S&P 500 Notches Seventh Consecutive Winning Week, Nears All-Time High Array ( [cookie] => 6f3388-875091-40dba3-5d47ab-c2ce97 [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 1 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 187812 [user_id] => [reason] => Usage under limits [method] => ) 1 and can accesss 1
Our Views
- The December FOMC rate decision on Wednesday was probably the most consequential catalyst for equity markets between this week and year-end. The Fed made a dovish shift, as we expected, and we saw a scramble in the markets as hawks capitulated. Right now and looking forward, the key is for the Fed to shift towards “business cycle management” away from fighting a “brute force inflation war.” That would mean a friendlier Fed and one that doesn’t necessarily want stock prices to sink
- We believe stocks will ultimately rally post-FOMC and into year-end. Although we might see a “sell the news” price weakening, that will likely be short-lived. In our view, there is too much performance chasing needed as many investors have been bearish, in a year when the S&P 500 is up >20% and near all-time highs.
- Bottom line: We’ve been saying for week now that the juice is in small caps and banks, and to me that’s still the story until year end: small caps, regional banks, and of course FAANG.
- Equal-weighted RSP -0.89% has exceeded July peaks, while NASDAQ, SPX nearing all-time highs.
- SPY vs. TLT has snapped an uptrend for 2023, showing more strength out of Treasuries.
- NY FANG index has consolidated vs. SPX but this doesn’t equate to a Sell signal.
- The week began with cascading long liquidations, spurred by heightened risk aversion in anticipation of the FOMC Meeting and unusually high selling pressure from miners.
- Miners continue to benefit from Ordinals-driven fee pressure, a tailwind that we expect the market to appreciate further in the coming months.
- The initial risk aversion preceding the FOMC meeting has shifted following the Fed’s release of its economic projections, which indicate several rate cuts next year.
- A weakening dollar is supporting risk assets and is likely to act as an additional boost for the broader crypto market as the year draws to a close.
- Core Strategy – Given strong capital inflows, increased volumes in both spot and futures markets, significant institutional involvement, renewed excitement for an anticipated ETF, and the impending halving, we believe that now is an opportune time to be fully allocated in the market. As evidenced by the market’s rebound, we do not view this week’s dip as a trend change, but rather a temporary dislocation between the perps and spot markets. In our view, risk asymmetries still skew to the upside.
- The House has left for the holidays, but it managed to pass a key defense-spending bill before members departed.
- With the passage of the defense-spending bill, House Speaker Mike Johnson showed his ability to overcome opposition from the far-right wing of his own party when he finds it necessary to do so.
- A supplemental spending bill to support Ukraine and Israel will likely remain at an impasse until after the holidays, with Republicans pushing to bundle such assistance with funding to bolster the Southern border.
Wall Street Debrief — Weekly Roundup
“My mind's never gone very far away from what I wanted to accomplish.” ~ Dan Gable
Good evening,
Most investors had one main focus this week: December 13, when the Federal Reserve announced that it would leave the Fed funds rate at the same levels they have occupied since July 26, 2023. Before the announcement, the likelihood of the FOMC leaving rates unchanged was seen as a foregone conclusion, and hence priced into the markets. Because of that, the catalyst was expected to be the Fed’s views on the path forward. This includes not just the FOMC’s Summary Economic Projections (SEP) and dot plot, but also Fed Chair Jerome Powell’s statement and remarks during the press conference.
For weeks before the meeting, Tom Lee, Fundstrat’s Head of Research, had argued that not only could the Fed make a dovish move, but that it needed to do so, asserting that Committee members had been ignoring data that showed inflation cooling. CPI numbers released on Tuesday, a day ahead of the meeting, helped to reinforce his case. “To us, this was a very good inflation report,” Lee said, particularly with housing prices falling. While used car prices showed an anomaly in November, Lee noted that Manheim wholesale used car data, which leads retail numbers, suggest that “used cars will resume tanking next month.”
These were important because, as he has pointed out for much of the year, once again “the entire rise of Core CPI was due to cars and housing.” This is shown our Chart of the Week:
Wednesday saw the Fed capitulating on inflation and on its “higher for longer” stance, as Lee had argued it would. The latest SEP showed significantly lowered median expectations for both inflation and rates in 2023 and 2024. Assuming that the Fed continues its pattern of shifting rates in increments of 0.25%, it suggested three rate cuts in 2024.
Yet to Lee, Powell’s response to a question about “real rates” suggested the possibility of even more than three cuts next year. His reasoning? Powell said, “I think the expectation would be that the real rate is declining as we move forward.” If inflation continues to fall – as analyses by Lee and his team suggest they will – the Fed will need to cut rates just to keep the real rate (Fed funds minus inflation) steady.
This sparked a surge in equities – the Dow hit a new high, and the S&P 500 rose 1.37% over the previous day’s close. It also sent U.S. 10-year yields plummeting. When equity markets opened on Wednesday, rates were around 4.17%, but they had fallen by more than 25 bp by Friday afternoon. In Lee’s view, the strength of this reaction suggested that many investors, expecting Powell and the Fed to be hawkish, were short or offside ahead of the meeting, and were thus left scrambling afterward.
For Fundstrat clients, there was another important event this week: Head of Technical Strategy Mark Newton released his 2024 Technical Strategy Outlook. Newton opened by pointing out that this year’s rally was arguably dominated by Technology in the first part of 2023. “It was only in early November that other sectors sprang to life.” Looking at recent improvements in Financials, Consumer Discretionary, and Healthcare, Newton said: “That’s a very big positive as we look into 2024. I think next year is going to be a little easier for people,” he said, including less passive investors. He noted that the recent broadening in market strength should continue: “Equal-weighted S&P [500] has an excellent chance of outperforming the S&P 500,” he noted, and he singled out Energy and Industrials as sectors that could join Technology in leading the market.
For Newton, the bottom line was that, while it might not be a straight shot, stocks should climb next year and hit new highs. His year-end 2024 target for the S&P 500 was 5175.
Elsewhere
The White House announced the first grant funded by 2022’s CHIPS Act, allocating $35 million to BAE Systems to make fighter-jet chips in a New Hampshire plant. The money will be used to quadruple the plant’s current production capacity.
Alphabet lost an antitrust trial to the maker of Fortnite, as a San Francisco jury agreed that the company’s Android smartphone operating system, its Play Store, and its billing system constituted a monopoly that the respondents used to stifle app-store competition and foist improperly high transaction fees on app developers like the plaintiff, Epic Games. Alphabet said it plans to appeal.
The Financial Stability Oversight Council added artificial intelligence to its list of potential risks to U.S. financial stability for the first time. In its latest annual report, the FSOC cited possible concerns “related to data controls, privacy, and cybersecurity”
The British economy shrank in October, declining 0.3% after growing 0.2% in September. The Office of National Statistics said the contraction was seen across all the main sectors of the economy. The reading came in below expectations, as economists had projected 0% growth.
Germany passed a budget, contrary to expectations from its own ruling coalition a week ago after a court ruling that struck down its plans to use pandemic-era borrowing to fill a spending gap. Faced with either suspending its debt brake, which limits deficit spending to 0.35% of GDP, or austerity, the government chose the latter. Chancellor Olaf Scholz noted, however, that a suspension of the debt brake was still an option if Germany later decides to extend further assistance to Ukraine.
Albania said it will rely on ChatGPT to help fulfill one of the requirements for its entry into the European Union. ChatGPT will be used to translate thousands of pages of EU laws, rules, and regulations into Shqip, the Albanian language; to summarize them; and to suggest the most appropriate places within Albania’s legal code to integrate them.
Chinese officials announced that the percentage of senior citizens (defined in this report as those aged 60 or over) in the country was now at least 280 million, roughly 19.8% of its population. The statistics were as of end of 2022.
Meanwhile, OpenAI announced a possible solution to managing the risks of a “superhuman artificial intelligence” (also known as an Artificial General Intelligence) behaving in dangerous ways. In short, the company’s Superalignment team proposed guiding such an AI with … another AI, albeit one that is less powerful. Current experiments involve training and managing its Chat-GPT4 model with its earlier GPT-2 model, from 2019.
And finally: The countdown for the (possible) return of K-pop supergroup BTS has begun, with the last two members of the boy band (RM, aka Kim Namjun, and V, aka Kim Taehyung) beginning their mandatory 18-month service in the South Korean military this week. Some pundits (and fans, of course) have argued that, given their positive economic impact on South Korea, estimated at $3.5 billion a year by the Hyundai Research Institute, BTS members should have been exempt from service.
Important Events
Est.: 103.4 Prev.: 102.0
A leading indicator measuring consumers’ forward expectations about their own personal financial situations and the economy as a whole.
Est.: 0.2% Prev.: 0.16%
A measure of U.S. consumers’ spending on goods and services.
Prev.: 3.1
The University of Michigan’s assessment of consumer expectations of inflation 12 months from now.
FS Insight Media
Stock List Performance
| Strategy | YTD | YTD vs S&P 500 | Inception vs S&P 500 | |
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Granny Shots
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+26.72%
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+3.81%
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+91.47%
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