How nice was Thanksgiving! Boy, I love that holiday. And with the markets opening for a very limited amount of time both Wednesday and Friday it almost felt like a mini vacation. I must also bring up the fact that most of the major market indexes closed at all-time highs to end the month and that through November the S&P 500 is up in excess of 20% for the year, another great kiss to US investors. The unfortunate thing about sitting in my chair is that one cannot rest on their laurels and the infamous question begins to come up, "what are you gunna do for me now?" To answer this question, I take a moment and look at statistics to determine if the stage is set for a good December or not.
I like to begin with the currency market as this is really the biggest market in the world. As can be seen below, the US Dollar continues its strength which began post the November 5th election of President elect Trump. This tells me that money is flowing in from everywhere and that it is causing a large demand for US Dollar denominated assets- both fixed income and stocks. The Investment Policy Institute (ICI) reported a near $44 Billion weekly inflow into domestic equity mutual funds plus ETFs for the week ending November 15th. This marked the largest weekly inflow since March 2021. See the blue spike below back in 2021 and the spike the second week of November.
The next logical question would be, "Where did the funds come from to facilitate this infusion of capital into US markets?" Ari Wald, Chief Technician, Oppenheimer & Co. provided a great graphic of this. It shows the price movement of the all-equity world market, and below this a relative strength chart of this all-world index relative to the S&P 500. It is clear that although the all-world market has been advancing, it is performing quite poorly relative to the US index.
This week is the start of the final weeks of 2024, and we have seen 4 reasons why equities should still rally into year-end towards S&P 500 6,300. There is a caveat that in the near-term, we could be entering a “zone of hesitation”, but this is where we would urge investors to buy the dip.
Four reasons why he believes that market rallies to 6.300 by year end:
1. Seasonally strong December with an 83% probability of a positive return. On top of this general point, Decembers tend to be even stronger when the markets have been up over 20% through November. Returns in December have been more than double the all-period average when the index starts the month above its 200-day average, as is the case this year.
2. Interest rates have declined to pre-election levels. Declining interest rates tend to be positive and act as a discounting mechanism for positive equity strength. When yields fall it gives P/E’s a chance to rise and hence the stock market overall tends to rise. Yields have come down from almost 5% to 4.16% in just a couple of weeks while at the same time the market has been quiet. Also, the draw of placing money in bonds diminishes as rates decline, so the sugar high of 5% short-term yields has begun to wear off.
3. Sentiment is cautious- following the election bump the intensity of the rally has really fizzled and the internal sentiment of bulls to bears shows that the AAII studies say over the last three weeks that they have gone into bearish camp. This is exactly the opposite of what one would expect at market high points. This is what we are seeing at the current reading below. Market tops seldom if ever begin with investment sentiment declining while prices are increasing. I have highlighted how high points tend to represent high points in the market, but low points tend to exhibit opportunity for further advances.
4. "Fed Put and Trump Put." These are two very strong underlying components, and one should really see a high probability of market advances when both are in place. What is meant by this is the Fed is focused on being dovish and on a course to continue to lower interest rates. Lower interest rates tend to provide the fuel for continued economic expansion, and as all will know, Trump tends to be pro-business, and this is being demonstrated by his desire to do lots of drilling for oil and natural gas. Strong growth. Low interest rates.
We still have to get through the Jobs report this Friday, CPI and PPI next week, and the last FOMC meeting on 12/18, then market strategists should have a clear runway to year-end high point. Once we have gotten through these important unknowns, a healthy respite could be in place for the final push into year end. According to Thomas Lee of FundStrat, this could take the S&P up to 6,300. He annotated a chart to show where we were as of last Friday and how he expects this year to finish with indications of announcements that he feels are important.
In closing, although five widely followed indexes closed at record highs in November, the tech heavy NASDAQ was not one of them. To many this could pose a problem as it has been the leader for the entire year, but I, on the other hand, found the powerful rally in stocks other than tech is significant and shows a broadening of the market. This week started off a bit mixed, but this could possibly be trepidation in front of the Jobs report, and next week's CPI and PPI reports as Thomas Lee illustrated above with his squiggly line. We will keep a close eye on these reports as well as the Dollar, interest rates and of course the winners and losers in the equity markets.
- Ken South, Newport Beach Financial Advisor
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