US Strategy Weekly: Earnings, FOMC, and Jobs

The S&P 500 and the Dow Jones Industrial Average recorded a series of new highs in recent sessions, triggered by the US Treasury’s announcement that funding in the first quarter would be less than previously expected and the International Monetary Fund releasing its global forecasts and announcing that a “soft landing” is in sight. (Should we worry?) But the week is far from over since on the horizon are results from many of the Mag 7 stocks, an important FOMC meeting, and January’s job report.

The Importance of AI Earnings

This is also a peak week for earnings announcements with 86 of the S&P 500 companies expected to report. To date, fourth-quarter earnings results have been mixed. And as we go to press, the stock market is trying to digest results from Microsoft Corp. (MSFT – $408.59), Alphabet Inc. A (GOOGL – $151.46), and Advanced Micro Devices, Inc. (AMD – $172.06) which failed to impress investors.

Earnings results will be important for the equity market, particularly for companies in the technology and communication services sectors, which have been leading the advance. Note that the S&P communications services sector includes highflyers like Alphabet Inc. C (GOOG – $153.05), Alphabet Inc. A (GOOGL – $151.46), Meta Platforms, Inc. (META – $400.05), and Netflix, Inc. (NFLX – $562.85), which dominate the market capitalization of the group. It also includes AT&T Inc. (T -$17.53), Verizon Communications Inc. (VZ – $42.47), Walt Disney Company (The) (DIS – $96.94), and Omnicom Group Inc. (OMC – $91.83). Given the lofty PE multiples in the Mag 7 companies, earnings results will be more important than ever. Moreover, any disappointment in the growth prospects for AI-related stocks would be a big negative for the overall marketplace.  

The S&P Dow Jones consensus estimate for 2024 of $240.08, was lowered by $0.61 last week. The LSEG IBES estimate for 2024 was $242.61 down $0.56. Keep in mind that based upon the IBES earnings estimate for this year, equities are very richly valued with a PE of 20.3 times. This is particularly high with inflation currently at 3.3%. The sum of this PE and inflation equals 23.6 and is just below the 23.8 level that defines an extremely overvalued equity market. If one uses the S&P Dow Jones consensus estimate, the current 2024 PE is even higher at 20.5 times. See page 9.

It has been our view that the equity market is at an important junction in 2024. Either earnings surge and justify current multiples, or equity prices will stall or decline until earnings improve. Another option is for equity prices to continue to rise, particularly in AI-related stocks, and to simply disconnect from fundamentals. This would be the start of a bubble market similar to those seen prior to the 1972 and 2000 peaks. This helps to explain why potential in AI-related growth is a key element to stock performance this year.

FOMC on Hold

Meanwhile, the economy appears to be stronger than many expected, and this could keep the Fed on hold for at least the next few months. We do not anticipate any significant change in policy this week, but it will be interesting to see how Fed Chairman Jerome Powell handles the press conference which could be lively. It would be unwise for the Fed to lower interest rates in view of recent economic reports. Real GDP grew 3.3% in the fourth quarter, down from the unsustainable rate of 4.9% seen in the third quarter, but strong, nevertheless. The most impressive feature of this fourth quarter growth was that all components were additive, including trade which is typically a drag on GDP. The main strength was the consumer, which was 1.9% of the quarter’s 3.3% increase. It is important to note that the 3.3% rate seen in the fourth quarter, although down on a quarter-over-quarter basis, remained solidly above the long-term average GDP growth rate of 3.2%. See page 3.

In December, personal income grew 4.7% YOY, disposable income grew 6.9% YOY and real disposable income grew 4.2% YOY. This last number is down from 4.4% in November; nonetheless, it is the 12th consecutive month of positive real income growth. This string of positive real income follows 21 consecutive months of weak or negative real income growth seen from April 2021 to December 2022. This 21-month stretch of negative real income growth was the first time negative real income did not translate into an economic recession. See page 4.

The personal savings rate fell from 4.1% to 3.7% in December. Both savings rates were well below the 22-year average of 5.8% or the long-term average of 8.5% and this could mean that many households dipped into their savings for the holidays. Recent data from the St. Louis Federal Reserve helps to explain why good economic data has not had a substantial impact on consumer sentiment. Real personal median income peaked in 2019 at $40,980, fell in 2020 and has been flat ever since. In short, despite a surprisingly strong job market, and a rise in wages, inflation has taken a toll on many households and real median income has not increased. And it helps to explain why some consumers are still struggling despite a recent deceleration in inflation. See page 5.

To understand why consumer sentiment has hovered near recessionary levels, one needs to dig deeper than just the headlines. Household spending has been concentrated on necessities. For example, in the last 3 years spending on gasoline has increased nearly 90%, transportation services spending has increased 77%, and food services and accommodation spending has increased 71%. After being confined to their homes due to COVID mandates, consumers increased spending on recreational services by 78% in the last three years. Plus, we were quite surprised to find that wages in the government sector rose over 8% in 2023, which was far more than the 5% seen in most other industries. See page 6.

Interest payments are another area that has pressured many households. Personal interest payments, increased as much as 66.5% YOY in June 2023, and were still high at 37% YOY in December. Personal taxes were down in 2023 after substantial increases in 2021 and 2022. And what may prove to be the most significant data point in 2024 is the decline in government stimulus. The chart on page 7 shows that while “other” government stimulus is steadily trending lower, it is still well above normal. The surge in fiscal stimulus in 2021 helped boost consumption and the economy and may be the single reason many recessionary signals proved to be either wrong or too early.

Technical Update

A new set of breakouts materialized in the S&P 500 and the Dow Jones Industrials this week generating a series of new all-time highs. The Nasdaq Composite is running to catch up. However, the Russell 2000 remains the most interesting index. After beating key resistance at 2000, it retreated below this level early in the year, and failed at another breakout attempt this week. There is still time for a breakout, and if the Russell succeeds, it would be bullish for the overall equity market. See page 10. The 25-day up/down volume oscillator is at 0.13 and neutral this week after being in overbought territory of 3.0 or higher for 22 of the 25 consecutive trading days ending January 5. To confirm this week’s advance the indicator should reach and remain in overbought territory for a minimum of five consecutive trading sessions in coming weeks.

Gail Dudack

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Stocks performed well in the fourth quarter and for the year 2023, with the S&P 500 advancing more than 20%. However, practically all the action was in the so-called “magnificent seven,” a handful of primarily large cap technology issues. The remaining 493 companies in the S&P 500 appreciated 14% collectively. The number of stocks, or market breadth, substantially increased in the fourth quarter, a good sign for further progress in 2024.

While U.S. economic growth has been resilient, inflation staying well-anchored is the more important determinant for future Federal Reserve policy and the hoped-for soft landing. In December, the U.S. Consumer Price Index was a bit above expectations, but the Producer Price Index (PPI) was well below. We have now had three consecutive months of negative PPI readings. Separately, the New York Fed’s survey of one-year consumer inflation expectations fell to 3.0% and the three-year dipped to 2.6%. The domestic labor market appears to be overheating less, with fewer people leaving their jobs and better skills-matching at businesses. In sum, the U.S. labor market appears to be normalizing by cutting job openings rather than jobs.

At their most recent December meeting, Chairman Powell of the Federal Reserve Board hinted quite strongly that the Fed was finished raising interest rates, and the most likely path towards “normalization” would be rate cuts. This was greeted by some equity investors promptly penciling in five to six rate cuts during the course of 2024. We think this is excessive, and that three-to-four rate cuts are more likely. The last thing that the Fed wants is a repeat of the 1970s when they were forced to adopt a stop-and-go monetary policy due to reoccurring bouts of inflation.

Election years are generally good years for equity investors, but unique from other years in market patterns. We would not be surprised, therefore, to see weakness in the first half of the year, as investors muddle through the political process and its economic implications. We are optimistic, however, that with interest rates and inflation on a downward path and corporate profits increasing, 2024 will be a good year for both fixed income and equity investors.

January 2024

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US Strategy Weekly: Stocks, Bonds, and Primaries

A Primary Thought

As we go to print, the New Hampshire primary is in progress, and it is getting an amazing amount of news coverage both domestically and globally. Perhaps this is because the New Hampshire primary is shaping up to be “the real beginning” or the actual end of former South Carolina Governor and former UN Ambassador Nikki Haley’s race for the Oval Office. Haley spent more money in New Hampshire than any other candidate and has the governor of the state supporting her. She has an impressive resume and did well as the US Ambassador to the United Nations. However, her campaign has received huge donations from multiple Democratic supporters which complicates her Republican standing. Either way, it feels like this primary is the real start of the 2024 presidential election campaign.

New Hampshire is a small state, but an interesting one. Forty percent of voters are registered as independent, and as such, can choose which party primary they want to participate in. On the Republican side, 22 delegates to the Republican National Convention will be awarded on a proportional basis. And though this is a small portion of the 1,215 delegates needed to clinch the nomination, New Hampshire’s early spot on the calendar has given the state an outsized role in the nominating process.

On the Democratic side, 33 delegates will be sent to the Democratic National Convention from New Hampshire, but their vote will not be bound by the primary results due to a dispute within the party. President Joe Biden is not on the ballot because the Democratic National Committee decided to make South Carolina its first voting state. Meanwhile, Dean Phillips and Marianne Williamson have been actively campaigning for Democratic votes in the state. As a result, the Biden campaign began only recently, an active movement to get voters out to vote and to write-in Biden’s name. This could make the Democratic primary, which was expected to be a nonevent, also interesting. Interviews with early voters suggest that the border and immigration is a major focus for voters in the state, which could also make the New Hampshire results more important than the actual number of delegates it sends to the respective conventions.

Newscasters are indicating that if former President Donald Trump wins the New Hampshire primary he will be the first Republican candidate to win the first two primaries in Iowa and New Hampshire since Gerald Ford in 1976.

Stocks and Bonds

The stock market has shrugged off several hurdles this week, including Monday’s 6% decline in the Chinese stock market and mixed fourth quarter earnings results. Interest rates are inching higher due to a week of heavy debt issuance. This will be the first of many debt auctions this year since the Treasury is expected to issue nearly $2 trillion of debt in 2024. Nonetheless, in recent sessions the S&P 500 index joined the Dow Jones Industrial Average by recording an all-time high.

Although the S&P 500 has now recorded a new high, our technical indicators are yet to confirm the move. The Russell 2000, after beating the key 2000 resistance, has now dropped below this level, which neutralizes the December breakout. See page 7. The NYSE cumulative advance/decline line is performing better than the Russell 2000 index, but it too, is not confirming the S&P 500, and remains 11,643 net advancing issues below its all-time high. See page 9.

The 25-day up/down volume oscillator is at minus 0.53 and neutral this week after being in overbought territory of 3.0 or higher for 22 of the 25 consecutive trading days ending January 5. The oscillator did confirm the December uptrend as “significant,” however, it has not yet confirmed this week’s advance. To confirm this week’s move in the S&P 500 to record highs, this oscillator should move into overbought territory for a minimum of five consecutive trading sessions. The current neutral reading is not surprising, but the oscillator needs to reach overbought territory in the next 5 to 10 days to confirm the January 19 and January 23 closes. See page 8. We remain cautious on equities until we get this confirmation.

Improving Economic News

Sentiment indicators improved at year end with the NFIB small business optimism index rising from 90.6 to 91.9 in December, its highest reading since July. The gains came from economic expectations and earnings trends which were less negative than a month earlier. The University of Michigan consumer sentiment index jumped 9.1 points to 78.8 in January, due to a 10-point gain in present conditions and an 8.5-point gain in expectations. However, note that both surveys remain well below long-term average levels. See page 3.

Retail sales rose 0.6% in the month of December and were up 5.6% YOY. Excluding auto & gas sales, core retail sales increased 5.8% YOY, which indicates that holiday shopping ended on an upbeat note, with growth led by department stores, apparel stores, and nonstore retailers. The 2.2% YOY gain in real retail sales was the best seen since February 2022 and it follows, and possibly reverses, a long period of negative real retail sales in 10 of the 12 months ending November 2023. A long stretch of negative real retail sales is characteristic of a recession. See page 4.

The National Association of Home Builders (NAHB) home builder survey increased 7 points to 44 in January, showing gains in all components including current single-family sales, sales expectations over the next 6 months, and traffic of new potential buyers. The National Association of Realtors (NAR) Affordability index rose in November to 94.2 from 91.4, due to a decline in mortgage rates from 7.7% to 7.5%, a modest rise in median family income to $99,432 and a slight decline in the price of a median single-family home to $392,100. Nonetheless, affordability remains near its lowest level since data began in 2007. See page 5.


It has been our view that the market is currently richly valued. This means that the December rally could be the beginning of a liquidity-driven advance similar to those seen at the peaks made in 1973 or 2000. In both of these cases, the stock market disconnected from fundamentals due to the expectation of a new era of growth. Investors became enthralled by the Nifty Fifty stocks in 1972-1973 and by the dotcom craze of 1997-2000. Clearly, the buzz around artificial intelligence has a similar potential. Time will tell. Meanwhile, the S&P Dow Jones consensus estimate for 2024 is $240.68, down $0.56 this week. The LSEG IBES estimate for 2024 is $243.17 down $0.34. Based upon this IBES EPS estimate of $243.17 for this year, equities remain overvalued with a PE of 20.0 times. This multiple coupled with inflation of 3.3% sums to 23.3 and is just below the 23.8 level that defines an overvalued equity market. See page 6. If one uses the S&P estimate of $240.68, the 2024 PE is 20.2 times. In short, the stock market has already factored in a substantial decline in inflation and the next 12 months of earnings growth into current prices. As we noted last week, the bond market may be a better barometer of risk in 2024 than equities and rising interest rates are not factored into current equity prices.  

Gail Dudack

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And Then … There Were Five

DJIA:  37,468

And then … there were five.  Of the Magnificent Seven, two now seem a bit less so – the two being Apple (189) and Tesla (212).  Granted five out of seven good charts is not a bad win rate, but it makes the point the market in general has lost some participation.  The market, of course, still has all that momentum going for it out of the October low, but numbers like stocks above their various moving averages show a stall, as do the level of 12-month highs.  None of this is yet to show up meaningfully in the Averages, but that’s not unusual.   The exception perhaps is the Russell 2000 which recently had become everyone’s favorite.  The problem, of course, is the average stock eventually takes its toll on the rest.  So while the look for now might be called mixed, it’s likely to worsen.  Our measure of breadth momentum recently turned negative, having been positive for a couple of months.

Going through the charts the other day we thought we had missed a nuclear war somewhere, at least to look at the Uranium stocks.  Turns out the look came about for the more mundane reason of a shortage in supply.  And this realization came about almost overnight?  To look at the charts of URA (31), URNJ (28), URNM (56), CCJ (48) and others, you might have thought so, the moves were that dramatic.  Indeed, dramatic enough to look in need of a consolidation.  Meanwhile, war is hell, especially when it doesn’t rally your Defense stocks, and a Middle East war that doesn’t rally Oil.  We don’t mean to make light of war, what we’re making light of is that simple logic often fails when it comes to the stock market.  So should we worry why the cyber stocks act as well as they do?

We remain positive on our Other Magnificent Seven, all of which are in long-term uptrends – see the monthly rather than the daily charts.  Keep in mind, not all of the original Magnificent Seven are in long-term uptrends – Microsoft (394) being one, Netflix (485) being far from it. There are still other Others that seem attractive here, names like Accenture (360), Eaton (240), Molina Healthcare (381), Costco (687) and Waste Management (184).  According to IBD, and a few years of observation, as much as 75% of the movement in any stock is the function of the market’s overall trend.  It’s therefore hard to expect any stock to be immune in a market correction.  The advantage to the stocks we’ve mentioned is that they have those long-term uptrends as support.  The exception to stocks possibly immune to a correction would be defensive names like Food, and so on.  The problem here is when the correction ends, they underperform as money goes to stocks that have sold off.

Apparently even in China, the charts tell a story.  The Taiwan elections seemed a worry, but Chinese stocks were undaunted to start the week. Then came the deluge.  Onshore shares dropped to a five-year low, shares in Hong Kong and the US fared even worse.  What happened was a bleak picture of China’s recovery.  Home prices fell the most in nine years, while a measure of price change recorded its largest stretch of declines since 1999.   As Bloomberg’s John Authers put it, investors seemed to lose patience.  If it’s an ill wind – deflation there is good for inflation here.  Meanwhile, in the category of sell on the news/be careful what you wish for – how about that Bitcoin?  Even if a small fraction of 1% of the assets under management were allocated to Bitcoin, it would have a huge impact argues Marathon Digital’s CEO Fred Thiel.  Perhaps, but for now is it discounted?

They say they don’t ring a bell at the top.  We heard it ring and the Fed’s typically dovish Waller seemed to ring it.  Yet he said nothing the rest of them haven’t been saying for a while now in their effort to dampen the market’s enthusiasm.  So why this time did the market react so negatively?  The answer of course is simple – it’s not the same market.  Heraclitus (500 BC) might well have been talking about the stock market when he said you never step in the same river twice.  And the market, the river, is what matters – it’s the market that makes the news.  Given the momentum from the October low, we see this as a garden-variety correction.  Even so, bad news somewhere could see the VIX (14) rise to last October’s level in the low 20s.  It’s not a sell everything kind of decline, but it’s time to let go of your hope stocks, the stocks not going up but you hope will.

Frank D. Gretz

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US Strategy Weekly: Bonds May Hold the Key

The December rally seems to have run out of momentum early in 2024, and despite three attempts by the S&P 500 index to better its all-time record, it is yet to do so. And while the financial media talks about the market being in record territory, only the Dow Jones Industrial Average managed to eke out a new high recently. Our favorite barometer, the Russell 2000 index, dropped back below the critical 2000 resistance/support level making the bullish December breakout questionable.

Federal Reserve Policy Expectations

There have not been any new developments to stop the advance. However, the December rally was driven by the consensus view that multiple Fed rate cuts were on the horizon and interest rates would begin to fall in March. The new year has tempered these expectations a bit, but we are concerned that those expecting rates to fall at the long end of the curve may also be disappointed. It is not new news that Treasury issuance is expected to nearly double to $2 trillion in 2024. Given this huge increase in supply, prices may have to fall and yields rise to entice demand for this flood of new debt.

It was not long ago that a credit rating downgrade by Fitch fueled a bond selloff that saw the 10-year yield reach 5%, its highest level since 2007. Signs that inflation is stickier than expected could also complicate the supply/demand picture for Treasury issuance. To offset these fears, some economists are theorizing that the central bank may end its quantitative tightening policy earlier than expected in order to improve the supply/demand balance in the marketplace. In the last 18 months, the Fed has reduced its balance sheet by over $1 trillion through quantitative tightening. But some Fed officials, perhaps in response to these fears, recently said the central bank should start considering slowing down and ending the shrinkage of its bond holdings.

Also working against the bond market is the fact that fiscal deficits remain historically high, and the 12-month total deficit was 8% of GDP in December. See page 3. At the end of 2023, the deficit was due in large part to a 7.2% YOY decline in receipts, or government revenues. Revenue declines of this size are worrisome since they represent a decline in income or corporate profits and are usually associated with a recession. In short, this could be a warning for the economy as well as the bond market. It is also worth noting that the current deficit at 8% of GDP is greater than the average 12-month deficit seen prior to the COVID-19 shutdown. Deficits normally run high during recessions but decrease during economic expansions. The fiscal stimulus policies maintained throughout 2023 did boost the economy, as seen in third quarter GDP, but it came at the cost of increasing federal debt to high levels.

The composition of federal debt issuance is directed by the Treasury Secretary, and some have noticed that an increasing portion of debt has been issued at the shorter end of the yield curve, in Treasury bills. This makes sense if interest rates are close to zero, but after Fed tightening lifted short-term interest rates over 5%, this shift has contributed to the problem of rapidly rising interest payments on the debt. Data from the St. Louis Federal Reserve showed that at the end of 2023, government payments on the debt reached 11% of total government outlays. See page 4.

We think some economists believe this rise in government interest outlays may force the Federal Reserve to lower rates earlier than they may want to do so. This may be true, but for that to happen inflation must also fall.  

Economists will be watching every Treasury quarterly refunding announcement in 2024, not only to analyze the supply of debt coming to market but also its composition. The Treasury Borrowing Advisory Committee recommends that short-term financing not be more than 20% of federal debt in order to keep financing manageable. But the 20% level was exceeded in 2020, and at the end of 2023 Treasury bills represented 17% of federal debt and the trend was rising. See page 5. In sum, Treasuries could exceed 20% in coming quarters, and this would increase government interest payments even more. All in all, the bond markets need to be monitored closely this year, since the equity market has already discounted lower interest rates in 2024 not higher interest rates.

Inflation Expectations

The December CPI report showed headline inflation rising from 3.1% to 3.3% in December, with core CPI falling a bit from 4.0% to 3.9%. Our work uses non-seasonally adjusted data, and it shows a slightly different scenario of headline inflation falling 0.1 in December to 3.4% and core CPI increasing 0.1 to 3.9%. But more importantly, most underlying components of the CPI were rising faster than the headline index on a month-to-month basis. See page 6. Overall, most inflation measures show prices decelerating from their 2022 peaks and we think this should continue if energy prices remain stable.

What is a concern is that while headline and core inflation seem to be decelerating, several components of the CPI appear to be rebounding. See page 7. Transportation is the greatest concern for us, but in the service arena, components like motor vehicle insurance are rising 20% YOY. Note, while motor vehicle insurance only has a 2.9% weighting in the index, it is a service that impacts a majority of US households. We think it is items like this, the 5.0% YOY increase in personal care products, or the 5.1% YOY increase in pets, pet products and services, which keep many households concerned about inflation. See page 7.

Technical Update

December’s bullish breakouts in all four of the popular indices were perpendicular and dramatic, but weeks later only the Dow Jones Industrial Average recorded an all-time high. The S&P 500 remains interesting at this juncture since it has been fractionally away from a new record three times in the last month but is yet to better its January 3, 2022 high of 4796.56. The Russell 2000, after beating the key 2000 resistance, has now dropped below this resistance/support level, and this neutralizes the December breakout. See page 9.

The 25-day up/down volume oscillator is at 1.02 and neutral this week after being in overbought territory of 3.0 or higher for 22 of the 25 consecutive trading days ending January 5. This indicator needed to remain in overbought territory for a minimum of five consecutive trading sessions to sanction the advance, which means that the oscillator has confirmed the December uptrend as “significant.” January’s pullback in prices may simply be a short consolidation phase, but it may last longer than some think, since we believe the equity market needs a new catalyst to propel stock prices higher. The obvious catalyst would be better-than-expected earnings, but to date, that has not materialized. As we wrote last week, December’s rally was driven by liquidity, not by valuation. At present, based on the LSEG IBES earnings estimate of $243.51 for this year, equities remain overvalued with a PE of 19.6 times. Adding 19.6 and the inflation rate of 3.4%, sums to 23.0, or just below the 23.8 level that defines an overvalued equity market. Based on the S&P estimate of $241.25; the 2024 PE is 19.8 times and even higher. We remain cautious.

Gail Dudack

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What a Difference a Day Makes … It Doesn’t

DJIA:  37,771

What a difference a day makes … it doesn’t.  We’re thinking here of Monday, a more than good day.  After a tough start to the year, we feared what we’ve called a bad up day – higher in the Averages but flat or modestly positive A/Ds.  Monday was not that day.  The A/Ds were a more than respectable 3-to-1 up.  Still, and you might want to write this down, one day is just one day.  And one day is never analytically meaningful.  Some of the best one-day rallies have happened in bear markets, not that that’s relevant here.  The A/Ds need not be positive every day, but needed is a pattern of positive numbers.  Strong stocks like the Techs bore the brunt of the recent weakness.  The template here might be XLK (192) – down to the 50-day, and now bouncing.  It likely will take time to get back or through the highs for the stocks, but more important those lows around the 50-day now need to hold. 

A selloff in the year’s first week is always a bit surprising.  It has been said for tax considerations investors waited until the new year to take profits.  Logical enough, but the logic that escapes us is why profit-taking at all, particularly in stocks that have acted so well.  The only logical explanation we can see is to move on to other areas, which seems to have been the case if we look to almost anything in Healthcare.  Rather than try to explain why the market does what it does, best just to recognize it and take it for what it is.  Techs were sold hard enough to take them down to the 50-day.  Still, Healthcare was bought hard enough to leave them now in impressive uptrends.  The Averages suffered simply as a function of the differing market caps.  If not exactly a zero-sum game, it could’ve been worse – selling in one area without commensurate buying in the other.

While the jockeying around we’re seeing could go on for a while, it’s important to remember the market has the momentum of the last two months at its back.  S&P stocks above the 50-day and the reversal in the Russell both say higher prices over the next six months.  To that you can add a positive change in junk bonds.  Here the 50-day moving average of its A/D Index rose above the 200-day, a so-called “golden cross.”  This seems important for a couple reasons.  Junk or high-yield bonds can be thought of as the most sensitive of corporate credit.  So in terms of the economy’s financial health, all seems well.  In terms of the stock market, these crossings have seen the S&P rise at a near 15% annualized rate, according to

While you have been sleeping, so to speak, China has been quietly drifting lower.  Clearly there are some real problems in the form of real estate and debt there.  They claim to be growing at 5% yet intend to stimulate.  If they’re really growing at 5%, they shouldn’t need to stimulate.  Meanwhile, the charts there are across the board poor.  With all the focus on the Fed, rates, and the Middle East, we are not sure how, but China could be a problem that sneaks up on markets.  It’s often where you’re not looking that causes the problems.  Meanwhile, despite the prospect of an expanded war in the Middle East, defense stocks seem unfazed.  Of course, the ETFs here have been hurt by Boeing (223).  What have acted well are the cyber security stocks like Palo Alto (323) and CrowdStrike (285).

Wednesday seemed like old times – at least for Nvidia (548), Meta (370) and Microsoft (385).  As for Apple (186), it may be time to think Magnificent 6.  On behalf of Tech and other strong stocks, let’s hear it for the 50-day.  Meanwhile, it’s a brave New World for most of Healthcare.  So far so good it would seem overall, but that’s a bit superficial.  A breadth momentum measure we follow closely has turned negative for the first time in two months.  After the strength in the fourth quarter some setback had seemed likely – February is typical, but you never know.  Meanwhile, it’s time to waste time on the January effect.  January is thought to be predictive of the year, the first five days predictive of the month.  This year the S&P was basically unchanged the first five days, not a great sign – outcomes proved poor over the next couple months historically.  Looking at the entire month of January, when up the next 11 months were positive 78% of the time, when negative only 59%.  By the way, the month of April is more predictive.

Frank D. Gretz

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US Strategy Weekly: The Underpinnings of Targets

How much potential or risk there is in stock prices is best explained by current and forecasted fundamentals, in our opinion. Momentum and sentiment can drive stock prices over the short-to-intermediate term, but over the longer term, earnings growth, or lack thereof, always underlies the trend of the equity market. For this reason, we sought to understand the underpinnings of the many S&P 500 forecasts of 5100 or 5700 for this year.

There are two simple components to any S&P forecast: the appropriate PE multiple and the earnings estimate. However, it is never that simple because both can be moving targets. As we noted in our 2024 outlook, our valuation model is a PE forecasting model derived from our expectations for inflation and interest rates. Our assumptions for 2024 are that inflation will ease to 2.75%, short-term interest rates will fall to 4.25%, and Treasury bond yields stay relatively stable at 3.6%. These are optimistic forecasts in our view; however, they fall well within the range of consensus forecasts. With these estimates, our valuation model indicates that the average PE for this year should be 18.5 times and the maximum PE multiple could be 21 times. A 21 PE multiple would be a possibility if inflation falls to 2% or less, since this would imply earnings growth is more “real.” In short, the model provides a broad range of possibilities.

When we take a multiple of 18.5 times and apply it to our 2024 earnings estimate of $234.00, a 10% increase from S&P Dow Jones 2023 estimate of $213.55, the result is an SPX target of 4330 for this year. If we use a maximum PE multiple of 21, we get an SPX target of 4914.

If we assume our earnings forecast is too pessimistic and use the IBES consensus estimate of $243.98 for this year, we get an SPX target of 4514 with an 18.5 multiple. To get to an SPX target of 5123, we need to use a maximum PE of 21 times and the IBES 2024 earnings estimate. This is a good explanation of why several strategists are using a 5000+ target for this year.

However, for those looking for even higher SPX targets, the forecaster must use not only a maximum PE of 21 times, but also the IBES 2025 earnings forecast of $274.59. This combination equates to a target of SPX 5766. In short, this exercise explains how one gets to an SPX target of 5100 or 5700, but it also reveals how much risk there is to these targets.

First, both targets assume stocks will reach and maintain a maximum PE which is likely only if inflation falls to 2% or less later this year. Second, an SPX 5100 forecast assumes that the IBES consensus earnings estimate for this year is correct. The risk here is that consensus earnings forecasts tend to peak early in the year, start to decline in March and then during each reporting season thereafter. This declining trend is rarely absent unless the economy is coming out of a recession. Analysts tend to be too pessimistic after a recession; and as a result, consensus earnings estimates are usually too low and increase during each quarterly earnings season.

Nonetheless, an SPX target of 5700 discounts not only a perfect year of low inflation but all the optimistic earnings growth expected over the next 24 months. There are many risks to these assumptions, the most obvious being that the economy may slow, revenues will decelerate, and earnings growth could disappoint. The first few days of 2024 have already been an adjustment to the overly optimistic view that there will be multiple interest rate cuts beginning in early 2024. And after analyzing the basis of the bullish targets for 2024 it becomes clear that every earnings season, every inflation report, and every FOMC meeting will be very important to substantiate the bullish forecasts for this year.

Employment Data

The 216,000 increase in payrolls in December was stronger than expected, but the unemployment rate was unchanged at 3.7%. Note that the unemployment rate for those with less than a high school degree has been rising and was 6% in December. Clearly, the lower-income worker was experiencing a more difficult job market at the end of the year. The household survey showed roughly a 1.5 million increase in people no longer counted in the labor force in December; meanwhile, there was a 460,000 increase in the number of people not included in the workforce but who indicated they want a job. Job growth was 1.75% in December, which is above the long-term average of 1.7%. However, job growth in the household survey was 1.18% and this was below the 1.5% long-term average for the first time since March 2021. In short, there were some signs of stress in the jobs data. See page 3.

Economic Data

The ISM manufacturing index improved slightly from 46.7 to 47.4 in December; however, the services index fell from 52.7 to 50.6. Since 50 is the breakeven level, the December services survey was indicating only modest economic activity. Perhaps more importantly, the services survey saw the employment index fall from 50.7 to 43.3 in December, the lowest reading since July 2020 and a sign that job growth has slowed or is declining in the service sector. The employment index in the manufacturing survey has been below 50 (neutral) since September. See page 4.

When we look at a variety of components in the ISM manufacturing index, it is obvious that most have been below 50 for most of 2023, a sign of weak economic activity. In the services survey, the overall trend was above 50 but slowly decelerating. The drop in the employment index may be a bad omen for 2024. See page 5.

The small business optimism index improved slightly in December, rising 1.3 points to 91.9. However, this reading was still the 24th consecutive month below the long-term average of 98 and a sign of recession. In December, businesses indicated they were generally unhappy with the level of their inventories and indicated a reluctance to increase capital expenditure. Hiring plans also continued to decline. On a hopeful note, plans to raise prices appear to have peaked for most entrepreneurs. See page 6.

Technical Update The breakouts in all four of the popular indices were perpendicular and dramatic at the end of 2023, but only the Dow Jones Industrial Average managed to record an all-time high. The S&P 500 is most interesting since it has been fractionally away from recording a new high but is yet to better its January 3, 2022 high of 4796.56. The Russell 2000, after beating the key 2000 resistance, has now dropped below this level, which neutralizes the breakout seen at the end of the year. See page 9. The 25-day up/down volume oscillator is at 1.76 and neutral this week after being in overbought territory of 3.0 or higher for 22 of 25 consecutive trading days ending January 5. This indicator needed to remain in overbought territory for a minimum of five consecutive trading sessions to confirm the recent uptrend as “significant.” This is positive, however, weakness in the early part of a new year is often a warning sign of fading demand for equities. In sum, 2024 is apt to be a volatile and unpredictable year.

Gail Dudack

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Wring Out the Old … Ring in the New?  

DJIA:  37,440

Wring out the old … ring in the new?   Quite a change to start this or any new year.  Profit-taking in last year’s winners and dip buying in last year’s losers.  It also saw some interesting numbers on that first day of trading – the Dow modestly higher, a very weak NAZ and 1700 advancing issues.  All things being equal, not a bad configuration. Those A/D numbers were pretty much the same for the NASDAQ, surprising given the weakness there.  Clearly Tech was the most prominent part of the weakness, but it was almost anything that has done well recently.  Meanwhile, just when you thought a stock like Hershey (191) might never lift it, other food and pharma stocks did quite well.  The question, of course, for how long.  With the overall background favorable, ideally this dichotomy will meet in the middle.

Despite this week’s setback, history and its probabilities still seem on the market’s side. The upside momentum we’ve seen carries with it some impressive outcomes.  If we look at the broader S&P 1500, 90% of the components there are above their 50-day average, a number with a 90% probability of higher prices six months later, according to  The Equal Weight version of the S&P (RSP-155) has cycled from a 52-week low to a 52-week high near record time, also suggesting higher prices over the next six months.  Of course, probabilities are not certainties, but they should put the odds in your favor.  If God told us to buy 1000 S&P call options, we would first say thanks, and then ask where to put our stop.  For the S&P, the Index is teetering on its exponential 21-day weighted averages, one utilized by IBD.  Granted it’s a trader’s measure, but the S&P has been above it since November 2, making any break somewhat noteworthy.

The worry we have about Tech is that everyone treats the stocks like they are the companies.  They’re not – they are pieces of paper and pieces of paper can become over owned, or just go out of favor.  One of our favorite charts is a long-term chart of McDonald’s (292) from the 70s and early 80s.  McDonald’s in 1973 peaked approximately at 75, went down to 22 in 1974, rebounded to 66 in early 1976 and then went sideways for the next five years.  Interestingly, the earnings continued growing throughout the decade at a compounded rate of 25% a year and the company never missed a quarter.  Despite all that, by its 1980 low McDonald’s was selling at 10 times trailing 12-months earnings, compared with selling at 75 times trailing 12-months earnings in 1973.  Even good stocks can become over owned and/or fall out of favor.   

With the leadership dust more than a little unsettled, a stock like McDonald’s might make sense.  It didn’t have a great year last year, thanks to a 20% drawdown in August – September, but has a more than decent uptrend going for it now.  Also going for it, it could easily be among our Other Mag Seven stocks in that it has a great long-term pattern.   As things sort themselves out, you might also look to Oil which also didn’t have a great year in 2023, and it has failed to respond to threats in the Gulf.  Still, if not quite ready for prime time, the stocks are shaping up, and are among the laggards that are a recent market focus.  Among the better charts are Diamondback (156) and Phillips 66 (135).

Tech isn’t going away, but it could go dormant.  Not dormant like MCD in the 70s, but dormant relative to last year.  Clearly it’s too soon to say, weakness there is what the old westerns used to call a flesh wound.  The stocks of course have had runs that deserve a break, and now there seem options.  If Hershey is not on your diet, there are many healthcare stocks with good short and long-term patterns – even most of Biotech has a turn.  With all the recent cross currents, the best guide to overall market health isn’t the NAZ, S&P, or even the RSP, it’s the average stock.  Because the large caps dominate the Averages, the Averages for now can be almost misleading.  Dare we say, look to the A/Ds as a better guide to market health.  When most days most stocks, go up, whatever they may be, markets don’t get into trouble.

Frank D. Gretz

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US Strategy Weekly: History, Liquidity, and Valuation

A Bit of History

The media is filled with headlines stating that the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite Index have booked nine consecutive weekly gains — the longest weekly winning streak for the S&P 500 since January 2004, and the longest stretch for the Dow Jones Industrial Average and the Nasdaq Composite Index since early 2019. Many in the media have then suggested that this strong run means more gains are ahead. Indeed, double-digit gains in the equity indices don’t suggest a bear market … unless there are three years in a row of double-digit gains. But as you can see from page 7, the full year 2004 had a fairly mediocre performance after its early advance. In 2019 an early advance in the first quarter stalled, then rallied, and in November, COVID-19 became a global pandemic, making comparisons difficult.

However, the parallel between 2004 and 2024 is not only due to the nine weekly gains, but that both are presidential election years. And they are years ending in “4.” Depending upon which market index one uses, the presidential election year has the third or fourth best performance of the four-year cycle. In short, election years tend to be mediocre. The pre-election year is the year with the biggest stock gains in the four-year cycle. This is probably due to fiscal stimulus done early in the year to help the economy and to help the incumbent president win votes due to a strong economy. This pattern seems to fit the current cycle, even though it is a most unusual economic cycle.

However, one of the most interesting things about an election year is that it has some ability to predict the outcome of the presidential election. When the incumbent is about to win, equities tend to be weakest in May in July. The May decline sets up a classic summer rally which is followed by a weak July. Typically, July is the fourth best performing month of the year, so this works against seasonality. In years when the incumbent loses, the weakest months of the year tend to appear in January, February, September, and October. January has a history of being the sixth best performing month, on the heels of good gains in November and December. So, this too, goes against seasonality and weakness early in the year is a bad omen for an incumbent president. In both cases, or most election years, the strongest months tend to be November and December. See page 8.

This is also a year ending in 4, and the decennial pattern suggests it will be a year with an average gain of 7.1%, leaving it tied for fifth place in the 10-year cycle. Still, “4” years have produced gains in nine of the last 14 cycles, so there is a bullish bias to years ending in 4. See page 6. All in all, history points to an up year, but more in line with a single-digit gain than a double-digit gain.


The dramatic gains seen at the end of 2023 were driven by the widely held belief that interest rates are coming down in 2024. Federal Reserve Chairman Jerome Powell attempted to dampen these expectations in subsequent days, however, his comments after the last FOMC meeting did indicate that rate cuts were likely in 2024. This suggestion triggered a swift decline in long-term interest rates and a rush out of cash and into equities. The momentum of the equity market is strong, and this is seen in our technical indicators. However, behind good momentum tends to be good liquidity. For this, we looked at Federal Reserve data on commercial banks. What we found was that banks hold nearly $19 trillion in customers’ liquid short-term assets. This number is the sum of $4.99 trillion in demand deposits, $1.7 trillion in retail money market funds, $1.0 trillion in small-denomination time deposits, and nearly $11 trillion in other liquid deposits. See page 4. In recent years, money flowed into short-term assets as interest rates rose and the threat of recession was looming. Powell’s “pivot” on interest rates created a “pivot” in investor sentiment and their opinion of cash. In a Cinderella world of falling interest rates, declining inflation, and no recession, $19 trillion is a substantial amount of potential demand for equities. Moreover, we know that the cash held at commercial banks is a majority, but not all inclusive, of household cash coffers.

Nevertheless, we have experienced liquidity-driven markets in the past and have learned that it is important to put any “liquidity cache” in perspective to the size of the overall market. If we compare current cash assets to total US market capitalization, we find that it represents 38% of total US market capitalization. This is a substantial, but not historic ratio, of cash. See page 4. Most secular bull cycles began when cash equals 50% or more of market capitalization. In short, cash levels support a strong momentum-driven market for a while, but do not suggest this is the start of a major secular bull market.


If the equity market is on the verge of a bubble market, we will know fairly quickly since bubbles are driven by sentiment, liquidity, and leverage, not by earnings or fundamentals. At present, the fundamentals are not supportive of the bulls. There are many ways to measure valuation, but most show the market to be richly valued today. On page 9, we show the Rule of 23, which implies that when the sum of the trailing PE and inflation exceeds 23.8, the stock market is extended and overvalued. The current trailing PE is 22.3 times and the S&P PE based on 2024 earnings estimates is 19.6 times. With inflation at 3.2% and potentially easing, when coupled with the trailing PE of 22.3, the sum of 25.5 is well above the dangerous 23.8 level. Perhaps more importantly, if we add the estimated 2024 forward PE ratio of 19.6 times to inflation of 3.2%, the sum of 22.8 is only two points below the 23.8 danger level. In short, the stock market’s valuation has already discounted a substantial decline in inflation and all of this year’s potential earnings growth. This implies that every CPI report and every earnings reporting season has the potential to be a market-moving event.

Bullish Technicals

What keeps us from getting too negative about valuation too soon is the significant change in our technical indicators. The breakouts in all four charts of the popular indices are both perpendicular and dramatic, but to date, only the DJIA has managed to make a new all-time high. The SPX is most interesting at this juncture since it has been fractionally away from a new record high for several sessions but is yet to better its January 3, 2022 peak of 4796.56. The Russell 2000, after beating key resistance at the 2000 level, is now testing this level as support. If the Russell begins to trade below 2000 once again, it could neutralize what is now a very bullish technical pattern. See page 11. The 25-day up/down volume oscillator is at 3.45 this week and has been in overbought territory of 3.0 or higher for 19 of the last 22 consecutive trading days. To confirm the recent advance this indicator needed to remain in overbought territory for a minimum of five consecutive trading sessions, which means the oscillator has definitely confirmed the recent uptrend as “significant.” The current 19-day overbought reading is far better than the 11-day reading seen between January 25, 2022 and February 8, 2022. The only missing ingredient to the current strength of this indicator is an overbought reading in excess of 5.0. Extreme overbought readings of 5.0 or more are often seen at the start of a new bull market cycle. However, this is not a requirement for a significant advance. What will be important is that any pullback in the equity market ends once this indicator approaches an oversold reading. In a bull market oversold readings tend to be brief or nonexistent.  

Gail Dudack

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Liquidity-driven Market

2023 ended with a flourish after Federal Reserve Chairman Jerome Powell indicated that interest rate cuts were likely in 2024. This surprising “Fed pivot” by Powell following the last FOMC meeting of the year, unleased a buying surge that generated one-month gains of 4.8% in the Dow Jones Industrial Average, 4.4% in the S&P 500, 5.5% in the Nasdaq Composite and a stunning 12% in the smaller cap Russell 2000 index. The December 2023 rally carried the Dow Jones Industrial Average to a new record high and the S&P 500 came within 1% of its all-time high.

Chairman Powell’s indication that rates would soon come down, unleashed a liquidity-driven advance fueled by the $7.5 trillion in cash seen in demand deposits, retail money market funds, and small-denomination time deposits. Yet, despite strong December performances, the Nasdaq Composite closed the year 6.5% from a record high and the Russell 2000 ended 17% below its November 8, 2021 high of 2442.74.

For the full year, the Dow Jones Industrial Average gained 13.7%, the S&P 500 gained 24.2%, the Nasdaq Composite inked a gain of 43%, and the Russell 2000 index rose 15%. Overall, it was an amazing yearend performance for a year that until then had been only modestly successful and a time most analysts expected to include a recession and a poor stock market.

Remembering 2023

The first half of 2023 was expected by many, including us, to be the final chapter of the post-pandemic hangover. There were many signs of an imminent recession, including a long and severely inverted Treasury yield curve, a slump in the real estate markets, recessionary levels in consumer and business sentiment surveys, historic weakness in the leading economic indicators, and negative year-over-year retail sales. Consumers were experiencing declining purchasing power due to rising prices, and corporations suffered profit margin squeezes from escalating costs for labor, transportation, and raw materials. Yet despite all these warnings, the economy continued to grow a bit each quarter, and in the third quarter of 2023, GDP reached 4.9% on a seasonally adjusted annualized basis.

In the early and unsettled environment of 2023, some investors began to focus on the long-term growth prospects of artificial intelligence. This led to the popularity of a small group of stocks called the Magnificent Seven, which included Apple Inc. (AAPL – $192.53), Microsoft Corp. (MSFT – $376.04), (AMZN – $151.94), Nvidia Corp. (NVDA – $495.22), Alphabet Inc. (GOOG – $140.93), Tesla Inc. (TSLA – $248.48), and Meta Platforms Inc. (META – $353.96). These companies quickly became the investment darlings of 2023 driven in part by an analysis from PwC indicating that artificial intelligence was expected to improve productivity by 40% by 2035 and the global AI market was expected to grow 37% annually from 2023 to 2030. Not surprisingly, at a time when a recession appeared to be around the corner, these stocks became the most exciting investments to own. From our perspective, we felt it was also important to note that PwC’s surveys also showed that 73% of US companies have already adopted artificial intelligence in some areas of their business. This poses questions about the near-term potential of AI.

A Wall Street Journal article (“It’s the Magnificent Seven’s Market. The Other Stocks Are Just Living in It.” December 17, 2023) noted that these seven stocks soared 75% in 2023, while the remaining 493 stocks in the S&P 500 rose only 12% and the S&P 500 index gained 23%. But more importantly, these stocks represented 30% of S&P’s market value, which approaches the highest-ever share for seven stocks. Perhaps most surprisingly, the group represents more than the combined weighting of all stocks in Japan, France, China, and the UK, in the MSCI All Country World Index.

This outsized performance of a small group of stocks is reminiscent of the bubbly Nifty Fifty and the Dot-Com eras. In these earlier equity manias, a small group of stocks led dramatic advances that persisted for a year or two. But eventually, an extremely overvalued market later ended in tears. In our opinion, even though the current advance may not be over, there is risk in the overall market, and more importantly in these seven stocks. The Magnificent Seven stocks have discounted a substantial amount of future growth which means they would be vulnerable should anything challenge the expectations of AI-driven earnings growth. At the same time, these numbers suggest there is much better value found in the broader marketplace.

Our 2024 Forecasts

Our assumptions for 2024 include GDP growth of 0.8% YOY for the full year, which implies slowing economic activity and the possibility of a negative quarter of growth, but the year should escape a full recession of two consecutive falling quarters of GDP. In this environment we are assuming some weakness in topline revenues, but efficiencies developed during the economic shut down and a rocky economy in 2023 will help companies generate modest earnings growth of 10%. Given the Fed’s recent pivot we are expecting a possible 75 basis point decrease in the fed funds rate. To do this, we are assuming a modest decline in inflation to 2.75% which will allow the Fed to maintain a real yield of 220 basis points in the fed funds rate throughout the year. In line with this, our forecast expects Treasury bill yields to fall to 4.25% in line with an easier Fed policy, and for Treasury bond yields to be lower and stable at 3.6%.

There are many risks to these forecasts since external factors like the Houthi’s attacks in the Red Sea have the potential to interrupt trade and send oil prices higher. Other risks include the possibility that efficiencies from artificial intelligence may prove to be less than expected. The wars in Ukraine and Israel could increase past current borders and trigger fear of a widening escalation. Politics should be a major topic in 2024 since there will be nine parliamentary elections in Europe in 2024, as well as elections in the UK, Mexico, Taiwan, and the US.

Although the economy may manage to muddle through a year of sluggish growth in the economy and earnings, equity valuation remains a hurdle. Our forecasts for 2024 coupled with our valuation model, yield a mid-point predicted PE of 15.8 and a top-of-the-range PE of 18.4. This, combined with our 2024 S&P 500 earnings forecast of $230 creates a midpoint S&P 500 target of 3634 and a high of 4295 for 2024. Using a higher IBES 2024 earnings estimate of $245.21, these targets rise to 3875 and 4511, however, yearend prices have already exceeded these levels. And for those who think our model’s predicted PE multiples are too low, note that at the end of 2023, the S&P trailing PE was 22.3 and the 12-month forward PE was 19.6. These are at or above the top of the normal range for PE multiples. In sum, this implies that next year’s earnings growth has already been factored into current prices and this will leave the equity market vulnerable during every earnings season in 2024.

Sector changes

A shift in relative performance at the beginning of an advance is often a sign of new sector leadership and we are using December’s relative performance as a predictor of 2024 price action. As a result, we expect good performance from the consumer discretionary, financial, and materials sectors. Weak relative performance in December suggests underperformance in energy, staples, and utilities. December’s good performance in financials is a bullish factor since new bull market cycles require participation from this sector. However, the out-performance in the materials group may be a warning that inflation is not yet under control. Altogether, 2024 may be a year that requires nimbleness and attention to good fundamentals.

Closing prices are as of December 29, 2023

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