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To say that this has been an exceedingly strange year would be a gross understatement. Throughout 2023 I have highlighted unusual market developments. It started with the strongest first seven months in 26 years. To be followed by the steepest rise in interest rates in 16 years. The breadth of the market has been equally strange in that the market was seemingly dragged higher by the "Magnificent Seven" huge technology companies in May (again another record for how narrow the number of companies it took to pull the market higher). Then the markets began their digestion period. As I stated last week, the decline has been really quite orderly, having moved down in three waves. I have taken the time to give a very clear illustration below:
This three wave down move is fairly textbook in how a decline “should” go. So, I took some time to really examine the action out of the S&P 500 to see just exactly how common the overall action out of the markets this year has been. The market basically went up for 7 months, and then down for 3 months. So, I did a query to see how many times this has happened. It turns out this is equally rare as it is only the 4th time on record that this type of market action has occurred. The previous three were: 1940-41, 1974-75, and in 2016. The two most recent cases were early in cyclical bull markets (as I believe we are in currently). I’ve attached a table that shows what occurred below. What is important is what happened next. Over the last 50 years, the S&P 500 was up every time from one to twelve months later. Not a bad record!
The other point that I wanted to give some input on is from the Dale Hirsch organization, famous for the Stock Trader’s Almanac. It gives a clear indication of what the beginning of November tends to hold for the next six month, as this is the strongest period of the year:
I could continue to give more statistics that show why this market should still really have a strong finish, but instead I thought it far more important to discuss the hand we have been dealt. In the Saturday Wall Street Journal, there was an article titled, "For Investors, Economy Is Key." In the article, Mackintosh explains that Wednesday of last week provided the perfect demonstration of the three most important issue facing the markets:
- The economy
- Government spending
- The Federal Reserve
Last week, the 10-year Treasury yields posted their third-largest daily drop since March, when Silicon Valley Bank failed. This caused a big flight to safety. Given that the banking system appeared to be in dire straits, the money then had a more important reason to leave bank deposits and hide in US Treasuries. That is exactly what happened and exacerbated the banking crisis.
During Wednesday’s Federal Reserve meeting, Fed Chairman Powell once again stated his mandate of reaching an inflation rate of 2% and that his way of measuring the progress of his rate hikes would be in evaluating measures of inflation (CPI & PPI) as well as his primary measure of unemployment and wage growth. It turns out that ex food and energy, consumer prices are remaining quite tame, but what really seemed to influence Powell's comments at last Wednesday's Fed meeting was labor.
It turns out that the labor reports we got last week showed unemployment increasing and greater job losses than expected. Savvy market participants might have noticed that the 412,000 jobs counted in October that were reported Friday came from the Bureau of Labor Statistics' Birth-Death Model. This model assumes that there are many, many new jobs that are not counted due to the creation of 1,000's of new businesses that are off their radar, so to speak. In an environment where small business bankruptcies are at a level not seen since just after the 2008 Financial Crisis, I tend to think this model does little more than create mythical fantasy jobs that really do not exist in the real economy. If we are then to subtract this Birth-Death Model fudge-factor from the 150,000 new jobs reported we come up with a loss of 262,000 jobs, which shows just how weak this economy really is.
Last month's Bureau of Labor Statistics jobs report came in at a hot 360,000 new jobs, but underneath the surface this was due to 850,000 full-time jobs being lost and replaced by 1.127 million part-time jobs, not a sign of economic strength. This being coupled with banks being flushed with trillions in capital in excess of required reserves, now eliminates the need for borrowing and lending aggressively. Hence, the rates at which they are lending to homeowners and commercial property borrowers are much lower than they should be. This in turn further slows the economy. Think about it, if you are running a bank and you are concerned about the valuations on real estate and are getting 5 ½% on short-term US Treasuries, why would you take the risk and lend? So, if you are going to lend, charge an outrageous rate of 8% to home buyers, because if they will pay it you will take it! Not good at all!
All of this adds to the extremes that we are seeing in the equity markets. It is quite amazing to see that the most current National Association of Active Investment Managers (NAAIM) Exposure Survey results show that these supposedly active money managers were, at least by Thursday of last week, still positioned way out over their skis in a negative tilt. The last time active managers were more bearishly positioned was in October 2022. Not surprisingly, that level of extreme bearish positioning coincided with a market low at the time that eventually built up into the bull phase we saw ensue in 2023. See chart below:
Based on this as well as seasonal factors, one-year market cycles, four-year presidential cycles, and the various statistical data points I share almost weekly, it seems like the eventuality of a market bounce was almost certainly ready to happen. As mentioned above in the three bullet points, the catalyst of the Fed policy announcement provided the firepower and Friday's labor numbers the added confidence that the rate hiking cycle may be over.
So, let's take one last look at the action internally in the markets last week:
- Thursday & Friday gave the market two consecutive 80% upside days.
- Monday and Tuesday's 75% upside days preceded this.
- The market, needless to say, has done pretty much all it could do to suggest that the bull case is not dead after all!
I will finish with one of my favorite pictures that clearly illustrates the plight of the nervous investor:
My point is that if we sit around and listen and internalize all the negativity that is being relentlessly spewed upon us, we become fixated with the next sound bite rather than paying attention to what we should, the long-range runway ahead of us for great companies and great advances in medicine and technology.
Please feel free to call should any questions arise. We are always at the ready to hopefully help you progress in your plan while dealing with the realities that are thrown at us.
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