Happy New Year to All! As we turn the chapter on 2023, we are faced with the constant dilemma of "what have you done for me lately?" To rest on the laurels of 2023 does little help anyone on their financial journey to create the best life for themselves possible. Last year was a great year to be sure. The "Magnificent Eight" had a continuous run and ended up being the small group of huge companies that pulled the markets higher for the year. Besides the late October of year-end advance being truly impressive and leaving many non-believers flat footed, we noticed a widening in the number of companies joining the rally party and this is the best vote of confidence for future, continued market advancement that could have been hoped for. So what is next? What "should" 2024 provide? These are the questions that I will attempt to tackle this week and into January as January tends to set the stage for the remainder of the year if historical precedent and statistics are to be used as possible future road markers in the markets' travel forward.
After a challenging 2023, we expect 2024 to be a mostly easier market to navigate, with positive tailwinds building. Some of these tailwinds I list below, but I want to stress that caution is still, as always, warranted as we are coming off a very aggressive upside move from the last weeks of 2023 and a digestion would not be unexpected prior to a continued-up move.
Foremost, consider this positive combination of fundamental tailwinds in 2024:
– Falling inflation (like a rock). If inflation was the root of the Fed raising rates, and the cause of the market's decline in 2022, then the opposite should hold true now- given earnings growth remains positive.
– Dovish Fed managing a business cycle, not “hammering inflation.” It must be remembered that the inflation fight was one with excess money supply, not an overly robust business environment. This was very different.
– Falling interest rates benefit consumers, corporations, and stock market valuations.
– Positive investor inflows = expanding market breadth. Smaller companies and lagging sectors for the majority of the 2023 advance have begun to move positively. This is a good thing!
Doesn’t this feel like a formula for rising markets?
In our view, the answer is yes. There are many investors who were skeptical in 2023 and we think they will be forced to change their opinions going into 2024 as well. Plus, if Europe/China recover, this adds to the broadening upside. Europe depends on the US for our consumption. China depends on the US for its labor and manufacturing needs. Should our economy continue to progress at a measured pace, this could prove to be very helpful for the rest of the world.
Keep in mind, we expect stocks to do better in 2H:
– one factor is “reaction near highs” as stocks making new highs then consolidate. As we have noticed on the first trading day of this week, it is not uncommon for companies that have advanced a lot to experience some profit taking after the end of the year for tax reasons.
– we expect new highs in Jan 2024, and sometime in 1H a consolidation. If election year precedent is any indicator of this year, you can see in the chart below that the first couple of months of 2024 could be a slight shuffling of the deck and not a continuation of a straight up advance.
– “Seasonals in election year” mean stocks tend to peak in Feb and consolidate into April. Again, take a second look at the chart above to give some level of expectation for the beginning of 2024.
– Investors might get anxious waiting for Fed cuts in 1H and this could lead to turmoil. I bring this up as a potential "reason" for the first quarter digestion. The media tends to want to hang their hat on reasons why. Should there not be any other major flair ups in the international scene, or some other domestic black swan, the interest rate boogie man could be the one that the media could choose to hand their hat on.
But this does not mean we are on the sidelines in early 2024. The opposite is the case.
– A strong December 2023 implies solid gains into Jan and Feb 2024- before the earnings reports and forecasts are released, creating a trough in corporate news flow.
– When Dec >4% (ala 2023), Jan + Feb gains avg +2.6%/73% win-ratio.
– When Dec <0% (not the case), Jan + Feb gains avg +0.9%/50% win-ratio.
So to end this list of bullet points, a strong December tends to bode well for further gains. A decent base case is a 3% rally into the end of February or mid-February. But, if the first week of January proves to be a negative one, this progression could be challenged. If this proves to be true, then I will of course take the time to explain a change in expectations, based on continuously evolving facts. The facts of this first week of January measure is below:
Keep in mind the “year plays out” in the first 5 days.
– this is the “rule of 1st 5 days.”
– when prior year >15% AND Jan positive 1st 5 days = day 6 to YE +11%/78% win-ratio.
– when prior year >15% AND Jan negative 1st 5 days = day 6 to YE -2%/50% win-ratio.
– So Jan 8th close positive YTD could be key!
Why does the first 5 days of January tend to matter so much?
We think this reflects market dynamics early. This was the case in 2022 and 2023. And as such, if we get a negative first 5 days, this could negate our call if Jan “first 5 days” is weak. There is one other thing that I am paying particular attention to. This might take you a bit "into the weeds," but I think it is relevant to share with you all the same:
The expanding breadth statistics have not yet begun to turn down meaningfully in a way that merits attention. I say turn down meaningfully, but what I really mean is that the last week of the year the market didn't get negative, it just sort of "took the week off." It didn't get particularly tired, it just bounced along sideways without anything major happening in either direction. One gauge I often employ for breadth is to study the 10-period Exponential Moving Average (EMA) of Advancing issues divided by Advancing + Declining issues. As can be seen below, during times of market weakness, this gauge tends to drop ahead of time, and begins to turn lower, diverging from its peaks. Similarly, ahead of market advances, this gauge normally will begin to show positive divergence, and begin to trade relatively better from a low level. At present, this should be something to watch carefully in the weeks to come, as it will likely begin to turn down, most likely ahead of the S&P 500 beginning an eventual consolidation. At present, this has shown steady gains from October, and while some brief sideways consolidation has happened over the last month, it has not begun to turn down in a meaningful way. I’ll be following this in 2024 and will give it greater attention when it begins to turn back lower.
It is clear that we have sort of entered a "wait and see" sort of period. A period where there is a calendar line to follow, an immediate past to observe, and many historical / statistical data points to respect. I don't pretend to have any allegiance to any one of these, I only hope to be on the right side for longer and the wrong side for shorter! All of us at Tower 68 wish you all the best for 2024 and again, please always feel free to reach out should any individual questions arise!
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