“Well, all I know is this — nothing you ever learn is really wasted, and will sometime be used.” ~ Julia Child

Good evening,

We closed out the week with the S&P 500 hitting all-time highs, an unambiguously positive milestone. Yet the celebratory mood at Fundstrat was somewhat muted this week. Head of Research Tom Lee argued that “the easy money has been made for now.” This is illustrated in our Chart of the Week:

As Lee has previously written, the beginning of January tends to foreshadow how the full year will play out, and in his view, the “sloppy trading” we have seen thus far “is a reminder to expect a challenging year.” He said, “We are now overbought [...] so this is not a full ‘risk-on’ market.” 

Ever since presenting his 2024 Market Outlook in December, Lee has warned that although we could see strong gains in the second half of the year, the first half of 2024 would likely be challenging. So far, he sees markets hewing to his forecast. “It’s true that the indices have been holding up – the S&P has been somewhat flat year to date and the Nasdaq is up almost 1%,” he acknowledged. “However, those owning individual stocks might have noticed a lot more tumult and turmoil,” he suggested.

Head of Technical Strategy Mark Newton agreed, suggesting that a casual observer looking only at the indices might come away with an overly constructive view of the markets. “Technology, the trickster, has been at work again, making the U.S. Equity market seem flat,” he said. “When excluding Technology, this year has gotten off to a rough start and most sectors are down. Even though the indices say that the market’s not doing too badly – that's all because of Technology.”

To Newton, Healthcare, the second-biggest sector in the S&P 500, was also a bright spot this week. “What's interesting is that Healthcare as a sector has made this little minor breakout against the S&P. This is a sector that underperformed dramatically late last year, and now, all of a sudden, some of the biotechs are coming into life. I think that's definitely a positive for the first six months of this year. I like Healthcare as a group, and I would certainly overweight [it],” he told us.

One of the variables contributing to volatility this week was uncertainty over the Fed’s timeline for rate cuts. Federal Reserve officials including Fed Governor Christopher Waller publicly suggested that March could be too soon to begin cutting. “Fed officials simply are not convinced inflation is falling fast enough to warrant cuts,” Lee said – a view that diverges from what Lee’s research shows.

Washington Policy Strategist Tom Block provided a political perspective to this Fedspeak during our weekly research huddle. “I’m very skeptical of any predictions that the Fed will cut rates quickly, because this is really the only tool Fed officials have. Since there’s no recession now, they want to hold back so there’s still something they can do if the economy turns downward.” 

Regardless of the motivation, the result, as Newton noted, is that “Treasuries have been selling off, the dollar has been rallying, and stocks have been choppy as a result.” Looking a bit forward, Newton said, “Regarding the dollar, we're up to resistance. I don't think the dollar and yields make much more progress in the short run. They’re likely going to consolidate near term, which means over the next couple of weeks the stock market probably rallies as the dollar and yields start to pull back a little bit.”

Despite the market’s flirtation with all-time highs today, Fundstrat Research Associate Matt Cerminaro noted that this week, we had two consecutive days in which 86% of trading volume was downside, or sell, volume. This was a bit of an anomaly, but was it a meaningful one?

Maybe not, in Newton’s view: “I think you have to differentiate between times of rapid selling, when [this level of downside volume] comes right at the end of a decline, versus recent history where it's been very choppy. For me, as a technician, if you have declines over several weeks in which every day is down, and then all of a sudden you have a capitulation of volume or all the volume is to the downside, then that can be meaningful. This has marked the bottom in the past, like in 2009 and 2020. But what we see now, I think, is a few down days after some churning near the highs – that’s not the same thing.”

Still, Newton’s view of the current state of the market could be described as ambivalent. “We’ve been consolidating a little bit, and I see this as sort of par for the course when the market is around all-time highs.” He suggested viewing this month’s market action as “sort of a New Year's hangover. I don't see that as all that detrimental in the bigger scheme of things.”

Newton on non-U.S. markets

During our research huddle, Newton told us, ”We're in a period now where we had seen this dramatic sell off in both yields and the dollar, but both of them now are starting to rebound. What does that mean? Well, emerging markets are going to underperform. We've seen that in Brazil, Mexico, Thailand, South Korea and, of course, China. China has been struggling to find a bottom. But as the dollar starts to roll over later this year, which I do expect to happen, that will be more constructive for [emerging markets.] For now, however, we're sort of in a tough spot with regards to emerging markets as well as commodities.”

Elsewhere 

The U.S. State Department redesignated the Houthis as a terrorist group, in response to escalating attacks on cargo ships in the Red Sea that have disrupted supply chains and helped to send energy prices higher. The designation had been removed three years ago after the United Nations and humanitarian groups argued that sanctions against the terrorist group were contributing to a “large-scale famine” amongst Yemeni civilians.

The American consumer remained resilient in December, based on retail sales that rose 0.6% MoM, beating expectations of 0.4%. Annual retail sales were 5.6% higher YoY, not accounting for inflation. The same could not be said for the British consumer, with U.K. retail sales slipping 3.2% in December and sales volumes at their lowest since May 2020. 

Apple was the biggest smartphone maker by units sold in 2023, the first time the Cupertino giant has ever bested Samsung in this respect, according to statistics compiled by International Data Corp. (IDC). 

China’s population shrank in 2023 for the second consecutive year, despite government efforts to encourage people to have children. Of late, Beijing has framed childbirth as a patriotic endeavor while providing economic incentives such as cash, tax cuts, and access to cheaper housing, but this does not seem to have worked. 

OpenAI has reversed its own ban on providing its AI technology for use in “military and warfare” applications, working with the Pentagon on cybersecurity and suicide-prevention tools for veterans.
And finally: This Sunday, the NFL’s Detroit Lions will host the Tampa Bay Buccaneers, providing what Anderson Economic Group estimates to be a $52 million boost to Detroit’s economy. The post-season divisional matchup has drawn eager fans willing to pay an average $1,097 in order to attend a somewhat … rare … event – a Lions playoff game. Local hotels, restaurants, and casinos are expected to benefit.