Before we get into this week's musings, I wanted to take this opportunity to wish long-time readers of our blog and new readers a blessed holiday season! We hope you have benefited from this blog and we look forward to bringing you may more insights in 2024!
In what is likely our last Market Musings for 2023, we celebrate both the joy of the holidays and the recovery on Wall Street. Investors are in buy mode and the "Santa Claus" rally (last trading week of the year) begins today.
Hence, the inspiration for this week's musings, "Miracle on 34th Street." The original film, perhaps a family viewing tradition in your household, was released in 1947. Here's some trivia about this beloved film:
This movie is one of the few Christmas movies to be nominated and having won an Oscar. Edmund Gwenn (Kris Kringle) won in 1948 for Best Supporting Actor. The film also won for Best Original Story and Best Screenplay. It was also nominated for Best Picture, falling short to "Gentleman's Agreement," staring Gregory Peck and Dorothy McGuire.
In terms of 1947-48 Box Office results, this film was a smash. It had a reasonable budget of $630,000 and saw $2.7 million in box office receipts. However, what's interesting is that this film was released during the Summer of 1947, unlike today when Christmas movies are released around Thanksgiving.
The film was shot during a bitterly cold New York winter in 1946. Maureen O'Hara remembers shooting exterior scenes across from a woman's house who would often let the film crew come in to warm up.
Unknown to the parade watchers, Edmund Gwenn actually played Santa Claus in the Macy's Thanksgiving Day Parade for the exterior scenes shot during the parade.
Though Macy's and Gimbel's had the ultimate authority to refuse the use of their name in the film, both entities blessed their depiction after viewing the finished version. In fact, Macy's closed for half a day so that their 12,000 employees could go see the film when it opened in 1947.
Here's what we've seen so far this week...
Nice End To 2023. Last week the market moved considerably higher with the revelation that the Fed was finished raising rates and were forecasting the first rate cuts in 2024. This week, we saw some profit-taking, with markets ultimately bounding back and flirting with yet another weekly win in equities. Assuming the Fed doesn't pull a good one and next year's election is fairly civil, we should continue to expect more buying of equities. The scene in "Miracle on 34th Street" that makes me laugh every time is when Mr. Shellhammer is trying to rationalize with Doris that Kris Kringle may be fine to represent the store as Santa Claus. He tells her, "But... but maybe he's only a little crazy like painters or composers or... or some of those men in Washington."
Last week we witnessed the largest weekly inflow into the S&P 500 ETF since the first tracking of those numbers. This signifies pent-up demand for equities. Investors have been piling assets into Money Markets, as we pointed out last week. If we were seeing these kind of flows into equities at the top of the market then perhaps we would be witnessing the beginning of the end for the next burst bubble. However, we have yet to cross the last peak for the S&P 500 on January 4th, 2022. What we are witnessing is likely the start of a longer-term rally.
Yet, on Wednesday of this week, we saw a sell off in equities to the tune of about 1.5%. This provided the naysayers with some added confidence that the bubble has indeed burst. However, multiple trading desks rightfully termed Wednesday's action as "profit-taking" and the expiration of short-term "put" options. According to Goldman Sachs, volume was low on Wednesday, as some traders have already taken off for the year. Other assets, fixed income, real estate, etc. didn't really move much on Wednesday, meaning it was just an equity story. Lastly, GS determined that the action was "isolated" and they even went as far as to say investors should "buy the dip." The point is not that everything is rosy, but that, more often than not, these buying cycles are part of more broad moves higher for equities. As the graphic of market cycles indicates, the average duration of Bull Markets is 51 months, while the average duration of Bear Markets is 11 months. In addition, the average return for a Bull Market is 151%, while -34% for a Bear Market. This current run in equities is well below the average Bull Market, likely meaning there are more opportunities for gains moving forward.
The Recessionistas are also making much of the recent bloating of the Fed's Bank Term Funding Program. Assets in that program (borrowed by U.S. banks) have risen to all-time highs since the Banking Crisis in March. However, this is more likely an arbitrage situation for U.S. banks. The spread (difference) between what banks can borrow from the BTFP versus what they can earn on reserve balances is at least 50 basis points. Banks are taking advantage of what the Fed will let them borrow from the BTFP versus what they will compensate them for to prevent them from loaning the money out to consumers. All-in-all, the market has responded well to Wednesday's sell-off and is set to finish higher for the 8th consecutive week.
What To Expect In 2024? The most immediate concern is what to expect in the markets to start 2024. Those who continue to clamor for a recession remind me of the wife of the District Attorney in "Miracle On 34th Street." As the DA is trying the case in court against Kris Kringle, his wife says, "Sometimes I wish I married a butcher of a plumber." To which the DA responds, "My dear, if I lose this hearing, you may very well get your wish." Recessionistas should be careful what they wish for. Analysts refer to the alignment of 3 indicators to help determine expectations for 2024 - the "Santa Claus" rally, the "First Five Days," and the "January Barometer."
The "Santa Claus" rally refers to the last few trading days of the year and first two of next year, in this case, today through Wednesday, January 3rd. The "First Five Days" obviously refers to the first 5 trading days of each year. The "January Barometer" refers to belief that the performance of the S&P 500 Index for the first month of the year can predict the performance for the remainder of the year. When all three of these indicators are positive, it is called the "January Trifecta." This trading phenomenon has occurred 31 times since 1950, with 28 (90%) ending in a positive calendar year return on the S&P 500 Index. The average return for those occurrences is +17.5%, which could bode well for next year.
The economic picture looks promising for 2024. Today, the Fed's preferred measure of inflation, the PCE Price Index, was -0.1% for November, which is lower than expected and lower than October. On a year-over-year basis, the index dropped to its lowest level since May of 2021. If we compare that to Wages and Income, we see the consumer finally getting some breathing room. Personal Income (+0.4%) and Wage Growth (+0.4%) out-paced inflation in November.
The first rate cut by the Fed is now projected for March. The odds of the first rate cut in years has risen from 27% one month ago to more than 75% as of this morning. The ease in interest rates would help consumers both on the debt front and would encourage future spending.
The 30-year Fixed Mortgage Rate has declined more than 110 basis points in just under 60 days. When the Fed does actually begin cutting rates, we would expect interest rates on credit cards and prime loans to follow suit, providing further relieve for consumers. With this information as a back drop, it makes the case for a positive view of 2024, both from the economic and market standpoints.
Here are some of the best quotes from "Miracle on 34th Street...."
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