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Market Recap
Happy Holidays!
The S&P 500 roared back to life in November. The broad-based index rallied 6%, reversing October’s 1% decline. With less than 20 trading days left in the year, the market appears primed to notch a fresh record.
All 11 sectors ended November higher. The top performers included Consumer Discretionary, Financials, and Industrials, which gained 13%, 10%, and 7.3% respectively. Gains in these sectors were driven by former President Trump winning the election. Consumer Discretionary’s strength was buoyed by Tesla, which rose an impressive 38% in the period. Also of note was the divergence in performance of two major big-box retailers: Walmart and Target. Walmart raised its forecast for the year on positive sales trends, while Target lowered profit guidance after missing both top- and bottom-line earnings estimates. Healthcare was once again the laggard this month, rising 0.1%.
3Q2024 earnings season has almost concluded, with the last high-profile company NVDA 1.68% reported its earnings. 77% of the 491 companies that have reported thus far are beating estimates. Earnings growth (YoY, blended) for the quarter is currently 5.8%, marking the 5th consecutive quarter of year-over-year earnings growth. Overall, earnings season has been largely positive, demonstrating the strength of the U.S. economy and corporations.
We remain optimistic into the year-end with an S&P 500 target of $6,300. However, there is a possibility of a near-term “zone of hesitation” driven by the November Jobs Report, CPI, and/or December FOMC decision.
That being said, we see 4 major drivers in support of a year-end rally:
- Seasonality: Years with a strong 1H (>+10%) typically have a positive December (83% chance historically),
- Falling rates: interest rates (mainly the 10Y) are back to pre-election levels, increasing the relative attractiveness of equities
- Sentiment: AAII (American Association of Individual Investors) Sentiment Survey is turning bearish despite the economic outlook remaining stable, implying overly pessimistic positioning, and
- Two “puts”: a dovish Fed (Fed “put”) and the certainty of a Trump presidency (Trump “put”) provides support for equities. A Trump Presidency combined with a Dovish Fed also provides the potential for de-regulation, lowered cost of capital for business, and a general rise in market confidence (“animal spirits”) due to the Republican majority in the White House and Senate – all of which could lead equities higher through year-end 2024 and into 2025.
Sector Ratings
As the year-end approaches, neither Tom nor Mark made any changes to sector ratings in this month’s update. However, with their 2025 outlooks expected to be released in the coming weeks, sector ratings are likely to undergo some changes. Tom’s ratings, in particular, tend to focus on longer-term perspectives, making his year-end outlook the most important event for sector rating adjustments. Be sure to tune in next week to hear Tom’s strategies for 2025 (event page at the top).
Tactical Ratings
The Tactical Ratings remained largely unchanged compared to last month. The market in November closely mirrored this year’s broader market trends, once again reminding us that we are currently in a strong market.
Cyclical sectors led the market, supported by the resolution of election uncertainties and of course the “Trump trade.” Although defensive sectors saw a brief rebound during Thanksgiving week, cyclical sectors maintained their strength.
- The broader technology (Technology + Communication Services) staged a strong rebound after Thanksgiving, especially software stocks. Compared to last month, both sectors remain in the top 3.
- Financials have led the market since the beginning of the month, bolstered by expectations of deregulation following Trump’s election victory. Although their relative strength has slightly weakened since Thanksgiving (particularly banks), the overall sector momentum remains strong. Financials, alongside Communication Services and Technology, are still tactically overweighted.
- Consumer Discretionary has shown the strongest momentum since early November. The two giants, AMZN and TSLA (which together account for more than 50% of the sector), drove significant gains, especially TSLA, which surged over 40% since the start of November. Combined with holiday-related rally in consumer stocks, Discretionary ranks highest in trend scores. However, its lower rank in the quant model prevented it from making it into the top three.
- The Commodity sectors, Basic Materials and Energy, continue to demonstrate weak momentum. Basic Materials remained weak throughout the month, while the Energy sector, despite some mid-month recovery, gave up all its gains amid concerns that OPEC+ would maintain its production cuts.
- Healthcare was the most negatively impacted by the election results. Although some Medicare Plan C providers (aka Medicare Advantage Plans) benefitted from potential deregulation under new Trump administration, the sector as a whole—especially drugmakers—declined sharply due to the nomination of Robert F. Kennedy Jr. as head of HHS. Healthcare, along with Energy and Materials, remains at the bottom of the Tactical Momentum rankings and is tactically underweighted.
Sector Weights
Given that strategic ratings and tactical overweight/underweight positions remained unchanged, the main changes this month stem from the relative performance of sectors vs. the broader market in November.
- Consumer Discretionary: Due to gains in TSLA, AMZN, and other consumer stocks, sector weighting increased by 0.8%.
- Healthcare: Weak performance caused sector weighting to decline by 0.6%.
- Other sectors: Showed minimal changes.
Compared to the overall index*, our largest overweight positions are in Technology, Financials, and Communication Services, recommending an additional 2.9%, 2.5%, and 1.9% weighting, respectively.
- Consumer Discretionary is currently recommended for an additional 0.2% weighting. However, if the sector’s momentum remains this strong, we are likely to increase the overweight allocation.
- Industrials and Real Estate are strategically overweighted by Tom; however, due to their recent momentum being weaker than that of Technology, Financials, and Communication Services, we recommend an additional 0.5% and 0.4% weighting, respectively.
- On the underweight side, we continue to recommend under-allocating to commodity sectors — 0% to Materials and 0.8% to Energy. Compared to the index, this represents a reduced weighting of 1.7% and 1.9%, respectively.
- We also recommend under-allocating to all defensive sectors. Although Tom strategically rated Healthcare as overweight, considering its recent weak momentum, we still suggest under-allocating by 1.8%. For the other two defensive sectors, Consumer Staples and Utilities, we recommend under-allocations of 2.2% and 0.8%, respectively.
*Note: The above weights assume an 85% allocation to Sector ETFs and a 15% allocation to Tactical ETFs. For those 100% allocated to Sector ETFs, refer to slide 43 in the attached deck.
ETF Picks
Between November 1 and December 4, all five of our ETF picks outperformed the market. FINX, ARKW, and BITB saw significant gains due to election results and its favorable implications for crypto. Software recovery also helped SKYY and IHAK outperform the broader market.
For December, we decided to keep 4 of the 5 ETFs from November. The only change was replacing BITB -0.28% with MILN. This adjustment reflects short-term market considerations and does not indicate a negative view on Bitcoin. In fact, both ARKW and FINX provide significant Bitcoin/crypto exposure. MILN offers greater exposure to internet/software and consumer retail, segments showing strong momentum recently.
Updated Top 5 ETFs
– Global X FinTech ETF (FINX)
– iShares Cybersecurity & Tech ETF (IHAK -0.06% )
– Global X Millennial Consumer ETF (MILN)
– First Trust Cloud Computing ETF (SKYY 0.26% )
– ARK Next Generation Internet ETF (ARKW 0.43% )
