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Two weeks in, and the first act of the year is playing out much closer to the bull market script. After nine weeks of gains to end 2023, with bulls and bears alike pointing to an overheated economy and a two-week pause to cool down appropriately, the S&P 500 It is suppressed to a level just a semitone below. Updated the previous high set two years ago. There was some payback for the behind-the-scenes sell-off in November and December. The small-cap Russell 2000 index has fallen nearly 4% versus the S&P 500 index’s partial year-to-date gain. ARK Invest, a distributor of low-quality high-beta technologies, is down more than 12% from its late December highs. This was necessary and predictable, but perhaps unfinished. Here’s what we know about the extraordinary breadth and momentum scores achieved by the surge from October’s lows: The impact of forward returns over the past few months or year has been Although the basis is very positive, the short term is often characterized by some setbacks and sloppy profit taking. This chart from Ned Davis Research shows that the all-in rally towards the end of 2023 is a global event, with 92% of U.S. stock markets above their 50-day average, and during the recent market hiatus “There were almost no dents visible.” “The broad range of numbers we have received so far this year shows a decisive improvement in global participation,” said Tim Hayes, chief global strategist at NDR. The equally weighted national world index has risen at an annual rate of 24% since 1998, when this index exceeded his 75%. As Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, said late last week, while the economy is resilient, stocks are far less depressed and unpopular than they were a year ago. The situation is neither good nor bad.” He believes we are operating in “some kind of bull market” and is therefore right to expect further upward development, but added that “2024 will have a lot of ups and downs, and 2019-2023 “It will be much slower than what we saw in 2008.” Broadly speaking, the S&P 500 could fall by about 4% from here, pushing him back to around 4,600, but he still has regular technical checkbacks heading into the latest starting point in early December. It may be done. New Year’s bull market paused The S&P 500’s negative return over the first five trading days of the year is not meaningless, but it also doesn’t ring a loud alarm bell, effectively reducing the probability of a positive calendar year by about 70%. % to about 70%, history shows. 50%. Stock prices also tend to fall during the January monthly option expiration week, which is coming up next week. Keeping in mind these tactical risks and potential for indigestion, the broader framework is that stocks have undergone a two-year round-trip during which they have experienced 500 basis points of Fed tightening, a modest earnings pullback, and This means that the economy has absorbed the constant predictions that a soft recession will begin in 2024. The economic landing theory remains intact (if unproven) and disinflation unfolds as expected. .SPX Mountain 2022-01-10 S&P 500, 2 years Henry McVeigh, head of global macro at KKR, believes October 2022 will be the bottom of the bear market and that after such a low, stocks will fall below average. This is based on the fact that they tend to outperform. We will be returning in the next few years. “We believe too many investors are still stuck in the paradigm that the S&P 500 is trading at high headline valuations and that the U.S. economy is headed for a plateau and hard landing,” McVeigh said. he says. “We don’t see things that way.” While not pinning down any gaudy gains at the index level this year or strong U.S. GDP growth, McVeigh said the oil anointing Focusing on reasonably valued stocks away from attractive mega-cap stocks, the authors note importantly that none of the top 25 central banks have tightened by comparison. Meanwhile, the ratio of mergers and acquisitions, IPOs, and high-yield bond issuance to GDP remains at its lowest level since 2009. His Morgan Stanley Lacking Mergers and IPOs Remains a Leading Indicator in M&A This activity has recently spiked, with dealmaking the latest plot hole in the bull market scenario likely to return soon. It suggests that he should wake up. The average Wall Street strategist predicts no upside for the S&P 500 this year, and with the index having been stagnant for two years, the bull market will end before Animal Spirits mergers and IPOs get underway. Is it likely? It remains to be seen whether the recent uptick in acquisition activity (seen in biotech, energy, and software) will turn around and help restart small-cap stocks against big-growth companies. do not have. The rise of small-cap stocks from decades of relative depth in the second half of 2023 was greeted with much celebration. And certainly, lower interest rates should help, increasing confidence that the economy can avoid recession. Big Money Betting on Expansion But in his two weeks, the Russell 2000 Index has already lost about half of the outperformance over the Nasdaq 100 it has racked up over the past two months. And if this market starts favoring the majority of stocks over the names of the Magnificent Seven, that means the consensus gets exactly what it wants: the market’s tendency to act on command. I can’t help but point out again that this is not the case. Strategas’ Todd Thorne said inflows into the Invesco S&P 500 Equal Weight ETF (RSP) reached $13.5 billion last year, 30% higher than the previous 12-month record. The fund now has $49 billion in assets, with new money betting on tape expansion making up a significant portion of that total. It’s reasonable to expect the dominance of his seven index leaders, perhaps the largest, to be low, but markets don’t have to be zero-sum. None of the Mag7 have a higher expected PER than he did two years ago. And thankfully, Apple and Tesla have diverged on the downside recently, and they’re not moving in unison. Betting on the Fed’s “Peacetime” Interest Rate Cuts Rightly or wrongly, the current market debate never gets far before it turns into a debate about the Fed’s policy direction. Last week’s CPI and PPI data further reinforced the market’s common belief that downward momentum in inflation is strong, paving the way for a “peacetime” Fed rate cut. Fed Chair Jerome Powell has said that the easing will occur well before the 2% PCE inflation target is reached to ensure that policy does not become too restrictive at the current federal funds rate of 5.25% to 5.5%. I know that he admitted to being deaf. Despite the fact that the Fed considers a 2.5% to 3% federal funds rate “neutral” and its members did not expect it to reach its 2% target until at least 2025, We know that this represents the median expectation for a one-tenth of a point rate cut. All of this points to future easing. The federal funds futures market is now fairly confident of starting in March and is currently pricing in a total rate cut of 150 basis points by the end of 2024. (1 basis point equals 0.01%) This is the expected mismatch between federal funds and federal funds. .-Market expectations, cited by more cautious and less receptive observers as the main cause of market turmoil. However, beyond a few months, federal funds futures pricing becomes fairly unreliable, capturing a wide range of potential hedging and speculation scenarios with prices set along a spectrum, and the market sometimes overvalues. There is a tendency to But for now, the encouraging trend remains that inflation is falling more quickly and convincingly than labor market and consumer weakness. The Fed’s stated intention to respond to a soft landing (achieved with just a few rate cuts, such as in 1995 when the economy re-accelerated) is also a psychological backstop. A lot can go wrong, including deepening consumer fatigue (discretionary stock trading has been depressed for three weeks) and a growing wave of layoffs that jeopardizes the growth side of the soft-landing theory. But just because the S&P is trading near 4,800 again and the federal funds futures market is considering six rate cuts this year doesn’t mean the former is happening because of the latter.
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