The stock market has cooled off at the start of 2024, but still meets most of the criteria for a bull market
Two weeks later, the first act of the year is pretty much the same as the bull market scenario. After a nine-week upward sprint through the end of 2023, bulls and bears alike pointed out that the band was overheated and stretched and had duly cooled off with a two-week pause that kept the S&P 500 just half a step below its value Record high from two years ago. The crack beneath the surface in November and December was somewhat worth it. The Russell 2000 small-cap index is down nearly 4%, while the S&P 500 has gained only modestly year to date. ARK Invest, a proxy for low-quality, high-beta technology, is more than 12% below its late December peak. This was necessary, foreseeable and most likely ongoing. What we know about the kind of rare breadth and momentum achieved by the rise from the October lows is this: the impact on future returns lasting several months or a year is historically quite positive, yet In the short term there is often regression and sloppy profit-taking. This chart from Ned Davis Research shows that the all-in rally through the end of 2023 was a global affair, with 92% of all national stock markets above their 50-day moving average, and that during the recent market pause, “hardly a dent was visible was”. “The broad numbers recorded at the beginning of the year indicate a decisive improvement in global participation,” says NDR chief global strategist Tim Hayes. The equal-weighted All Country World Index has increased 24% on an annual basis since 1998, when this figure was above 75%. As Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, put it late last week, “The situation is neither all good nor all bad,” as the economy is robust but stocks are far less depressed and hated than they were a year ago . He believes we are in “some form of a bull market,” so it is right to expect further upside, although “2024 will bring a lot of ups and downs and a lot less speed than we saw between 2019 and 2023 “Broadly speaking, the S&P 500 could fall back to around 4600 – about 4% lower than here – and still be in a routine technical review of its last starting point in early December. New Year's rally break The negative return of the S&P 500 in the first five trading days of the year is not meaningless, but neither is it a loud alarm, because history shows that this essentially increases the chances of a positive calendar year from about 70% about 70% has fallen to 50%. January's monthly options week, which takes place next week, also tends to be weaker for stocks. Taking such tactical dangers and possible indigestion into account, stocks more broadly have endured a two-year tour in which they have weathered 500 basis points of Fed tightening, a slight decline in earnings and the constant prediction of a recession by 2024 with the weakness of The Thesis economic landing is intact (if not proven) and disinflation is proceeding as hoped. .SPX Mountain 2022-01-10 S&P 500, 2 years Henry McVey, Head of Global Macro at KKR, relies on the fact that October 2022 represented a bear market bottom and after such a low, stocks tend to outperform returns in the next few years. “We believe too many investors are still locked into the paradigm that the S&P 500 is trading at high headline valuations and the U.S. economy is peaking and heading for a hard landing,” McVey says. “That's not how we see it.” While McVey doesn't expect strong index-level increases this year or strong GDP growth in the US, he does point out that appropriately valued stocks lie beyond the anointed glamor mega-caps, and notably points out that, by comparison, none of the 25 largest central banks are tightening to 85% in 2022. Meanwhile, the combination of mergers and acquisitions, initial public offerings and high-yield debt issuance as a share of GDP is at its lowest level in recent memory 2009. Mergers and IPOs Missing Morgan Stanley Remains a Leading Indicator of M&A Activity has surged recently, suggesting dealmaking – a recent plot hole in the bull market scenario – may soon see a resurgence. When the average Wall Street strategist doesn't predict a rise in the S&P 500 this year and the index hasn't gone anywhere in two years, is it likely that a bull market will end before wild mergers and IPOs get underway? Whether the recent anecdotal surge in acquisition activity (visible in biotech, energy and software) will gain traction and help smaller companies continue to catch up with giant growth companies is far from clear. Small-cap stocks' rise from multi-decade relative lows in late 2023 was greeted with much cheer. And of course greater confidence in the economy, which is averting a recession as interest rates fall, should be a support. Big money is betting on expansion But in two weeks the Russell 2000 has already given up about half of the outperformance over the Nasdaq 100 that it achieved in the previous two months. And I have to point out again that if this market starts favoring the majority of stocks over the Magnificent Seven names, that would reflect the consensus getting exactly what it wants – something that the markets usually not given up on command. Todd Sohn of Strategas points out that the Invesco S&P 500 Equal Weight ETF (RSP) saw a vertical rise in inflows to $13.5 billion last year, 30% more than its previous 12-month record . The fund's total assets now stand at $49 billion, so the new money being put on a widening band represents a significant portion of the total. It may be reasonable to expect less dominance from the seven largest index leaders, but markets do not have to be zero-sum. None of the Mag7 has a higher forward P/E than two years ago. And helpfully, they're not moving as a unit, with Apple and Tesla trending lower lately. Betting on Fed Cuts in 'Peacetime' Right or wrong, the current market debate can never get far before it becomes a discussion about the Fed's policy course. Last week's CPI and PPI data reinforced the market's collective belief that downward momentum in inflation is strong, paving the way for “peacetime” rate cuts by the Fed. We know that Federal Reserve Chairman Jerome Powell has acknowledged that easing will occur well before the 2% PCE inflation target is reached, to ensure that monetary policy remains at a current rate of 5. 25-5.5% doesn't become too restrictive. We know that the Fed views a rate of 2.5% to 3% as “neutral” and that its members, on average, are forecasting three quarter-point rate cuts this year, although they did not expect to meet the 2% target will be achieved at least by 2025. All of this points to further easing. The Fed funds futures market is now pretty sure it will start in March, and is currently pricing in cuts totaling 150 basis points by the end of 2024 Market distortions can be cited. But beyond a few months, Fed Funds futures pricing is quite unreliable as it covers a wide range of potential hedging and speculative scenarios, with prices set along a spectrum, and the market will tend to over-extrapolate at times. For now, however, the reassuring trend remains that inflation is falling faster and more convincingly than the labor market and consumers are weakening. The Fed's stated willingness to try to engineer a soft landing (like in 1995 with just a few rate cuts as the economy recovered) also provides psychological support. A lot can go wrong, including increased consumer fatigue (discretionary stocks traded poorly for three weeks) or a growing wave of layoffs, threatening the growth side of the soft landing thesis. But just because the S&P is now back near 4800 and the Fed funds futures market is considering six rate cuts this year doesn't mean the former is due to the latter.