February 12, 2024

“The winner of the Superbowl will predict how the stock market will perform in the coming year”

Leonard Koppett NY Times Sportswriter 1978

Up until 1978 if the NFC won, a good year for the market, the AFC wins a poor market year. Well up until 1978 it was 100% correct and up to and including 2023 it has been correct 72% of the time. But take heart Chiefs fans, now that the Chiefs repeated, the last 20 years it was only 30% of the time. This and other nonscientific prognosticators, (like the groundhog, this year no shadow! Early spring!) it’s fun to talk about but not to bet money or market direction on.

Last week the S&P 500 broke the 5000 level and held it on Friday, for the week the S&P 500 finished up 1.4%, the Dow Jones Industrial Average added .32%, and the Nasdaq continued its winning ways leading up 2.41%. Internationally the FTSE 100 lost .56% and the MCSI-EAFE gained slightly .04%. The 2-year Treasury closed with a yield of 4.486% and the 10-Year yield finished at 4.17%. However, the tightening yield curve indicates a reduction in short term rates in the coming months. (any wonder why Banks are offering great 5 months CD rates?)

To say last week was historic would be an understatement, the Supreme Court may do something that rarely happens, all agree on an issue. It looks like both conservative and liberal justices understand the implications of the Colorado Ballot case. And after numerous gaffes by the President on Thursday his own Justice Department released a report indicting, Serious crimes committed and what any casual observer would conclude, the President’s mental acuity is in serious decline, this puts the Democratic party in a quandary, if he is too senile to be charged how can he lead this country? But if his memory is fine, then he should be charged with the crimes outlined in the special council report. Politics aside, the interesting thing is the markets did not seem to care and went on with business as usual. Amazing, considering the slightest bit of bad news that effects the nation, the world and all American citizens normally invoke an extreme reaction followed by equal counter reaction. I was talking with a Market Watch reporter on Friday who asked we if I though this is a very strange market, we both went over events and left scratching our heads why. He was intrigued by last week’s comment about “Riding the Bull” cautiously. The conclusion was its all we really can do, give the behavior of the markets in the past few years.

What’s the good or bad news driving the market (depending on your perspective)? Jobless claims fell by 9,000 to 218,000 in the first week of February. The Fed had a $25 billion auction of 30-year bonds on Thursday. There is a good problem of China’s CPI saw the biggest drop in nearly 15 years. As Market watch observes, “The resilience of the U.S. economy has been a surprise to Wall Street, and the Federal Reserve, for well over a year now, and the latest GDP Now estimate from the Atlanta Fed suggests the first quarter could once again handily beat Wall Street’s estimates.”

The leading theory on why the economy has been so strong, even amid a surge in inflation and then a steep rise in interest rates, is the power of fiscal spending. One paper last year suggested that unless the government pays down the debt — no risk of that with this Congress — excess savings will continue to “trickle up,” for a period of five years.

The U.S. trade deficit rose slightly in December, but the annual gap still fell to the lowest level in three years and added to economy’s strong performance in 2023. Imports fell 1.3% in December to $320.4 billion, the government said last Wednesday.

As I postulated last week, Wall Street looking forward to a probable change in policy could bode well for the US Market. With the events mentioned prior, the likelihood of the Republicans having a big November will definitely affect policy going forward, I will caution all, that nine months in politics in an eon!

Concerns?  Investors spent 2023 wondering if the stock-market rally largely driven by a handful of megacap tech stocks and will there be a reversal or a pause? Those worries remain in place as the S&P 500 has returned to record territory in the new year.

“With the usual set of select megacap stocks pacing early 2024 performance, concentration-risk worries have been getting a lot of attention again, and particularly what it may mean for stock-market performance should these trends reverse in the coming months,” said Brian Belski, chief investment strategist at BMO Capital Markets, in a note. It is a topic that comes up frequently in client conversations and appears to be what has investors worried most, he said. The good news, according to Belski, is that investors may be overestimating the risk a megacap reversal would pose to the bull market. Instead, BMO’s analysis shows that the S&P 500 SPX has performed just fine following peaks in relative performance of the 10 largest stocks. Belski highlighted the S&P 500 has averaged a 14.3% return in the year following prior relative performance peaks since 1990.

Do we buy it? Partially, why? As MarketWatch reports, “fears of a recession in the first half of 2024 have melted away like the snow in most of the country this winter, according to a new forecast of top economists released Friday. Economists now see only a 17.3% chance of negative growth of real gross domestic product in the first quarter. That’s down sharply from a 40.9% chance in the previous survey. In normal times, the risk of a recession is around 15%, economists say. In the April-June quarter, economists now see a 23.9% chance of a negative quarter of GDP growth, down from 40.2%. For the last two quarters of the year, the odds are now about 25%, down from above 24% in the prior survey. The Philadelphia Federal Reserve’s Survey of Professional Forecasters, the oldest quarterly survey of macroeconomic forecasts, began in 1968. It is based on 34 economists. This quarter’s survey paints a picture of a soft landing. The forecasters predict the economy will expand at a 2.1% annual rate in the January-March quarter, up from their expectation of 0.8% in the last survey.” But the leading economic indicators still have not turned positive.

Earnings did deliver, as earnings season is now half over. And while the Big Tech fireworks are in the rearview mirror, of the 255 S&P 500 companies reporting earnings thus far, 81% have beaten analyst estimates, according to data from LSEG I/B/E/S. (analyst rating service offerings) That’s far higher than the typical 67% beat rate. The S&P 500 is now on track to grow earnings 8.1% in the fourth quarter, LSEG notes. Take out energy stocks, and the growth jumps to 11.5%. With the good earnings reports so far, the Federal Reserve officials continue to sound confident about inflationary trends, while cautioning that it may be too soon for rate cuts. In a speech at the Brookings Institution today, Fed Governor Adriana Kugler said: “I am pleased with the disinflationary progress thus far and expect it to continue. I must emphasize, however, that the Committee’s job is not done yet.”

However, we will continue to collect dividends, enjoy relatively high interest rates as we go into the election. To my obsessed Chief fan in-laws, and my Taylor Swift adoring granddaughter, congratulations.

Mike