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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