Equities continued to rally this week and investors got a nice Christmas present from the Grinch (I mean Fed Chairman Powell). The Fed's new "Dot Plot" of future rate hikes showed cuts beginning in 2024. Equities exploded higher as a result.
Hence, the inspiration for this week's musings, "(There's No Place Like) Home For The Holidays," originally recorded by Perry Como in 1954. Here's some trivia about this beloved song:
This song was written by Robert Allen and Al Stillman, who teamed up for many of Como's hits. What's less known is that Como re-recorded the song in 1959, with a slightly different arrangement from the Mitchell Ayres Orchestra and the Ray Charles Singers. Both versions are frequently played on the radion during the holidays.
he song has been covered multiple times by the likes of Jim Nabors, The Carpenters (my personal favorite), Garth Brooks, Vince Gill, Olivia Newton-John, Cyndi Lauper, & Norah Jones.
In 1987, the Muppets sang the hit in their ABC special, "A Muppet Family Christmas."
The song was among the best selling records in 1954 and peaked at #18 on the Billboard charts.
"I met a man who lives in Tennessee, he was headin' for
Pennsylvania and some homemade pumpkin pie
From Pennsylvania folks are travellin'
Down to Dixie's sunny shore
From Atlantic to Pacific
Gee the traffic is terrific
Oh, there's no place like home for the holidays
'Cause no matter how far away you roam
If you wanna to be happy in a million ways
For the holidays you can't beat home sweet home"
Here's what we've seen so far this week...
There's No Place Like Equities. This time last year, the market was just starting to thaw as the Fed had just raised the Fed Funds rate for the 7th time on December 14th, 2022 for a total of 350 basis points. At that point, many analysts, myself included, were calling Fed Chairman Powell "The Grinch." Our point back then was that inflation had already declined for 6 consecutive months for a total of 260 basis points (year-over-year). Inflation would go one to delcine for 10 consecutive months and the rest is history.
ast forward to this year, and The Grinch's small heart must have grown three sizes as the new "Dot Plot" for the Fed's rate policy shows multiple cuts in 2024 and 2025. In fact, according to Fed minutes from the latest meeting this week, four Fed members see 4 rate cuts, six members see 3 cuts, five see 2 cuts, one sees 1 cut, and two see no cuts. This news is why equities, as measured by the S&P 500, moved higher by 1.3% on Wednesday. Why? Declining inflation along with declining rates would be much needed relief for a resilient, but stretched consumer. More importantly, as we have been pointing out over the past few weeks, market breadth continued to improve.
Just since last week, market breadth has increased 4-5x as 21% of large cap stocks made new highes yesterday - a move that is typically associated with a larger trend higher. In fact, market breadth is at the highest level since July, 2021. But, it doesn't stop there. Small cap stocks were up nearly 3% on back-to-back days. The last time that happened, according to Ryan Detrick of The Carson Group, was April '20 and March '09 - not the worst times for some market optimism.
If you're thinking, well, that's just in the U.S. While you "can't beat home sweet home for the holidays," it looks like breadth is picking up globally as well. The Weekly Advance-Decline Index for 73 different country indices just made new highs this week. So, it's no longer a question of are we in a new Bull Market, but for how long?
One metric that leads us to believe markets may be headed higher for a while is the massive amount of assets in Money Market funds (i.e., on the sidelines) and declining rates. There's nearly $6 trillion in Money Markets. The 3-month T-bill rate has dropped 20 basis points over the last 60 days, and given the Fed's latest revelations, is likely headed even lower. So, if equities are moving higher at the same time investors in Money Markets are losing yield (return), we could see assets flowing into equities in a FOMO (fear of missing out) trade.
No Matter How Far Away You Roam. As I previously mentioned, at this time last year, projections were not very rosy for 2023. In fact, multiple highly-respected firms were calling for less than bullish scenarios. Morgan Stanley was predicting a year-end level for the S&P 500 of 3,000-3,300. Deutsche Bank was expecting a 23% drop in the 3rd quarter of this year. That's not to bismirch those firms, but the point is, it's very hard to predict where markets will end up.
The S&P 500 Index is on pace to finish 2023 higher by 25%. A look at the data at this time last year could have helped investors stay invested. For example, the ANCFI was at a level of -0.11. When that index is less than zero, it means that financial conditions are loose. If we look at the index today (-0.50), it continues to be below zero and shows that financial conditions have loosened throughout this year. As we attempt to look out to 2024, the "risk" portion of the ANCFI is at a level of -0.27. Compare that to August of 2007 (just a few months before the 2008 Financial Crisis began), the "risk" component of the ANCFI was +0.17. At this point, we're just not seeing risk levels at dangerous levels yet.
On the fundamental economic front, recession just doesn't seem to be presenting itself. Retail Sales for November came in very strong on a year-over-year basis. The expectation was for Retail Sales to be negative in November, and yet, sales were +0.3%.
On inflation, both Consumer Prices and Producer Prices were tame for November and lower year-over-year. This is the key to the signal by the Fed that the battle to control inflation is over. If we look a little deeper at the costs for consumers, we see that it's mainly the services components that have not fully adjusted.
Hospital Services, Car Repairs, and Restaurants have not adjusted their prices lower for consumers, despite the fact that input costs have plummeted since last year. Many of these services are tyring to make up for lost revenues during the COVID years, so there's no real expectation for the costs for these services to come down until the consumer gets a little pickier about where they spend their dollars.
Lastly, on the jobs front, the Labor Market remains resilient. Both Initial and Continuing Claims were lower than expected this week. The plentiful number of available jobs and the low layoff rate will keep money in the consumer's pocket. The Fed upgraded their Q4 GDP projection from +1.2% to +2.3% based primarily on higher consumer spending. As a reminder, consumer spending is nearly two-thirds of GDP. So, it would appear there's no place like equities for the time being.
Here's my favorite version of this week's musings inspiration....
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