Equity markets certainly didn't begin 2024 where they left off in 2023. Unless things change today, equities will be looking at their first weekly decline in 10 weeks. But, is that a reason for despair?
The inspiration for this week's musings, "Skyfall," was a huge success at the box office and one of my personal favorites in the Bond series. The film represents a situation we all face at one point or another - how to come back from insurmountable odds. Here's some trivia the film:
This movie is the most successful Bond movie at the international box office in the entire film's franchise. While the film cost $200 million to make, it grossed over $1.1 billion at the global box office.
In over 50 years of James Bond movies with actors such as Sean Connery, Roger Moore, Pierce Brosnan, and Daniel Craig, Skyfall depicts only the 2nd time Bond was shot in the franchise. The other was "Thunderball" in 1965.
The role of Kincade, ultimately played by Albert Finney, was originally written with Sir Sean Connery in mind. The producers of the film badly wanted him for the role, but director Sam Mendes nixed the idea because...well, Connery IS Bond and that's all there is to it.
Judi Dench revived her role as M in Skyfall. Her screentime in this film exceeded the total screentime of Desmond Llewelyn, who played Q, across 17 Bond movies.
The villain in the film, Raoul Silva (Javier Bardem), has a lair on a tiny island in the Pacific. The site is actually Hashima Island in a group of uninhabited islands near Nagasaki, Japan. Hashima was last inhabited in 1974 and was once a thriving coal mining community. The untouched and abandoned concrete buildings depicted in the film were authentic.
Here's what we've seen so far this week...
Bull Market Barely Holding It Together? Markets don't go up forever. The recent run of 9 consecutive positive weeks for the S&P had not been seen since 2017. While the timing is not convenient to the "January Effect," markets were due for a break. So far in 2024, the S&P 500 Index is down 1.6%. For some perspective, it was up more than 15.8% the last 9 weeks of 2023.
The permabears are licking their chops at the recent decline, but they are likely getting ahead of themselves. It reminds me of the scene at Silva's lair when he comments on Bond's return to active duty as 007 when he remarks, "Just look at you, barely held together by your pills and your drink." To which Bond responds, "Don't forget my pathetic love of country."
Going back to 1950, it's common for the market to trade a bit sideways to begin the year when there is a Presidential Election, like in 2024. If we add the recent run in equities prior to this week, it's no wonder we're witnessing a break in the action. Another way of looking at it is the seasonality of equities, especially during the 4th year of a Presidential Cycle. Typically, January is flat, February is down, and March is improved during the 4th year of a President's term.
There's usually volatility in the early summer and just before the election. However, most election years still end on a positive note. The "Santa Rally" did not happen this year, which could provide a warning signal. When we fail to get a "Santa Rally," January only ends positive about 40% of the time, going back to 1955. However, the calendar year ends positive 67% of the time when the "Santa Rally" fails. Overall, there's not reason for concern at the point as fear or panic is low. The Goldman Sachs Volume Panic Index is still very low. The level of the Index was 3x higher in early 2020 (pre-COVID) and 3x higher in March of 2023 (banking crisis) than it is currently. More than likely, we're witnessing a break in action after a nice run in equities at the end of 2023.
Fundamentals Point To Continued Resurrection For Equities. Part of the problem in identifying where equities could be headed is in identifying from where we've come in the markets. The lack of acknowledgement that we were in a technical recession in Q1 and Q2 of 2022 is causing the permabears to ask, "Why hasn't a recession happened yet?" In reality, we're still in recovery from said technical recession. Another great scene in Skyfall highlights the back-and-forth between Silva & Bond. The villain tried to tempt Bond into joining his crusade and the following exchange occurs:
Silva: "If you wanted, you could pick your own secret missions."
Bond: "Well, everybody needs a hobby."
Silva: "So, what's yours?"
Jobless Claims have now reached levels that indicate recession risk has receded. Yesterday, Jobless Claims reached the lowest level since March of 2023. This bodes well for the consumer in 2024. We've covered the fact that wages are now exceeding inflation and as long as the consumer is employed, spending is not likely to diminish considerably.
The JOLTs Job Openings Report showed a slight decline in the number of available jobs on a month-over-month basis. But, Job Openings are still at highly inflated levels compared to pre-COVID, giving consumers options should they be laid off or seeking better employment opportunities. At the same time, Job Cuts for December were the lowest in the last 5 months. Redbook Sales show the consumer is spending more (+5.6%) on a year-over-year basis and that stands to push both the economy and corporate earnings higher in 2024. According to FacSet, analysts are estimating +11.8% for 2024.
In addition, big ticket items, such as vehicle purchases, showed promise in December. Total Vehicle Sales came in at 15.8 million in December, which was the strongest month since May of last year. Corporate buybacks were strong in 2023, which helped fuel equities at the end of the year. Goldman Sachs is predicting yet another strong year for buybacks, which also stands to help fuel returns this year. If the Fed does cut rates this year, as the Fed Funds Futures currently predict cuts in March and May, then the consumer will have inflation, rates, and wages growth to fuel their sails.
Here's the great scene between Tiago and Bond...
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