“Walk a single path, becoming neither cocky with victory nor broken with defeat, without forgetting caution when all is quiet or becoming frightened when danger threatens.” ~ Jigoro Kano

Good evening,

As Fundstrat Head of Research Tom Lee has frequently written, what happens in the first five trading days of the year tends to show how the rest of the year will play out. At the close of trading this Monday, the fifth trading day of 2024, the S&P 500 was down 0.1% over this period (though up for the day). Should we view this as signal or as a mulligan? To Fundstrat Head of Research Tom Lee, “Our takeaway is that this is a mulligan.”

There are 20 precedents for the first five trading days of the year ending “nearly flat,” Lee told us, and only twice in history was this followed by a large down year (1957 and 1974). The country was in a recession both times; we are not, and do not expect a recession this year. A look at the other 18 instances shows that the odds favor double-digit gains for the year. Importantly, Lee continues to expect that the bulk of those gains will occur in the second half of 2024.

Head of Technical Strategy Mark Newton believes that caution is warranted right now. “The October-December surge has quietly been consolidating in recent weeks,” he told us, and his examination of SPX and DJIA cycles shows a “mixed” picture. Furthermore, Newton sees the likelihood of Treasury yields holding up until March “before turning down sharply into August.” All of this begets wariness from Newton, as does election year seasonality, which, as Newton notes, “argues for a possible choppy period.”

Lee agrees, warning that “The choppy equity performance of the first two weeks of January tells us we are in a ‘difficult’ period, and markets will probably be like this for most of the first half.” He even noted, in jest, that even the SEC has had a rough start to 2024, what with the regulator’s X (Twitter) account becoming compromised the day before it ultimately approved spot Bitcoin ETFs. 

When the (actual) approval announcement finally arrived on Thursday, Head of Digital Asset Strategy Sean Farrell described it as “a pivotal moment in the evolution of the crypto industry, a testament to the remarkable journey of an asset class that emerged just 15 years ago.” Although he refrained from making any snap judgments about how the 11 spot BTC ETF debuts had gone, Farrell noted that “the BlackRock fund alone reported over $1 billion in volume, securing its position as one of the highest-volume debuts for a single ETF in history.”

To add context, he said, “It’s crucial not to overemphasize the significance of a single day’s price action, especially in the context of the recent ETF launch. The initial premarket spike in price seemed to be driven by anticipatory moves, likely a mix of allocators sourcing Bitcoin before the market opened, and speculative buying.”

Farrell also put Thursday’s crypto activity in the context of macro data: “The release of a hotter-than-expected CPI report and hawkish remarks from [Cleveland Federal Reserve President Loretta Mester], hinting at March being too soon for rate cuts, triggered a spike in rates. Intriguingly, Bitcoin’s price movements mirrored those of other risk assets, initially declining and then recovering, as rates stabilized and bonds rallied toward the day’s end.”

For Lee, the December CPI report came in tamer than expected, even if above consensus. A closer examination at the underlying components had Lee convinced that, contrary to consensus, inflation is still falling like a rock (a contention supported by Friday’s PPI data, which drove the S&P 500 to briefly touch record highs in the morning before subsequently retreating). “Auto insurance made up 20% of Core CPI inflation in December,” he said, “punching way above its weight.” If we zoom in on Core Services CPI, we also see an outsized impact from auto insurance. This is illustrated in our Chart of the Week:

He explained, “The reason [auto insurance prices surged] is that car prices surged post-pandemic, which in turn sparked a huge rise in auto repair bills.” Insurance is simply rising to catch up, he noted.

“Ex-autos, core CPI would have been +0.25%, or basically on target,” Lee pointed out, asking: “So, does the Fed keep hiking because of auto insurance rates going up?” In other words, are Fed officials likely to believe that higher rates will cause auto insurance prices to fall?”

On Technology

Lee and Head of Technical Strategy Mark Newton have both favored Technology since the beginning of 2023, and investors who heeded their call benefited greatly last year. This year, both continue to recommend overweighting in tech companies. Lee has continued to maintain his overweight in Technology and FAANG in particular, while Newton likes Technology’s technicals and expects the sector to benefit from rates beginning to drop this year.

This week, Lee hosted a fireside chat with Dan Ives, a technology expert with Wedbush Securities noted for his “boots on the ground” approach to covering the sector. Ives spoke to us from the Consumer Electronics Show (CES), where he discussed why he expects substantial earnings upside for tech companies. He expects three key trends to materialize this year:

• AI goes mainstream
• Cybersecurity (HACK) budgets rise sharply 
• Enterprise software spending is strong.

Ives expects these trends to drive top- and bottom-line growth, as well as valuation expansion.

A replay of the webinar with Dan Ives is available here.

Elsewhere

JN.1, a new COVID-19 variant, is infecting about 2 million Americans every day, though hospitalizations and deaths continue to fall – currently at half of what they were 12 months earlier. 

France has its youngest prime minister in modern history, with Gabriel Attal, 34, stepping into a post vacated when French President Emmanuel Macron asked Élisabeth Borne to step down. Attal, formerly education minister, is also France’s first openly gay prime minister.

X announced plans to launch a peer-to-peer payments platform this year as Elon Musk continues his previously stated objective of turning the former Twitter into an “everything app” similar to WeChat, an app that Chinese users depend on not just for messaging and social media, but also gaming, payments and banking, travel bookings, dating, food delivery, rideshare, doctor’s appointments, and some government services. 

And finally: Last but not least, the American Red Cross this week announced an emergency blood shortage, as the number of people donating blood had fallen to 20-year lows. The Red Cross said it processes approximately 40% of the blood donations in the country. 

U.S. markets and Fundstrat offices will be closed on Monday, January 15, 2024 in observance of Martin Luther King, Jr. Day. There will be no publications on Sunday evening or Monday.