View On Wall Street – A Good News Bad News Scene (NYSEARCA:SPY)

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.” – Charlie Munger

In conversations about the economy over the last several months, we’ve discussed how the current macro backdrop has been among the most difficult to make sense of that I can ever recollect. Following the surge in inflation to a 40-year high, the most aggressive Fed tightening cycle since the 1980s, and multidecade lows in business and consumer confidence, calls for a US recession have been prevalent all year. When it comes to where we are in the business cycle, you can point to things admire the yield curve, ISM Manufacturing, or the index of Leading Indicators and confidently say that the economy is either already in or on the cusp of a recession. Other economic data hasn’t been nearly as definitive with other factors such as a resilient consumer and a strong labor market offsetting the negatives.

The latest Retail Sales report provided another example. While the headline reading declined 0.1%, it still managed to top expectations, and September’s report was also revised higher. October’s better-than-expected reading was the fourth straight of better-than-expected reading tying it for the second longest streak since at least 2001. So the consumer who is supposed to be strapped and ready to crumble is still going.

Amidst the recessionary signals, another head-scratcher was Q3 GDP rising 4.9%, its fastest pace since 4Q21. In addition, since COVID, the US economy has been a standout relative to its Developed Market counterparts. Specifically, since the end of 2019, US GDP growth has cumulatively increased by 7.4%, far outpacing the next strongest G7 country (Canada: +3.5%). Q4 was originally forecast to be negative and the latest Atlanta GDPNow forecast is calling for a 2.1% print.

There are still calls for a recession in ’24, but those that are in that camp note the solid consumer profile (record net worth, low debt serving costs as a % of disposable income) and corporate fundamentals should ensure that it is one of the shortest and mildest recessions going back to 1945. The US labor market continues to defy gravity and this is another reason why the economy has avoided a recession up until this point. With the US economy coming back from the COVID event and people getting back to their jobs, more people working has helped propel consumer spending.

It’s been very slow, but now we can finally say jobs have been added in the last 2+ years. 161 million Americans are now employed, above the pre-COVID high of 158.5 million for a gain of 2.5 million in the last 3 years. As a comparison, the US created 2.7 million new jobs in 2018 alone. That was more than the previous two years, which saw 2.2 million jobs created in 2017 and 2.3 million in 2016. So while the headline reads “job growth”, the reality is that people have gone back to work. The actual enhance in jobs has been anemic, well below average, and one of the reasons economists have doubted this economy. We need to go no encourage than the official unemployment rate to confirm the reality of ‘no growth’ in jobs. The US Unemployment rate in 2019 was 3.7%. Last month the BLS reported that the unemployment rate was 3.9%.

In the future, the Bureau of Labor Statistics projects that the U.S. economy will see an enhance in total employment to 169.1 million, which would grow by 0.3% annually. That is well below what was seen in 2019 and that year was characterized as one of the worst for employment gains. My how the entire employment situation has changed in the last 3 years.

Given this recent data and forecasts for more of the same, it’s easy to see how analysts, economists, and many investors have been fooled by the resilience of the US economy. The primary reason is simple. Everyone who fell into that camp (myself included) did not factor in the long-lasting effect of the monumental stimulus that was doled out. We now see how this is still being worked off. However, a review of the present situation reveals a more reality-based economic forecast.

• The most aggressive rate hiking policy in US history
• A 40-year high in inflation that is still above norms
• Unprecedented monetary stimulus

It’s highly doubtful that after years of zero interest rates, with no inflation, the economy will withstand those shocks without ANY effects. Add in the forecast for more anemic job growth and a reality-based view takes on a negative slant.

Those views are up against present sentiment in the market today. A consensus view is that with greater certainty the Fed is done hiking rates and will eventually cut next year. Therefore investors no longer have to fear stronger-than-expected data. The economy is good and when rates are cut, it will get even stronger.

Positive economic data may be easier said than done, though, as we’ve seen a sharp enhance in the pace of weaker-than-expected reports. The Conference Board’s leading Economic index has fallen for 19 straight months. While that’s not a problem when everyone is worried about rate hikes, it’s not what you want to see when the Fed pendulum begins to shift. Investors, therefore, need to stay focused on the data. I also believe they need to be laser-focused on the direction of interest rates, specifically the highly discussed 10-year Treasury.

GOOD news, BAD news

The good news on interest rates; the short-term trend is down, and the Fed will be cutting rates next year. The BAD news, the longer-term PRIMARY trend is up. The same folks that forecast rate cuts are once again missing a key point—long rates, which execute stock valuations, will probably stay higher for longer.

More GOOD news is that the third quarter earnings season that just came to an unofficial end with Walmart’s (WMT) report, showed that the totality of reports didn’t suggest a rapidly deteriorating macro environment. The BAD news – consensus ’24 S&P earnings is around $237 and using an aggressive 20 PE yields an S&P of around 4700. For what it’s worth that is what Goldman Sachs is forecasting for the S&P 500 next year.

The GOOD news is that the market can overreach. The BAD news, the upside appears limited and we could see a recession next year. If so, that won’t boost earnings or PE ratios.

For those that use historical trends and technical analysis, there is more GOOD news. On a technical basis, things have shown a steady improvement with downtrends broken and a broadening out of the rally. Then there are the self-fulfilling historical patterns that some traders thrive on. It’s still amazing to see how closely this year’s pattern for the S&P 500 has tracked its typical annual pattern. Take a look at the chart below comparing this year to the average yearly path for the S&P since WWII.

The BULLS will tell us that this pattern has a great chance of continuing to track the historical path, giving investors a December to recollect.

The BAD news, is the rally had gone parabolic, as investors have begun the “chase” that fulfills the forecast of a year-end rally. Parabolic moves tend to end badly and if this one does it leaves a situation where plenty of work is still required on the longer-term charts. They continue to imply that despite this rally what we have is a 2-year TOPPING pattern in place for the S&P. It’s been about 2 years since the NASDAQ made a new high and the Russell 200 is at the same level it was three years ago. In essence, there is little evidence that the longer-term PRIMARY trend is bullish

Finally, the gem that changed the sentiment to ‘risk-on’ was the recent GOOD news week of inflation reports, with more improvement thereby encourage cementing expectations for the end of the rate hike cycle. The BAD news Inflation could still be a long way from the 2% target.

The Tug of War

That leaves both the BULLS and BEARS contemplating their “cases” and also wondering which way the data will break next. For the moment the BULLS have sentiment on their side. One of the most important things for ALL market participants to recognize is whether we are in a trader’s market or an investor’s market. “Trader’s” markets are characterized by volatility, range-bound indexes, and reliance on hedging and options, with narratives based more on hope than fact. There is rarely a dominant PRIMARY trend from which an investor can have true conviction.

On the other hand, an “Investor’s” market is grounded in low expectations and valuations, with durable catalysts and visibility for upside surprises. Examples of that backdrop were the BULL surge from 2009 to 2019 and 2020 to 2022.

Despite all rhetoric about a BULL market backdrop, I’ve made it a point to highlight how by any measure, US stocks are essentially flat. On a trailing two-year basis amid a highly volatile S&P 500 Index that has traded in a 3,500-4,800 range, I believe that is a perfect example of a “traders” market. encourage confirmation comes for the longer-term charts. Both the major indices and every sector except ENERGY have flip-flopped above and below their longer-term trend lines over this year and last. Leaving investors guessing as to what comes next.

And getting back to the flat performance we’ve seen over the last two years, it’s remarkable that with all the talk of how well the mega-caps are doing versus the rest of the market, the stats tell the true story of the last two years. Five basis points separate the mega-cap Nasdaq 100 (QQQ) and the S&P 500 Equal-weight (RSP) on a two-year total return basis. QQQ is up a whopping 2 basis points over the last two years while RSP is down 3.

The S&P 500 Equalweight index, which gives each stock in the index an equal 0.2% weighting, is currently trading at the same level it was at back in April 2021. Investors used to getting the standard 8-10% per year in the US stock market have gotten far less than that over the last two and a half years.

This performance confirms what I have reported since early 2021. There are no growth initiatives in place to uphold a major BULL market run. I’ve been warning and providing examples that the exact opposite exists

Stay tuned. It is going to be an interesting December and a more interesting 2024. We still have to deal with many unanswered questions on both the fundamental and technical scenes.

The Week On Wall Street

The DJIA, S&P, And NASDAQ Composite entered the week on five-week winning streaks. Monday’s session was a much-needed selloff that helped alleviate some of the excesses that have been built up during the rally off the lows. The trading action was different from what investors experienced during the rally. This was a reversion to the mean trade where money rotated out of the HOT sectors as they got hit the hardest. That money found a home in Select Healthcare, Consumer Discretionary, and Biotechs, along with some Industrials that now look much better.

Another sign of the reversion trade – The major indices were all in the red with the NASDAQ Composite, the HOTTEST index lately lost 1%. Note that the laggard index (Russell 2000) was in the green on Monday rallying 0.69%. This broadening out of the market is an excellent and healthy sign. Silver and Gold were HOT and they sold off on Monday as well.

Watching the indices on Tuesday and Wednesday was admire watching paint dry. Trading opened on Thursday with the S&P showing a gain of TWO points in the last twelve trading days. Thursday was the 13th day in a row where the S&P remained in a range between 4525 and 4600.

Perhaps it was a Goldilocks Job report or maybe the BULLS just decided to take charge. Whatever the case, all of the major indices broke above their respective trading ranges and the year-end melt-up continued. The weekly winning streaks for the DJIA, S&P 500, and the NASDAQ Composite were extended to six. The Russell 2000 pushed its weekly win streak to four.

The Economy

Auto Sales: Ward’s Auto reported a 4% Month-over-month drop in sales volumes for US light vehicles. The 15.32 million sales pace would be the lowest monthly compared to official BEA sales stats since December of last year.

Auto production got hit hard by the UAW strike, so some of this will probably get clawed back, but keep in mind auto sales peaked back in June, long before strike-driven supply changes.

Although they are coming off depressed levels, Hybrid sales were up 75% in the period.

Employment

JOLTS showed job openings dropped 617k to 8,733k in October after falling 147k to 9,350k in September. This is the lowest since March 2021. There are 1.3 jobs available for each job seeker. The rate of openings slowed to 5.3% from 5.6%.

Non-farm payrolls rose 199k in November, better than forecast. This follows gains of 150k in October and 262k in September. The unemployment rate fell back to 3.7% from 3.9%. That’s the same rate seen in 2019. Price action in the stock market has followed the Employment scene – “FLAT”

Average hourly earnings increased 0.4% from 0.2%. That left the y/y rate steady at 4.0%, which tied for the slowest since June 2021. The labor force participation rate edged up to 62.8% from 62.7% and tied for the highest since February 2020.

Consumer

Michigan Sentiment surprised to the upside rolling in at 69.4 a big jump from the 61.3 reading in November. While this is welcome news, before anyone gets too giddy the chart below indicates how far sentiment is from the 2019 levels.

The next report or two will give us a better feel if consumer sentiment has truly turned.

Services

The final S&P Global US Services PMI Business Activity Index posted 50.8 in November, matching the earlier released ‘flash’ calculate and little changed from October’s reading of 50.6.

The latest data signaled the fastest expansion in output since July, albeit only marginal and slower than the long-run series average. Greater business activity was often linked to stronger client demand and a renewed upturn in new orders.

ISM-NMI services bounced to 52.7 from a 7-month low of 51.8 leaving the measure encourage above the 50-mark but still below the 6-month high of 54.5 in August.

This ISM-NMI bounce joins a flat ISM figure, drops for the Dallas Fed and Richmond Fed, but gains for the Chicago PMI, Empire State, and Philly Fed to leave a mix that is consistent with a modest up-tilt in the full set of headline and component sentiment readings since a March trough.

The Global Scene

Global data on purchasing manager index activity for the services industry was released today. Across the 12 released services PMIs overnight, the average rose 0.2 points. UK Services shifted into expansion from contraction, while China’s index rose much more than expected from 50.4 to 51.5 (versus 50.5 estimated).

We also see India’s extreme run starting to pull back.

We often hear that the stock market isn’t the economy but instead, a leading indicator of where investors think the economy will go.

We’ve seen the poor Eurozone Manufacturing PMI data for the better part of 2 years now. Last night we got two very weak data points from Germany. The first was S&P Global/Markit’s construction PMI for November which showed rapidly deteriorating conditions; the headline index has only been weaker on a few previous occasions. Collapsing order volumes were driven by “the influence of elevated interest rates, high construction costs, and weakness in the broader economy.”

Other data received overnight also reflected poor domestic economic activity in Germany as consumer spending has been muted for months.

Germany does look admire the “sick man of Europe” which was the case in the 1990s and early 2000s as well. The broader Eurozone economy remains weak. Inflation has slowed, and as a result, consumer spending is barely rising, up less than 1% annualized each of the last four months as proxied by retail sales.

However, we should also note that the German Stock market – the DAX is at an all-time high.

This example brings about the importance of including the technical backdrop for the equity market in any market analysis. Listening to the headlines and dismissing the price action is a mistake.

Food for Thought

The Ev Boondoggle

It doesn’t end, does it? It was just a matter of time before the automakers reached their breaking point. After going along with the pie-in-the-sky EV rollout, Manufacturing EVs that lose money on each vehicle, only to find that they aren’t selling, companies are now balking at EV mandates that were pipe dreams. Approximately 4,000 car dealerships sent an open letter to the White House telling it admire it is and adding a dose of reality to what is occurring in the real world. The administration’s push for EVs to “supposedly” reduce greenhouse gas emissions has been flawed since it began. There is no reason to cover all of the reasons why this has been a failed experiment. In essence, there is little reason to debate. The final arbiter is the consumer. They have recognized the issues and spoken by their actions, saying “no mas“.

Ironically the consumer may have saved hundreds of millions more from being tossed down this “black hole”. Until all of the associated EV issues are resolved and consumers change their mindset, the EV transition as rolled out is what many forecasted – DOA. That is the SAD part, the warnings were present from day one. Unfortunately, the passionate groups that rely on emotion to make their decisions continued on their path.

A debt-ridden economy can ill afford to be making mistakes. Especially when the mistakes come with a huge price tag while producing no results. The MACRO scene is now being impacted by more deficits and zero growth from this initiative. An all-around lose/lose situation.

Seasonality

Whether you look at all years or just the last ten, the second half of December tends to be better than the first half.

Bespoke Investment Group;

For all years since 1983, the S&P 500 has been unchanged on an average basis as late as mid-month before closing out the year on a positive note. Even in the last ten years where average returns have been negative, the second half of the month has averaged gains.

One aspect of December’s performance that bodes well for this year is the fact that average performance improves based on how the market performed in the first eleven months of the year. Whether it was YTD gains of more or less than 15%, the S&P 500 tended to average gains of over 1.5% during December with most of the strength coming in the second half of the month.

Lastly, this December will be just the fifth time since 1983 that the S&P 500 was up 15%+ YTD and more than 5% in November. The prior four years were 1985, 1996, 1998, and 2009. Of those four years, the S&P 500 was positive in December three out of four times. In all four cases, though, the second half of the month tended to be stronger than the first half with the S&P 500 closing out the month not far from its highs of the month.

Since we have seen an unabated rally since early November, this seasonality pattern would seem to fit perfectly. A period of weakness to consolidate the gains, then a potential resurgence into year-end. That is a perfect setup for “DIP” buying in favored stocks.

The Daily chart of the S&P 500 (SPY)

The sideways trading range was broken to the upside on Friday, as the year-end melt-up continues.

It is all systems “GO” until we see a break in the short-term uphold lines. The S&P can dip to intermediate-term uphold about 200 points lower and that would not upset the uptrend that is in place. A pullback admire that would not be a pleasant encounter for the BULLS but they have plenty of uphold to keep their case alive.

Investment Backdrop

November is in the books and the stock market turned a sea of RED in October to a sea of GREEN in November. Last month I noted how bad things were when only Utilities posted a gain, compared to today’s positive report where only Energy posted a loss.

The indices were all positive and the gains were spread equally between them ranging from 8%-10%, with the NASDAQ Composite being the ultimate winner. encourage evidence that breadth had improved was the fact that the lagging S&P equal-weighted index (RSP) kept pace with the S&P 500, as each rose 9+%.

Interest rates fell and spurred Semiconductors and Biotech to gains of 16% and 14% respectively. Financials were also a surprise posting their first positive month since July, rallying 10.8% and wiping out the last 3 months of losses.

Commodities closed the month in the RED, as Natural Gas and Crude Oil dragged down that ETF. While Metals and Mining rebounded posting a 10+% gain. Silver was the leading metal in November rebounding 10%.

For the year all major indices are positive with the NASDAQ Composite out in front with a gain of 36%. The NASADAQ 100 which includes the mega-cap Tech stocks extended its YTD gain to 46%. That is a tick below the Semiconductors which now boast a 47% gain on the year.

Results courtesy of the Savvy Investor Marketplace Service

Energy, Health, Biotech, and Commodities will have to rally hard in December to wipe out their minor losses in ’23. Utilities are down 10% this year and are the leading sector on the downside.

Gold, Silver, and Uranium have done well with the latter now boasting a gaudy 55% return in ’23.

December has started with a ‘flat” trend as the indices are caught in narrow trading ranges while the November gains are digested. It will be interesting to see if the Reversion to the mean trade where the HOT “crowded trades” in the stocks and sectors are sold and money rotated into the unloved areas of the market. It’s a theme that is worthy of watching. If it can show some staying power it stands a good chance of continuing in ’24.

That does not mean that the large-cap mega-cap stocks are DEAD. They will still get some attention as the darlings of ’24 as the year comes to a close. The issue is whether they can continue at the frenetic pace they displayed this year as we turn the page into ’24. It’s very possible a new year will present a different landscape similar to the change we saw going from 2022 to this year.

Final Thoughts

The rally off the October lows is all about sentiment over interest rates. The catalyst was lower Treasury yields as economic data globally continued the trend of “deceleration”. PCE prices, ISM manufacturing, October consumer spending, holiday spending (according to NRF), China PMIs, and Europe inflation all show signs of deceleration, and outright weakness in recent reports. I’ve said that in the short term, “price action” trumps fundamentals. When the market is in good news is good news and bad news is good news backdrop some call it “Silly Season” but there is no reason to fight that trend.

Whatever you want to call it – “Reversion to the Mean” ” a “Catch-up” trade, or the leaders being sold to advance money into the laggards, it is a trend that warrants following. As shown last week, I have been fortunate to uncover some of the small-cap gems that do have good fundamentals and more importantly for the first time in a while, their technical patterns are flashing BUY signals.

That doesn’t mean investors should BUY anything. My strategy has changed all year. Selectivity is the name of this game. If no follow-through or a reversal is coming an investor wants to be left holding fundamentally sound companies with positive outlooks.

The opening quote from Charlie Munger is one of my favorites. I’ll add, that it is a great achievement to become a Ph.D., but if it’s not accompanied by “common sense”, it’s rendered worthless.

THANKS to all the readers who contribute to this forum to make these articles a better encounter for everyone.

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Best of Luck to Everyone!