“In the United States, our greatest single source of wealth is the minds and talent of our young people. Not to use it is stupid - to waste it is a crime." ~ Isaac Stern

Good evening,

When Tom Lee said a year ago that the S&P would end 2023 at 4750, many were inclined to dismiss the prediction as the view of a permabull who had contrarianed himself into a corner. Consensus was expecting a hard landing and inflation fighting lasting a decade, which did not exactly lend itself to the proposition of a year up ~24%.

As the proverbial chickens are hatching, it turns out that not only did Lee come closer than any strategist out there to predicting the market’s trajectory; he actually came within one-half of one percentage point – less than the allowance for statistical error – to the actual close at 4 PM on the last trading day of the year, which happens to be today.

Not one for chest-beating or victory laps, Lee is already focused on the future. He sees the end of this year as a launching point for further gains. “The median max gain over the next 18 months is +22%. There is only one instance, May 2007, when the max further gain was nominal (<5%), while the other 10 instances saw significant further gains.”

There is a general logic to this, which Lee is happy to clarify, “Reaching an all-time high is a significant market milestone, and stocks do not suddenly reverse from there.”

Is there a wrinkle? There is, actually. “Seven out of 11 times, markets first consolidated with a drawdown. These were modest, with overall declines at 2% to 5%. In the current context, we could see S&P 500 at 4,400-4,500 once we make all-time highs, i.e., a modest pullback.”

Lee pointed out that this is consistent with our 2024 Year Ahead Outlook, where our base case is that the S&P 500 makes most of its gains in 2H2024. Here are some potential reasons for this:

• The markets could get ‘itchy’ waiting for the Fed to cut interest rates, while the Fed itself dithers
• The AI timeline could be pushed out due to a ‘systematic hack’ by malevolent AI
• The equity markets will need to consolidate the parabolic gains from late-2023.

Relatedly, Lee pointed out that “a drawdown in Feb/March would be consistent with election year seasonal returns. We see a pronounced downturn historically around the Feb/March timeframe, although it is not entirely clear why this happens.” Still, there are multiple factors that suggest a consolidation/softness in early 2024.

Look for small caps to outperform in 2024.

Elsewhere 

Prosumer. Early data showed the American consumer has kept spending like a pro, as pre-Christmas spending rose 3.1 % YoY, unadjusted for inflation. Mastercard Spending Pulse reported broad gains in the period from November 1 to December 24, particularly in restaurants. 

The Persian Empire Keeps Striking. As Yemen’s Iran-backed Houthi militia regularly claims responsibility for missile attacks on commercial and military vessels in the Red Sea, as well as for attempted drone attacks on Israel, and the conflict in the Middle East expands, with U.S. forces striking targets in Iraq, Syria, and Yemen in response to attacks on American bases by Iran-backed groups, there is some positive news. It may not be the amalgam of breakthrough and miracle that would put an end to a festering conflict in which untold multitudes have perished – but it’s a start. 

The Saudi-backed government of Yemen and the Iran-aligned Houthis have jointly committed 1. to steps towards a ceasefire, and 2. to both resume oil exports, pay all public sector salaries, open roads, and further ease restrictions on the airport in the capital city as well as the port of Hodeida. In control of north Yemen, the Houthis have been fighting against a Saudi-led military alliance since 2015 in a conflict that has killed hundreds of thousands and left 80% of Yemen’s population in thrall to humanitarian aid. 

The peace initiative gained momentum after arch-rivals Saudi Arabia and Iran agreed to re-establish ties in March, in a deal brokered by China. In the meantime, the U.S. is spearheading Operation Prosperity Guardian, which is spooling up slower than some would like, but is meant in good time to ensure the safe passage of commercial traffic through the Suez Canal.  

Insta Geo. Analysts warn that geopolitical instability is likely to worsen in the coming months, although it’s hard to pin down whether that means Q124 or H124. Our unipolar world is entering the most volatile and dangerous period since the height of the Cold War, per Goldman Sachs’ Jared Cohen and Eurasia Group’s Ian Bremmer. Two prominent energy analysts write in Foreign Affairs that the transition to clean energy will involve a rude competition for resources that is already “upending geopolitics.” A survey of 500 investors by the French investment bank Natixis yields the conclusion that geopolitical bad actors will be the biggest risk to economic growth in 2024.

The Wages of War. The order books of the world’s biggest defense companies are near record highs after growing by more than 10% in just two years on the back of rising geopolitical tensions, including the war in Ukraine. Total global military expenditure was up by 3.7% in real terms in 2022 to a new high of $2.24 billion. Sustained state spending has driven investor interest in the defense sector. ITA 0.72%  (iShares US Aerospace & Defense ETF) is up ~22% since Feb. 24, 2022; eerily, it is up by practically the same percentage since Oct. 7, 2023.

RoboBus-iness. WeRide was given permission to test autonomous public buses on open roads in Singapore. The testing is part of a Singaporean initiative to automate its entire transportation system in response to mounting traffic problems and manpower shortages. China’s WeRide was also given permission to test its self-driving buses in the United Arab Emirates in July. 

Moving on Up, to the West Side. Orthodox Christians in Ukraine celebrated their first Gregorian Christmas in a pointed manifestation of their country’s cultural and religious split from Russia. This year, Kyiv’s Orthodox Church, which has traditionally celebrated Christmas on the Julian calendar, as does Russia, began doing so on Dec. 25, joining much of the Western world in a future-focused gesture full of symbolism. Analysts are skeptical of Russian President Vladimir Putin’s intentions as he signals openness to a ceasefire with Ukraine that would freeze the conflict along its current battlelines, since such an agreement would seek to delay and discourage further Western military assistance.

Plan B Money. The EU is preparing a back-up plan worth up to €20 billion for Ukraine, using a debt structure that sidesteps the objections of Hungary’s Viktor “Obstreperous” Orbàn in order to quickly release money desperately needed by Ukraine. Ukraine has warned of pension and salary delays without western aid. In the meantime, as the White House seeks alternatives for funding Ukraine amid opposition from Congress, the U.S. is proposing that G7 officials explore ways to seize $300 billion in Russian assets currently frozen in the EU.

Shock a Block. Argentina’s Javier Milei introduced wide-ranging reform legislation this week, aiming to overhaul penal, tax, and electoral issues not covered in an earlier decree. The massive omnibus bill, extending the trained economist’s shock-therapy approach beyond economic policy into various aspects of government (e.g. eliminating Argentina’s primary elections, charging university tuition, privatizing dozens of state-owned companies), is likely to face resistance in a fractured congress.

B Movie. Life continues to imitate art as Alexei Navalny; Russia’s leading opposition figure, who had suddenly disappeared from jail two weeks ago; has been located in a hellish-sounding Arctic prison straight out of a Hollywood action film – only there’s no Nicholas Cage coming to save him in a clapped-out C-130, backed by a ragtag group of ex-military heavies. Russia’s Navalny was tracked down in ‘Polar Wolf’, a maximum-security penal colony in the Yamal-Nenets region of Russia. Fears about his fate were previously raised when he went missing from his previous prison. President Putin, who faces a shoo-in election in less than three months, wants not a peep from the opposition so as to guarantee another ‘win’. 

I’m Afraid The Masquerade… Wall Street’s once all-in love affair with blank-check firms, less Romantically known as special-purpose acquisition companies (SPACs), has at last come to an ignominious end. The fad, which seemed especially attractive to companies looking to the stock market as a source of funding during the pandemic, is meeting a timely demise this year. Adding to the injury of large losses for shareholders is the insult of big bankruptcies. At least 21 firms that originally went public by merging with SPACs went bankrupt in 2023. Measured from the companies’ peak market caps, the insolvencies mean a loss of better – or, shall we say, worse – than $46 billion of total equity value.

Lox, Now a Staple at the Thanksgiving Table. A Turkish parliamentary committee has graciously approved Sweden’s bid for NATO membership. Recep Erdoğan, Turkey’s mercurial autocrat of a president – known for geopolitically helpful statements such as, “I will never be able to accept the definition of Hamas as a terror organization, and it makes no difference what others say,” uttered recently at a climate conference in Dubai – must have been in a good mood, or he’s notched a favor he plans to call in later. 

Gray with Umbrage. In a landmark development that will surely be watched by all of media, tech, and copyright/IP wonkdom, The Gray Old Lady filed a lawsuit this week against Microsoft (the company behind OpenAI) and OpenAI (the company behind ChatGPT,) accusing them all of copyright infringement and abuse of NYT’s intellectual property. They also stand accused of creating a business model based on “mass copyright infringement” and AI systems that “exploit and, in many cases, retain large portions of the copyrightable expression contained in those works.”

Markets and Fundstrat offices will be closed in observance of New Year's Day on Monday, January 1. We wish you and your family a healthy and prosperous 2024.

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

Important Events

1/2 9:45AM | Dec F S&P Manu PMI | 48.4 est | 48.2 last
1/3 10AM   | Dec ISM Manu PMI | 47.2 est | 46.7 last
1/3 10AM   | Nov JOLTS | 8862.5 est | 8733.0 last
1/3 2PM    | Dec 13 FOMC Minutes | n/a est | 0.0 last
1/4 9:45AM | Dec F S&P Srvcs PMI | 51.3 est | 51.3 last
1/5 8:30AM | Dec AHE m/m | 0.3 est | 0.4 last
1/5 8:30AM | Dec Unemployment Rate | 3.8 est | 3.7 last
1/5 8:30AM | Dec Non-farm Payrolls | 170.0 est | 199.0 last