“Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you’ve won.” – Charlie Munger
Investors have flipped the calendar to a new year, hoping for a fresh start in the equity market. After a substantial 27% gain for the S&P in ’21, many have been left wondering what comes next, especially after the surprising 19% loss in ’22 and a subsequent 24% gain in ’23. The market has been no less than a rollercoaster ride, with trends shifting multiple times over the last few years.
Sentiment and trends have been unpredictable, with the most recent twist being a 24% gain for the S&P 500 in 2023, defying many investors’ expectations. As we step into the new year, optimism seems to be riding high, fueled by hopes of a quick intervention by the Fed, a resilient economy in an election year, and bullish beliefs in the stock market.
Despite this optimism, it’s essential to exercise caution. The technical picture advises remaining optimistic, but ‘selectivity’ will be the key in Q1, as the market may have a big surprise in store for those who expect a repeat of last year’s trends.
Reviewing Market Action
2024 kicked off with significant repositioning from institutional investors, marking a dramatic departure from the trend seen in 2023. What was hot last year suddenly turned cold, and what was relegated to the backburner in ’23 became the center of attention.
The S&P 500 continued this change of pace with a 0.8% decline on Wednesday, followed by a further sell-off, where the Nasdaq and Russell 2,000 experienced larger drops. Energy, Utilities, and Communication Services were the only sectors to post a gain, signaling a significant reshuffling in market dynamics.
Thursday saw the selling trend persist, with intraday trading erasing earlier gains. The S&P 500, Nasdaq, and Russell 2,000 were all lower, with only Health Care, Financials, and Industrials scraping modest gains. Energy, previously a gainer, reversed its fortune, succumbing to a decline in WTI crude oil, which further exacerbated selling pressure.
Friday brought more volatility, as early gains dissipated, culminating in a last-minute rally that barely offset the week’s losses. This concluded a nine-week winning streak for the S&P 500, the DJIA, and the NASDAQ, as well as back-to-back losing weeks for the Russell 2000. The small-cap breakout has turned unsteady, denting previous cheers for its performance.
Assessing the Economic Landscape
The construction spending report exceeded expectations, posting a 0.4% November gain following substantial upward revisions. However, the US manufacturing sector slipped further into contraction in December, with the ISM index marking the 14th straight month of contraction. The final S&P Global US Services PMI Business Activity Index showed a modest increase, but the rate of growth remains slower than the series average.
The week’s end brought more disappointing news, as the December ISM services index dropped 2.1 points to 50.6, much weaker than anticipated, adding to the concerns about the economy.
Recapping the Latest Economic Data and Global Manufacturing
The latest economic data points to a mixed bag of results, signifying the ongoing struggle for stability. In November, the ISM services index inched up 0.9 points to 52.7, remaining in expansion for the 12th consecutive month. However, these figures are overshadowed by the fact that ISM services remain at 12-year lows since the pandemic’s onset. The employment component further exacerbated the situation with a sharp 7.4-point drop to 43.3, marking the weakest reading since July 2020.
In further employment news, JOLTS revealed a 62,000 decrease in job openings to 8,790,000 in November – the lowest number since March 2021. The total number of available jobs stood at 1.4 for each job seeker. Additionally, quitters decreased by 157,000 to 3,471,000, with the quit rate falling to 2.2%, the lowest rate since late 2020. These declining numbers indicate worker apprehension and reduced willingness to transition jobs.
However, the bleak scenario took a turn in December with nonfarm payrolls, reporting a robust 216,000 job additions, surpassing analysts’ expectations of 170,000. Despite this positive data, wage growth remained below estimates, with average hourly earnings increasing by 4.6% from a year ago, falling short of the estimated 5%. The labor force participation rate also fell to 62.5% from 62.8%, marking the lowest level since January 2023.
The continual downward revisions in the employment figures appear to conceal a volatile employment reality. The apparent discrepancy between initial reports and revised data creates confusion and undermines the accuracy of economic projections.
Ironically, the “private” sector ADP report, often criticized for misrepresenting job data, has fared more accurately than official figures. These erratic revisions render it challenging for economists to gauge the true economic trajectory.
Amidst this economic flux, a reevaluation of the present employment scenario is prudent. The volatile employment data beckons for a patient approach, awaiting subsequent releases for a comprehensive judgment.
Global Manufacturing Scene
Shifting attention to the global manufacturing domain, China’s Federation of Logistics and Purchasing released a PMI reading, falling below 50, indicating a slowdown and trailing November’s data. However, the service gauge, although below estimates, exhibited improvement, crossing the 50-point mark. The conjunction of the “official” PMI data with the S&P Global/Markit data highlights a noticeable weakness in the manufacturing sector.
In contrast, the S&P Global/Markit data, gathered from a broad global economic spectrum, surpassed estimates and rose above 50 in December. Notably, it indicated the fastest pace of new orders since February, despite waning export orders. This conflicting data suggests a subdued demand scenario, with declines in employment (for the fourth consecutive month) and backlog (for the first time in seven months).
Analyzing the Global Manufacturing PMI data for December, the collective reading witnessed a 0.5-point decline. Even discounting a significant 5.2-point plunge for Myanmar due to escalating conflict, results still veered downward. While Germany exhibited improvement, other European manufacturing figures displayed mixed outcomes, including a sequential decline in the Czech Republic’s stats amidst broad weaknesses.
Of the 24 reports, a staggering 19 lay in contraction territory, with only 5 in expansion mode (above 50). The J.P.Morgan Global Manufacturing PMI posted a concerning reading of 49.0 in December, persisting below the neutral 50.0 mark for the sixteenth consecutive month.
On the brighter side, the J.P. Morgan Global Composite PMI Output Index ascended to 51.0 in December, the highest reading since last July. However, despite this improvement, the index still lingered below its long-run average of 53.2, signaling modest growth at best.
The global Services PMIs also boasted positive trends. Most activity gauges surpassed estimates and exhibited growth, particularly in China, which achieved a five-month high, showcasing increased customer counts and enhanced spending. Nevertheless, the 12-month outlook remains weaker than the historical average.
These global manufacturing dynamics illustrate the intricate tapestry defining the current economic landscape, characterized by conflicting signals and uncertain trajectories.
The Reality of the Financial Landscape Amidst Market Uncertainty
The latest data on Eurozone services activity indicates a slight uptick, amid continued global economic uncertainty.
Parsing the FOMC Minutes
This week’s Fed Minutes have stirred the financial pot once again, with differing interpretations adding to the cacophony of analyses.
Chairman Powell’s statement from December 13th was highlighted, emphasizing the need to rein in inflation and the potential for further policy tightening.
The message from the FOMC minutes remains clear – rate cuts are anticipated, but an unusual level of uncertainty clouds any concrete predictions for the future.
Some analysts dismiss the market’s interpretation of these “messages” as mere noise, emphasizing the need to focus on broader trends rather than short-term fluctuations.
The Reality of Net Zero
Revisiting the Green New Deal
The fervor for the Green New Deal is experiencing a sobering shift as challenges to the widespread adoption of green initiatives are coming to the fore.
Recent setbacks in the European Union and the United Kingdom have exposed the limitations of the net-zero agenda, with financial constraints inhibiting broad-based ecological reforms.
The broader European countries are encountering the harsh reality that implementing net-zero policies does not necessarily lead to reduced costs, an influx of green jobs, or a decline in subsidy expenditure.
Moreover, developing economies are recognizing the indispensable role of fossil fuels in propelling their own economic growth, debunking the feasibility of wholehearted embrace of net-zero fantasies.
The recent COP28 Global Climate meeting further underscored the challenges as a draft climate deal excluded the phased-out fossil fuels demand, reflecting a growing resistance to unattainable targets.
Some conscious market participants are beginning to question the wisdom of funneling substantial funds with dubious outcomes in pursuit of addressing climate change, signaling a shift in the prevailing sentiment.
As the financial landscape navigates through these shifting tides, a renewed sense of sobriety and pragmatism is beginning to permeate the conversation surrounding major global economic policies.
Assessing the S&P 500 and Investment Strategies for 2024
Assessing the Current State of the S&P 500 and Investment Strategies for 2024
The world of investing is like a turbulent sea, with waves of uncertainty and periodic squalls of volatility. Investors must constantly monitor the proverbial weather and navigate through the market’s ever-changing tides. As we set sail into the new year, let’s take a closer look at the recent performance of the S&P 500 and analyze potential investment strategies for 2024.
The Daily Chart of the S&P 500 (SPY)
The S&P 500, like a valiant ship, has faced heavy resistance as it approached old highs, resulting in a four-day losing streak. This setback, though significant, has not shattered the market’s underlying upward trend. Indeed, some period of price weakness was expected after the rally off the October lows. The current situation calls for vigilance and a keen understanding of market dynamics.
After coming within a hair’s breadth of its record high in the last week of ’23, the S&P 500 experienced a downswing. While we remain within 2% of the record, the recent trade pattern has raised some legitimate concerns. Yet, the underlying uptrend persists, and we should anticipate periods of retracement and consolidation following robust rallies.
Investment Backdrop
January often brings forth counter-trend scenarios, where the winners of the previous year are sold off, and overlooked stocks from the past year attract attention. This phenomenon can lead to a weaker overall market, with select market segments demonstrating strength. Notably, a subtle shift in institutional strategy has been observed, as a bias towards “value” stocks emerges, accompanied by profit-taking in the tech sector and a flow of capital into neglected dividend-paying stocks. These developments underscore the nuanced and ever-evolving nature of investment dynamics in the early stages of the year.
The absence of a traditional ‘Santa Claus Rally’ has prompted discussions within the investment community. While this adage and its self-fulfilling prophecy may pique the interest of market enthusiasts, relying on such macro phenomena as the sole basis for investment decisions may lead one down a whimsical path. After all, placing steadfast faith in the Santa Claus Rally is akin to putting all the eggs in one whimsical, seasonal basket, a risky endeavor indeed!
If Santa Claus should fail to call, the BEARS may come to Broad and Wall.
While the absence of a Santa Claus Rally does raise eyebrows, hinging our investment strategies solely on such seasonal trends can be likened to placing blind trust in folklore rather than sound market analysis. After all, in the realm of investing, sturdy research carries more weight than rhythmic rhymes.
Final Thoughts
Reflecting upon the past year, one can’t help but acknowledge the complexities and challenges encountered. The S&P 500 made significant strides in January, June-July, and then November-December, punctuated by brief but impactful periods of gains. Despite these intermittent upswings, October served as a sobering reminder of the potential for seismic shifts in the primary trend. The year was marked by significant price fluctuations and deceptive breaks of pivotal support and resistance levels, creating an environment of heightened uncertainty and volatility.
As I seek to distill the lessons learned from last year, one resounding takeaway emerges – the critical importance of closely monitoring price action. While the chaotic macroeconomic milieu can influence investor sentiment, it is imperative to anchor one’s decisions in the tangible movements of the market. While experience can provide a shield against emotional turbulence, maintaining a vigilant eye on short-term price fluctuations and remaining open to strategic adjustments is paramount. These qualities were instrumental in identifying the shift in market direction and seizing the opportunities that unfolded in Q4, elevating the year for both myself and my fellow investors.
The robust dialogue within the investment community has contributed to an enriching and dynamic exchange of ideas. These discussions and insights form the bedrock of the Seeking Alpha platform, facilitating the dissemination of informed viewpoints and enhancing the investment experience for all participants. While the articles presented here are offered free of charge, they represent a collective effort to enrich collective understanding and awareness of market dynamics. Nonetheless, for a more in-depth analysis and personalized recommendations, I encourage readers to explore the dedicated service offerings on the platform.
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As we chart our course into the new year, I extend my best wishes to all market participants. May the prevailing winds be favorable, and may our collective endeavors yield fruitful and rewarding outcomes for all involved in this captivating journey of wealth creation and financial stewardship.
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