One is kind of flat, and seven are slowing down.” Xuan told us, “We don't see that as alarming; it gives the Fed even more reason to be dovish.”

That is also true of the latest PCE data released on Thursday. Xuan noted, “Headline PCE came in soft, even though that was largely because Energy has turned down.” 

As we discussed the PCE release, Xuan pointed out that “housing has generally been the number one contributor to PCE, but this month, it was hospital and nursing home services, so – healthcare related.” 

“If you exclude hospital and nursing services from Core PCE, it would be close to 0%,” Lee observed. And that leads to a somewhat rhetorical question he feels Fed decision-makers should consider as they attempt to lower PCE: “Would higher Fed rates really slow ‘hospital and nursing services’ expenses?”

Lee sees markets moving higher in December, though in a zig-zag pattern. “The primary turning point higher should be mid-December, after the December FOMC,” he said. This is shown in our Chart of the Week:

Head of Technical Strategy Mark Newton also suggests caution in the first half of December. “The stock market’s up about 10 and a half percent literally within the last five weeks, and that’s a very, very strong move. My fear, and what I'm thinking, is that we honestly need to consolidate and give back some of these gains,” he said.  “My work with various cycles show that we have to weaken before we can strengthen.”

“The bond market could start to retreat, and I say that because bond yields are now at support and the dollar is also at support – both of them in my view should go off over the next month,” he told us. “My thinking is that bond yields start to move higher from here over the next month. And anything above 4.50% [for the U.S. 10-year] is likely going to spook the stock market. Historically, the correlation has been very strong between treasuries and equities and I also see  equities having reached resistance right near 4600.” 

“So, my thinking is: hold off on putting new money to work in the stock market or in Treasuries right now,” he said.

Elsewhere 

The global economy has been resilient, but will slow in 2024, according to the OECD. The group cited wars, inflation, and high interest rates in forecasting that world economic growth would slip to 2.7% in 2024, down from the expected 2023 rate of 2.9%. Nevertheless, the OECD projected that “recessions will be avoided almost everywhere.”

Three members of Congress have asked the Department of Justice to investigate the hacking of a water utility in Western Pennsylvania. Sens. John Fetterman (D) and Bob Casey (D), along with Rep. Chris Deluzio (D), said the attack showed that Americans’ water supply was at risk from “nation-state adversaries and terrorist organizations.” The Municipal Water Authority of Aliquippa, Pa. was compromised on Nov. 24, purportedly by hackers linked to Iran who were targeting equipment made in Israel.

The Beijing Stock Exchange has prohibited major shareholders of listed companies from selling shares, Reuters reported. Citing anonymous sources, the news outlet claimed that any investor with a stake of 5% or more is now required to seek permission from the exchange before selling shares, and that no such requests have been granted.

Argentine President-elect Javier Milei visited Washington this week. The right-leaning libertarian met with White House officials, including National Security Adviser Jake Sullivan. Milei also met with former President Bill Clinton and with the head of the IMF, which counts Argentina as its biggest debtor.

The U.S. is projected to break domestic records for oil and natural-gas production in 2023, according to government data. This includes 12.9 million barrels of crude in 2023 and an average natural-gas output of 103.72 billion cubic feet (bcfd) per day.

And finally: The world’s largest genomic library, colloquially referred to as “Google Maps for geneticists,” went live this week, opening new avenues of research to investigators around the world. The UK Biobank, which contains the anonymized, complete genomic sequences of 500,000 British volunteers, will help researchers to identify correlations between specific genes and various diseases, physical traits, and health outcomes. Work on compiling a U.S. equivalent, the All of Us study, is underway. When complete, it will contain the genomes of some 1 million people.