ANGLES.

It was more of the same. For the second week running, stocks played a nervous waiting game for the first three days of the week, afraid of being disappointed by some data that was coming out on Thursday. Then, also just like the week before, when the data proved to not be as bad as feared, stock markets got bought up nicely on Thursday and Friday to end the week with gains and yet more new all time record highs.

Monday was quiet as Wall Street traders digested the previous week’s melt-up and decided to hold their fire ahead of the influential PCE inflation numbers later in the week. It was suspected that that this release could well confirm the inflation stickiness indicated by the most recent Consumer and Producer Price Index data, thereby justifying the Federal Reserve’s highly cautious approach to lowering interest rates any time soon. Stocks moved a touch lower.

This waiting game continued on Tuesday. The latest data on Durable Goods sales and consumer sentiment both came in softer than expected. The can braced itself for yet another kick down the road as noises coming out of Washington DC took a decidedly optimistic turn regarding a deal to avoid the potential government shutdown. This proved ultimately to be misleading, as we will see later.

Suspicions continued to deepen that the inflation data coming out on Thursday would disappoint - but anyone selling stocks since October has usually got burned by the experience so the net outcome was another holding pattern for most of the indexes, although the recently-battered Small Caps actually ended up having a pretty good session.

Stocks continued to struggle to find any direction and experienced small losses on a largely uneventful Wednesday after a report showed that Q4 2023 Gross Domestic Product (GDP) is estimated to have risen at a revised 3.2% annualized pace, compared with an expectation of 3.3%. Consumer spending advanced at a 3.0% rate, a bit faster than estimates. Over the course of the entire year, the U.S. economy expanded 2.5% in 2023.

When the government shutdown can did get kicked on Wednesday evening, it didn’t make it very far down the road. The House agreed to extend federal funding for all of a week and the lights-out date was pushed back by a whole two weeks, so the key shutdown dates are now March 8th (Part I) and March 22nd (Part II). This half-baked, pathetic punt was then passed in the Senate the next day and sent to Biden for his signature. Which means that we will face the same political posturing s**t show in Congress all over again this week and likely for the next couple of weeks as well.

We finally got to see the hotly-anticipated Core Personal Consumption Expenditures (PCE) price index on Thursday morning before markets opened for business. This is the measure that the Fed uses to determine what inflation is really doing and is therefore arguably the most important of economic statistics these days.

It showed an increase of 0.4% for January and 2.8% from a year ago. This was entirely in line with expectations, leaving the fears experienced over the preceding few days unwarranted. Wall Street exhaled in relief and resumed its steady buying of stocks which proved enough to send the S&P 500 to (you guessed it!) its 14th new record closing high of 2024 and the NASDAQ to its first new record closing high since November 2021.

The price of the stock of commercial real estate lender New York Community Bancorp tumbled further on Friday after the regional bank admitted that it had discovered “material weaknesses” in how it tracks loan risk. The stock plunged 30% in a matter of minutes to a level 75% below where it was as recently as August of last year.

The broad market did fine, however, on the back of continued relief surrounding the previous day’s inflation figures and some rather benign Fed-speak. All the indexes ran higher again and yet more new all-time record closing highs were recorded. The bears are in full retreat right now.

The market’s sense last week was that the doomsayers’ ongoing narrative that “any day now a catastrophic number will derail the rally and send the market into a tailspin” was once again proved wrong and that the safest reaction in response seems to be to just keep on steadfastly buying.

My view is that any meaningful derailment of this rally will be a process and not an event. If we are watching carefully enough, we should see it begin to unfold in real time.

All the while, there continues to be a quiet but steady drumbeat in the deep background of the opinion that inflation’s stickiness could mean that there actually may not be any rate cuts at all in 2024. While it would be wrong to say that this view is moving into the mainstream, you don’t need to dig very deep into financial media any more to find it. Higher for longer, as they say.

But in a world that seems to automatically correlate the narrative of “interest rates up = stocks down” and vice-versa, it’s sometimes easy to forget that investors had no issue with high interest rates back in the 1990s, when stocks went on a record run. During that decade, the S&P 500 averaged a mouth-watering annual return of 18.2%. Meanwhile, the Fed Funds rate was as high as 8.25% during that period and never once went below 3%. It’s currently 5.375%, so it’s clear than higher interest rates and upwardly mobile stock markets can co-exist.

What cannot co-exist, though, is an upwardly mobile stock market and a meaningful recession. The S&P 500, which closed on Friday at 5,137, was trading solidly below 4,000 much of last year precisely because investors feared a recession. If a proper recession does now occur (albeit much later than expected) then it’s not unreasonable to expect stocks to drop back to that level or below.Put simply:  No one currently expects the economy to roll over. But if it does, it could erase the entire rally that’s occurred since October 2023 and then some. That’s why investors must continue to watch economic data closely and recognize rising slowdown risks if they emerge so that they aren’t blindsided by any sudden market volatility. That’s what I try to do all week and report back to subscribers each Sunday.

OTHER NEWS ..

Pointless Exercise .. The utter futility of those stupid end of year predictions that no-one should take any notice of was highlighted by the fact that five Wall Street firms have already raised their forecasts for the S&P 500, which is up 7% to start the year after rising 24% in 2023. Last week alone, Piper Sandler, UBS and Barclays boosted their targets. Two firms — Goldman Sachs Group Inc. and UBS again — have already adjusted their guesses upwards twice since December.

So Long, EV .. Apple is canceling a decade-long bid to build an electric car, abandoning one of the most ambitious projects in the history of the company. According to Bloomberg, Apple made the disclosure internally on Tuesday, surprising the nearly 2,000 employees working on it. The decision to ultimately wind down the initiative is a bombshell, ending a multibillion-dollar effort called Project Titan that would have vaulted Apple into a whole new industry. The tech giant started working on a car around 2014, setting its sights on a fully autonomous electric vehicle with a limousine-like interior and voice-guided navigation. But now its all over.

It’s Really Hard To Get A Car Loan .. Access to auto credit hit the lowest point since August 2020, with the approval rate for loans down 1.6 percentage points year-over-year. With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards.

This state of affairs is freezing out buyers with lower credit scores who can’t afford a large down payment, while even Americans with healthy finances are having more trouble than usual securing loans. And for dealers, it means many potential customers have struggled to get approved for loans in recent months, which is dragging down sales. 

UNDER THE HOOD ..

Core technical indica…

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There was only one name on Wall Street’s lips last week; chipmaker Nvidia, the last of the Magnificent Seven stocks to report Q4 2023 earnings on Wednesday evening. The first part of the week was spent in fear of the firm failing to meet strongly-enhanced expectations. Thursday was one big Nvidia-inspired celebratory party after it blew through those expectations and markets spent Friday nursing a quiet post-celebration hangover. The net outcome was yet another up-week for most Large Cap U.S. stocks.

The week began on Tuesday following the Presidents’ Day holiday with Big Tech dragging the whole stock market ecosystem lower and away from its all-time highs. With Wall Street breathlessly awaiting earnings and outlook from Nvidia, the so-called most important stock on the planet, up by 220% in the last twelve months and responsible for about a third of the total stock market gains so far in 2024, for confirmation that the chipmaker could meet expectations that were now sky-high, there was a sense that there was very little room for disappointment - that almost whatever the company’s earnings looked like, it was always likely to be a letdown vs. the now-astronomical expectation level brought about by market AI-mania.

As a result, the prices of Nvidia’s fellow big dog stocks also fell, anticipating a possible across-the-board “sell the news” reaction to the earnings report, since any signs that the AI boom may be slowing could lead to a big reversal in the stock price, so traders were understandably nervy. The price of Nvidia fell almost 4.5% on the day.

More of the same on Wednesday, as frenzied speculation about Nvidia’s upcoming report that night dwarfed almost everything else, even the rather downbeat minutes from the most recent Fed rate-setting meeting which seemed to confirm that officials are going to tread very carefully on interest rate cuts. Stocks fell at the outset and spent most of the session in the red before a late charge higher got prices back to pretty much flat by the close.

In the end, of course, we needn’t have worried as all fears of any disappointment failed to materialize. After the closing bell, Nvidia shattered even those absurdly raised expectations, delivering yet another jaw-dropping sales forecast, anticipating an amazing $24 billion in revenue this quarter. Even the most wildly optimistic of Wall Street estimates had been for about $21 billion. Results for the last quarter of 2023 also blew decisively through what had been anticipated. As Barron’s put it, “Nvidia is selling shovels in a gold rush”.

Predictably, stock markets responded by going on a massive rocket ride on Thursday, needing to completely reverse its caution from earlier in the week. Nvidia stock surged, increasing the company’s value by $277 billion in just six and a half hours to almost $2 trillion. The S&P 500 ripped higher, breaking through its recently-achieved record all-time high within the first ten minutes of trading. The tech-heavy NASDAQ-100 did even better, soaring to within a hair’s breadth of its own all-time record high which dates back to November 2021. Markets held on to those gains all day as the bulls celebrated the Nvidia report and bought up pretty much everything else they could lay their hands on as well.

Stocks struggled to follow through on a rather more sober Friday, with Big Tech in particular losing a little steam after the previous day’s powerful rally. The S&P 500 barely budged, while still posting a win for the week, although its Small Cap cousins lost ground across five days.

There’s little that Wall Street loves more than to come up with a clever new word for something. Previously, the current economic situation had always been described as Goldilocks, i.e. just right. After last week’s Nvidia-driven new leg higher in stock prices, a new term is being coined to describe what is even better than Goldilocks .. “Platinumlocks”. I’m not sure that one will stick.

But it’s indicative of the enormous level of optimism on Wall Street right now. The Fed is like a stern pastor warning from the pulpit about the need for patience and temperance on interest rate cuts, but the stock market just doesn’t want to listen and keeps slugging from the AI punchbowl, even while at the same time acknowledging that its overly-optimistic assessment from as recently as the beginning of this year of the timing and extent of interest rate cuts is now probably dead and buried (seven rate cuts in 2024??? Ha!!! .. the latest most likely projection is now for just three and the market-driven probability of any cuts at all before June is now only 8%, see FEDWATCH INTEREST RATE TOOL below).

The fact is that, to bring this rally to a crashing halt, actual news now needs to not just be disappointing, but outright bad because the current positive momentum in this market is just so strong. For inflation data, for example, to be powerful enough to challenge the bullish momentum, it has to show not just that inflation has stopped falling (as was in fact implied in the data earlier this month) but that it is rising again, because that will challenge the very idea of any upcoming rate cuts.

And we simply aren’t there right now, so the almost inevitable short-term over-bought pause or pullback that we are likely to experience in the next week or two probably will not represent any kind of meaningful turnaround in the upward trend.

OTHER NEWS ..

Joining The Club .. Amazon is finally joining the famous Dow Jones Industrial Average. With the caveat that the Dow Jones is a stupid index (I never pass up on an opportunity to repeat this), the e-commerce giant will replace Walgreens Boots Alliance in the benchmark index of just 30 U.S. stocks. The change will go into effect prior to the open of trading on Monday, February 26th.

Finally! .. Phil Collins was top of the charts, ironically singing about another day in Paradise, the last time the Japanese stock market as measured by the Nikkei Index last reached a new all-time high of 38,915 at the end of December 1989 .. until last week when, over 34 years later, that level was finally surpassed. This came in spite of the fact that we are only a week removed from learning that the country had fallen into a technical recession.

European stocks, as measured by the Stoxx Europe 600 Index also joined the Nikkei and the S&P 500 in the U.S. in making new all-time highs, boosted by strong performances in 2024 from Dutch chip equipment maker ASML Holding NV, Danish drugmaker Novo Nordisk A/S, German software giant SAP SE and French luxury goods manufacturer LVMH.

The Never-Ending Story .. The U.S. government shutdown clock is ticking (yet again!). Without another short-term spending bill or passage of four key appropriations measures, the government will stumble into a partial shutdown on this coming Friday, March 1st and will then completely run out of money and turn out the lights a week later on March 8th.

The Senate reconvenes after a recess on Monday (but it has to deal with the impeachment articles against Homeland Security Secretary Alejandro Mayorkas before anything else) and the House doesn’t get back to work until Wednesday. Expectations are for yet another kick-the-can-down-the-road decision, especially with the March 8th deadline involving $1.2 trillion in spending. The appetite for a political fight on the issue from the wackier corners of the Republican party seems a little more muted this time around.

UNDER THE HOOD ..

This weekly review monitors the latest level of both the Fear and Greed Index and also the % of stocks above 50 day and 200 day moving averages (see below). These are important in assessing the technical state of the market. Here’s how they stand ..

The currently elevated level of the Fear and Greed Index of 78, comfortably in the Extreme Greed zone suggests there are risks of a negative shift in sentiment resulting in a potentially sizable but probably temporary pullback in the broader stock market like we saw at t…

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After having risen for 14 of the last 15 weeks, the S&P 500 fell a smidge last week. It basically went on a wild ride to nowhere, driven mostly by messy economic data. There were two signals that inflation isn’t dying as quickly as markets (and the Federal Reserve) would like and there was also a sign that the prolific American consumer may finally be starting to close their wallet a little, all of which combined to hurt stocks, causing one index to have its worst day in years. Yet somehow the week also managed to contain more new all-time highs for Large Cap U.S. stocks.

Markets started out on Monday just as they had ended the previous Friday, although on lower volume - perhaps not that surprising on the day after the Super Bowl, when an estimated 16 million Americans skipped work. The result was at first another straight march higher but then, with the 5,050 level within sight for the S&P 500, nerves finally set in ahead of the following day’s retail inflation report. Traders decided that they wanted to maybe take a little off the table, being that many of them have been making some pretty big bets on the inflation-down/stocks-up narrative already this calendar year. Most indexes sank back and ended up down a touch for the day except for the Russell 2K Small Cap index which was having a moment, up almost another 2% on the session.

When it came out pre-market on Tuesday morning, the Consumer Price Index (CPI) measure of retail inflation caught Wall Street off guard and took a sledge hammer to stock prices. Core CPI rose 0.4% in January, climbing the most in eight months for a year-on-year rate of 3.9%. Both these data points were higher than expectations and stocks charged headfirst into a buzzsaw, plunging at the open and continuing lower all day.

This was the S&P 500’s worst reaction to a CPI release since September 2022. The NASDAQ-100 and the Russell 2K Small Cap index did even worse, the latter crapping out nearly 4% on the session, its worst day in years and bringing its recent short run of outperformance to a crashing halt.

Treasury yields soared, pushing bond prices lower as the reality seemed to finally hit home that there are now not going to be any interest rate cuts in March and very possibly not in May either. Those market-driven probabilities quickly tumbled to just 7% and 33% respectively. The deemed-most likely interest rate at the end of the year rose to 4.375%, a mere 1.0% lower than now, implying just four rate cuts in 2024 (which finally almost matches what the Fed has been consistently saying since November) as opposed to the market consensus expectation just over a month ago of as many as seven rate cuts this year.

There was something of a knee-jerk snap reversal though on Wednesday, as stocks clawed back a decent portion of Tuesday’s heavy losses as the apparent disgust that inflation had actually dared to pause its rapid downward decline wore off a little in something of a re-think of the need for the previous day’s freakout. The S&P 500 regained the 5000 level but stalled there as stocks ended the day priced almost exactly where they had closed on Thursday of the previous week. Rate cut probabilities recovered a little, too.

Most of the time American consumers can be firmly relied upon to spend lots of money that they don’t have on lots of stuff that they don’t need. But, in another piece of rather surprising economic data, we learned on Thursday that Retail Sales broadly declined last month, indicating that usually turbo-spending Americans finally took a breather. The value of retail purchases in January decreased 0.8% from December, its biggest drop in nearly a year.

Markets reacted by stumbling aimlessly around for much of the day, before Wall Street finally decided that recovering from Tuesday’s over-reaction was more important than running scared from some possibly temporary Retail Sales disappointment and stocks ended the day higher again with the S&P 500 back in all-time closing record high territory.

Next up on Friday morning was the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers. The core number for January climbed 0.5% from the prior month and 2.0% from a year ago - both exceeding expectations and acting as something of a confirmation of Tuesday’s rough retail inflation number. Wall Street’s knee jerked yet again and the recovery rally stalled and the S&P 500 floated back down again to end the week about half a percent lower than where it started it.

I said in a recent report that if the probabilities of an interest rate cut in May fell far enough, then “look out below”. That’s what we saw on Tuesday, when the market-driven probability of such a cut fell below 50% on its way to crumbling further to eventually represent only a one-in-three chance by Tuesday’s closing bell.

Indeed an intriguing new narrative began to slowly and quietly emerge last week, initially restricted to the outer fringes of the financial media - but which moved into the mainstream when repeated on Bloomberg TV by somewhat-respected former Treasury Secretary Larry Summers, who said; “There’s a meaningful chance — maybe it’s 15% — that the next move is going to have be upwards in rates, not downwards. The Fed is going to have to be very careful.”

That scenario coming true would horrify Wall Street which has taken stocks on an almost unbroken powerful upward journey since late October of 2023 based primarily on the unshakeable assumption that interest rates were imminently moving lower. While there has maybe been a little disappointment surrounding the timing of such cuts, the idea that they will arrive sooner or later as the Fed’s next move remained totally unchallenged in public until last week.

It will take another couple of cycles of data releases to either establish a new alarming inflation trend or to show that last week’s data was just a bump in the road before we know if this rather frightening narrative will either take hold or fall silently into the (overflowing) garbage can of financial pundit hot takes that simply never come to pass.

OTHER NEWS ..

Sorry, What Did You Say? .. Ride-hailing provider Lyft had a bumbling, chaotic week. The firm saw the price of its shares soar 67% in after-hours trading on Tuesday after releasing results that showed projected earnings jumped by 11% and included a prediction that margins were set to expand this year by an eye-watering 500 basis points (5.00%). But less than an hour later, company CFO Erin Brewer came out and said that in fact the company is actually expecting margins to expand by 50 basis points (0.50%), with a company spokesperson later attributing the extra-zero mistake to a “clerical error” . 

Lyft’s rather annoying CEO David Risher did himself no favors by going into lamentably transparent spin mode on TV, casually saying it was “my bad” , acting like he had just spilled someone’s beer or something. He also attempted to minimize the issue by suggesting that it was only a case of just “one zero in a press release.” (false: the error also appeared in multiple documents and was repeated over again on the earnings call before eventually being corrected).

Rumors began to swirl (denied by Risher) that the misinformation was a result of the firm having used AI to generate its earnings report and associated documentation. By the time pre-market trading opened the following morning, the price gain had fallen all the way back to just 17%. The Securities and Exchange Commission (SEC) is quite correctly investigating the incident.

Gloomier And Gloomier .. The economic picture around the world darkened as both Japan and the UK fell into technical recessions last week. Adding to the gloom, the European Commission said it expects weaker economic growth across the EuroZone bloc in 2024 and 2025 — bad news for its largest economy, Germany, which is already stagnating economically as well as suffering from increasing political and social turmoil. Of course, these onl…

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We are entering the year of the dragon on the Chinese calendar which it appears traditionally signifies good luck, prosperity, strength and abundance. Although the Chinese stock market is not really the place to look for much in the way of prosperity or abundance right now, U.S. stock markets are hot, hot, hot and that didn’t change as we saw yet another week of gains across the board with a significant new milestone reached by the S&P 500.

Federal Reserve chairman Jerome Powell reiterated in an interview with CBS’s 60 Minutes that aired last Sunday evening that the Fed likely won't be ready to cut interest rates at its next meeting in March, stating that “the danger of moving too soon is that the job’s not quite done”.

There was absolutely nothing new here, this was no more than an exact echo of what he had told us all a few days earlier at his press conference, but Treasury bond yields still jumped and stocks opened lower on Monday, with Small Caps leading the downward charge and the decline accelerated later in the day when two of Powell’s influential Fed colleagues came out and said exactly the same thing. Fed-speak is clearly getting organized and in synch.

This continued on Tuesday when Fed officials were once more out in force, reiterating the “higher for longer” company line that it would be a mistake to cut interest rates too soon. If this Fed-Speak was intended to take some more froth out of stock markets, it worked for a while and Monday’s decline resumed. Later in the day, however, the dip buyers jumped back in and both the Large and Small Cap indexes actually closed the day with small gains.

Concerns about the viability of embattled New York Community Bancorp (NYCB) intensified as it was cut to junk by the Moody’s credit rating agency on Wednesday. Equivalent lending institutions around the world, heavily exposed to their own mostly toxic commercial real estate markets and not helped by contagion from the implosion of the Evergrande Group in China, are clearly experiencing problems too.

There was also a continued drumbeat of Fed-Speak throughout the day from even more central bank officials expressing satisfaction with inflation trends but playing down the likelihood of imminent interest rate cuts. Even so, driven by steadier market interest rates and some more decent earnings reports, Large Cap and tech stocks shrugged it all off and started to become magnetically drawn towards “S&P 5k”, the crowded option strike price and psychologically important 5,000 level for the S&P 500 index, getting to within five points of the symbolic milestone.

But like a teenager who is too nervous to approach their crush at the high school dance, the S&P 500 spent Thursday frequently getting up close to the 5k level and then backing away before finally managing to land a brief kiss a minute or so before the closing bell. It couldn’t quite hold on to close above the line but still managed its ninth all-time record high of 2024. Interestingly, this session saw the Russell 2K Small Cap index suddenly bounce spectacularly from recent under-performance, up by over 1.5%.

S&P 5k was breached again on Friday morning and this time the index held above that level for the rest of the session, recording its first ever >5k close at 5,027 and obviously a tenth new all-time high of the year - and it’s only early February. The mood was cheered by the release of the annual audit and report card on the accuracy of the last twelve months’-worth of retail inflation data which confirmed the strong downward trajectory that we’ve been seeing for many months now.

The Russell 2K Small Cap index followed through on its strong showing from the day before and was by far the best-performing corner of the market again. This is very positive for stocks in general as it demonstrates a widening of the breadth of stocks participating in the rally and a closing of the gap between Large and Small Caps by means of the little guys moving higher rather than by the big guys moving lower.

Oh, and by the way, Microsoft became the largest company in history by market value, closing the day with a market capitalization of $3.125 trillion, surpassing the previous biggest which was Apple at a mere $3.09 trillion.

2024 has started out with lots of noise .. mixed messages from the first Fed meeting (yes to rate cuts - but not yet), its officials publicly taking to the airwaves, conflicting earnings reports from tech giants, bizarre jobs data, all-time high records tumbling all over the place, Elon being Elon, a return of small bank concerns amid what is clearly becoming a commercial real estate crisis around the world, China’s situation going from bad to worse, Putin chatting cozily with U.S. media and so on and so forth.

For all the noise and strange nuance that we are seeing, this bullish mantra is still intact: No hard landing, Fed cutting rates sooner rather than later, inflation declining, earnings growth holding up. For this rally to reverse meaningfully, one of those four statements must be proved false and despite some rather head-scratching recent data, none of it was enough to even begin to do so, and as such, the S&P 500 continues to reach fresh all-time highs, pulling all the other indexes higher with it.

But we may be approaching an inflection point and it’s very important to cut through the noise right now and focus solidly on what matters, the four core drivers of stock prices at the moment:

* solid economic growth

* a Fed embracing the idea of interest rate cuts

* falling inflation

* growing corporate earnings

Again, until one of those drivers is shown to be broken (and they will be at some point, they always are) then momentum can easily carry this market even higher. And yes, stocks are ripe for a 10%+ correction as and when one or more of the factors are disproved, but we are certainly not there yet.

The burden of proof lies entirely with the bears and so far they’re not accumulating enough evidence to stop this rally, aside from a few overbought pullbacks from time to time. The risks are plentiful, but momentum can be a hard trend to fight.

OTHER NEWS ..

In Other Words .. Job cuts have hit Big Tech and other sectors, and while it’s hard to sugar-coat a job loss if you’re on the receiving end, companies are tying themselves in linguistic knots trying to come up with cringe-worthy corporate-speak around the subject. Examples of phrases being used to describe layoffs are: “right-sizing”, “org changes”, “a simplified operating model”, “fitting our organization to our strategy" and my personal favorite, the vomit-inducing “an involuntary career event”.

For some reason that is beyond the comprehension of anyone with the intellect of a jellyfish or higher, executives and HR professionals at these firms still somehow seem to believe that if they use language like this, people won’t get as upset. I wonder how that’s working out? I know what effect even just writing this had on me.

USA! USA! USA! .. New Jersey’s MetLife Stadium will become the first arena in history to have staged both a Wrestlemania and a World Cup Final when it hosts by far the biggest sporting event in the world (think over 70x the number of Superbowl viewers) in 2026 following the announcement last week from soccer’s world governing body, FIFA, of the location schedule. The Azteca Stadium in Mexico City is to host the opening game of the U.S.-Canada-Mexico-hosted tournament.

Despite its supposed three nation format, however, it’s going to be very U.S.-centric. All the games at the business end of the month-long competition (quarter-finals and beyond) will take place in the States and there are actually just as many games taking place in Texas as there are in Canada.

Moving Lower .. Israel received its first-ever sovereign downgrade as Moody’s Investors Service lowered its credit rating, citing the impact of its ongoing military operation in the region on the nation’s finances. The country was cut to A2, the sixth-highest investment gra…

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It was a very busy week with some huge earnings reports painting a somewhat mixed but on balance positive picture, a Fed interest rate meeting that pushed back hard against Wall Street interest rate cut expectations, a sudden resurrection of regional bank concerns and an astonishing Jobs Report that indicated that the economy is on fire right now. All this kept traders on their toes, but the final outcome was yet another positive week for U.S. stocks which ended Friday back at more new all-time highs.

Coming off a weekend of increased Middle East tension and the apparent final confirmation of the demise of China’s largest real estate firm, Evergrande Group, markets were quite subdued for most of Monday before a late flurry of optimism about falling Treasury yields and the Federal Reserve’s upcoming interest rate call pushed stocks higher and right back into all-time record closing high territory once again.

Monday’s late-day gains were broadly maintained on Tuesday, but things were generally very quiet and barely changed ahead of some mega-tech earnings after the closing bell and the Fed interest rate-setting meeting the following day.

When they were released, the big Q4 2023 earnings reports were kind of so-so. Microsoft posted its strongest revenue growth since 2022 with the help of AI products, but its cloud performance disappointed. Alphabet/Google beat estimates for sales and profits, but its ad revenue came in shy of the forecast.

The knee-jerk reaction to these earnings on Wednesday morning was a sharp selloff in tech and tech-adjacent stocks, and this accelerated when the Fed statement was released after interest rates were left predictably unchanged that included the killer line that Fed officials “do not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

A definition of what “greater confidence” meant was notably lacking, but the message was clear; yes, there will be likely be interest rate cuts at some point in 2024, but there’s definitely no rush. Fed Chairman Jerome Powell very much stuck to this script in his press conference, calling an interest rate cut at the Fed’s next meeting in March “not the most likely case”. You could almost hear the stock market groaning in disappointment as stocks continued to cascade lower all afternoon, with the tech-heavy NASDAQ having its worst day in over a year.

Thursday was a day of digestion as Wall Street re-litigated the previous day’s Fed decision and Powell’s words, eventually deciding that things weren’t so bad after all. It was also a massive day for earnings and we got another mixed bag. Apple shares fell after a deepening slump in China overshadowed sales from elsewhere beating estimates, but Amazon reported very strong sales and Meta/Facebook shares jumped in extended trading after its sales forecast beat estimates. The firm will also pay its first ever dividend in March. Stocks rebounded from Wednesday’s dismal showing, with all the indexes jumping more than 1% on the day.

Everything seemed to change on Friday morning when, pre-market, we got a stunning blowout Jobs Report. Payrolls increased by 353k in January, that’s double what had been expected. While the unemployment rate remained unchanged at 3.7%, wage growth exploded higher as well to 4.5% year-on-year, up from 4.1% in December. Numbers for prior payroll reports were even revised higher, suggesting that this is something more than just a one-off blip.

This kind of data is an interest-rate-cut-killer, as it points to the fact that a victory lap over the final conquest of inflation may possibly be premature. Going in to the Jobs Report, the market-derived probability of lower interest rates by the end of the March Fed meeting was 42% and by the May meeting was 94%. Within minutes of the report coming out these probabilities had plunged to 16% and 68% respectively (before recovering slightly later) and the number of expected 0.25% rate cuts for 2024 fell from six to five (see FEDWATCH INTEREST RATE TOOL below).

Stocks, which had been poised to roar higher when the market opened on the back of those solid earnings reports the previous evening from Meta/Facebook and Amazon, wobbled at first in the face of the jobs data and, for a while, it felt like a bad-tempered stock market was going to knock prices down as a result of the sense that the imminent and frequent rate cuts to which it feels so entitled were slipping away from its grasp.

However, disappointment about a diminishing imminent rate cut likelihood was ultimately overwhelmed by a sense of bullishness about the ripping economy and what it could mean for corporate earnings. Stocks took another leg higher led by the tech and communications services sectors (and Meta/Facebook in particular ,which soared 20%) and even deeper into all-time record high territory by Friday’s close.

It’s just plain hard be a seller of stocks at the moment in an economy that is experiencing massive expansion, collapsing inflation, vibrant labor markets, a consumer that seems incapable of not spending shitloads of money, mostly solid (and sometimes spectacular) earnings reports from the biggest companies and a very healthy technical setup.

March (and possibly even May) interest rate cuts may now be off the table after that staggering Jobs Report, but there is a developing sense that exactly when the interest rate cuts begin is becoming less important than the total extent of cuts by the end of the year, both in terms of how many cuts there’ll be and how much lower interest rates will be on New Year’s Eve than they are now.

I am now monitoring all these numbers for you in the FEDWATCH INTEREST RATE TOOL below and even after the shocks of last week, we are still looking at a market expectation of a total of five interest rate cuts in 2024. If we see nothing in May’s meeting, that would mean a 0.25% cut at each and every one of the remaining Fed meetings for the rest of the year.

It sounds like a tall order, but consider this. When you look at the inflation rate using more recent data with a six month look-back (then annualized) rather than the more traditional straight one-year look-back, the Fed’s measure of annual inflation is now down to 1.9%, already below its target of 2%.

That says to me that the Fed could already be in a position to cut interest rates and just needs to be sure that the recent inflation data is not some kind of short term head fake that could suddenly reverse. The startling Jobs Report demonstrated the wisdom of the Fed’s slow and cautious approach, which gives policymakers flexibility. But ultimately the cuts will come.

OTHER NEWS ..

70% Inflation .. Tickets to attend the Super Bowl in Las Vegas next weekend are the most expensive ever for the event, going for an average $9,815 each so far, according to reseller TickPick. The price is 70% more than last year’s game, which was held in Arizona. This year’s attractive location is being cited as the biggest factor driving demand. It’s the first NFL championship to be held in the city. The previous record average ticket price was $7,046 in 2021 in Tampa, Florida, when the game was played at a sharply reduced capacity due to the pandemic. Many rooms at Las Vegas hotels, including the Bellagio and the Fontainebleau, are priced at well over $1,000 a night for the weekend.

Global Growth Optimism .. The International Monetary Fund (IMF) raised its forecast for global growth this year on the strong economic expansion in the U.S. and fiscal stimulus in China. The world economy will grow 3.1% this year, up from the 2.9% seen in October, the institution said last week. Tighter central-bank policy to fight inflation and public-spending cuts in some countries are among the reasons why growth is expected to be slower than in the two decades before the pandemic, when it averaged 3.8%.

But, given the scale of the COVID price shocks and the flurry of significant…

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A steady stream of earnings reports last week, along with continued positive economic and inflation data, set up the stock market for another shift higher. But it all felt a bit forced, with small, incremental gains rather than solid leaps forward. There’s a sense that markets may have hit an air pocket in their upward glidepath as we wait to see if rising Large Cap stocks can pull the rest of the market up with them.

Even in the face of deepening hostilities in the Middle East and a resulting firmness in the oil price, Monday saw the S&P 500 add to its all-time high set the previous Friday on optimism surrounding upcoming tech earnings later in the week and momentum from the previous Friday’s big gains. The session was also notable for an impressive turnaround in recently-beaten-down Small Cap stocks which quite handily outperformed their Large Cap cousins on the day.

On Tuesday, stocks remained stuck in a narrow range as Wall Street tried to drink from a firehose of very mixed earnings reports from many of the big dogs, while also keeping an eye (ok, maybe just half an eye) on the New Hampshire Republican primary that day. The indexes still managed to creep a little higher, thereby setting yet another all-time record closing high in the S&P 500.

It was a similar story on Wednesday. After a bubbly start, stock prices retreated and spent most of the day hugging the unchanged line. Again, some decent earnings provided some support but the feeling is developing that it’s going to take something shiny and new to trigger the next meaningful leg higher. With GDP and PCE inflation coming out before the end of the week, there was a chance that we might just get that, but no-one seemed particularly willing to bet big-time on it.

Nevertheless, a teeny gain on Wednesday for the S&P 500, helped partly by the European Central Bank (ECB) holding interest rates steady over there, saw yet another new all-time record closing high for that index. The NASDAQ-100 also climbed for the fifth successive day, reflecting renewed optimism in the tech space.

By the time the market opened on Thursday, we had learned that Tesla suffered dismal revenues and profits in Q4 2023 relative to expectations along with a gloomy projection of “notably slower growth” in 2024. Wall Street was distinctly unimpressed and trashed the stock by 12% in a matter of hours.

However on a more general note, we also saw the first of three estimates for Q4 2023 Gross Domestic Product (GDP) come in way higher than expected at a 3.3% growth rate vs. the expectation of 2.0% and a rest-of-2023 total growth rate of 2.5%. This sparked something of a rally in stock prices with an increase in optimism about earnings in a much more-buoyant-than-expected economy. Markets still seem convinced that interest rate cuts are coming sometime this year, regardless of economic data.

On Friday, the pre-market release of the Fed’s preferred method of measuring inflation, the Core Personal Consumption Expenditures (PCE) Price Index for December, showed an increase of 0.2% on the month and fell to 2.9% on a yearly basis, a three year low and less than 1% above the Fed’s target rate, keeping the debate alive over whether officials will soon cut interest rates.

The S&P 500 seemed to not really know how to react and just waffled around most of the day. By the close it had slipped less than 0.1% on the day, finally ending its streak of consecutive record-high closes. Focus continued to be on big company earnings reports. Disappointment from Intel got severely punished but on the other hand, American Express’ stock price soared to a new all-time high after strong 2024 guidance and a dividend increase. Despite Friday's less decisive performances, all the major indexes posted weekly advances.

So, what is currently keeping Wall Street traders up at night?

* I know I keep saying it, but .. this market is very vulnerable to a substantial decline should economic data start to point towards any kind of a hard landing (which, to be clear, it is not doing right now). That statement is especially true given i) the nearly universal expectation that there will not be a hard landing and ii) the stock market, especially in Large Caps, is very stretched on a valuation basis at these current prices.

* It’s still too early to draw any conclusions about growth from this earnings season, mega-cap tech earnings will still dominate the narrative. So far though, non-tech earnings and guidance are echoing what we’re seeing in the broader data; that economic growth is definitely moderating.

* We are starting to witness cracks and some significant divergences within the group of so-called Magnificent Seven stocks that have driven the rally over most of the last year. For example, Nvidia is up over 20% so far in 2024, but with last week’s terrible performance, Tesla is now down 26% over the same period. That’s more than $200 billion of the company’s value wiped out in four weeks.

* Also of some concern is the fact that the probability that interest rates will be lower than now after the May Fed meeting last week slipped below a 100% certainty for the first time (see FEDWATCH INTEREST RATE TOOL below). Futures market probability also now favors an end-of-year Fed Funds interest rate of 3.875% which is 1.50% lower than where we are now, but still a quarter of a percent higher than where the expectation was just the previous week. I have now started tracking this important market assumption each week in FEDWATCH INTEREST RATE TOOL below.

The stock market was described by one analyst last week as being like a runaway train. He added that a runaway train usually does go off the rails in the end, but it can travel a long way before that happens.

OTHER NEWS ..

Bounce Back? .. We just ended a two-year barren spell without a new all-time record high in the S&P 500 index. In 13 of the 14 prior instances the index went at least a year between record highs, it has been higher a year later (the exception was 2007, which followed a seven year drought). The average gain over the ensuing twelve months was 14%, which is about three percentage points higher than the average annual return for the S&P 500 over the last hundred years.

India Goes Fourth .. India’s stock market capitalization has overtaken Hong Kong’s for the first time as the former’s growth prospects and policy reforms make it an investor darling just as global capital pours out of China. The combined value of shares listed on Indian exchanges reached $4.33 trillion as of Monday’s close, versus $4.29 trillion for Hong Kong, according to data compiled by Bloomberg. That makes India the fourth-biggest stock market in the world, behind only the U.S., China and Japan. 

Toyota’s EV Skepticism .. Toyota Motor Corp. Chairman Akio Toyoda says he believes battery electric vehicles will reach only a 30% market share at most - with the rest taken up by hybrids, hydrogen fuel cell and fuel-burning cars. He pointed out that, with a billion people in the world living without electricity, limiting their choices and ability to travel by making expensive cars simply isn’t the answer. “Customers, not regulations or politics, should make that decision,” he said.

UNDER THE HOOD ..

Both price action and the technical body of evidence now reflect a returning split between the largest stocks and the rest of the pack. In terms of Demand, it will be important to monitor which segment (large or small) reverses direction to meet the other. In relative strength terms to the S&P 500 Large Cap index, the Russell 2K Small Cap index fell to its lowest levels since late November, giving back all of the relative outperformance that it had realized in December.

As is always the case when markets are at all-time highs, there is no overhead technical resistance for the market, so the psychological 4,900 level in the S&P 500 will be key to watch to the upside, as the round number could offer an excuse for some traders to take profits while it is also a high-vo…

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It took just over two years, but we finally have ourselves another new all-time record closing high for the S&P 500 which was reached on Friday when the index closed at 4839.81. The U.S. stock market really is an incredible piece of work. Never in history has it ever once failed to recover from all of its losses, no matter how huge, and then go on to set yet another new record high. If you are investing for the long term, you need to bottle this moment and remember it the next time stocks are down large and everything seems hopeless.

After yet another long weekend, during which geopolitical tensions around the world continued to escalate and Trump won big in Iowa, Wall Street traders returned to the battlefield on Tuesday morning and were soon confronted by Fed Governor Christopher Waller saying that, while the state of the U.S. economy was “almost as good as it gets”, he was unconvinced that higher inflation had been killed and that fact could impede progress towards the frequent and extensive interest rate cuts that the market expects the Fed to provide, starting as early as March. Stocks glided lower, especially when officials from the European Central Bank (ECB) started making similar noises.

We learned on Wednesday that U.S. consumers in December kept on spending like drunken sailors. The Retail Sales data came in hot, up 0.6% from November’s spending and 5.6% higher than a year ago, providing more signs that the economy is continuing to grow and just adding to the “inflation is not dead” side of the ledger.

The probability of a Fed interest rate cut by March, which had been as high as over 80% as recently as the previous week and was basically a 100% certainty at the beginning of January, reacted by collapsing to pretty much that of a coin-flip.

Stocks dropped further in response and it’s not hard to figure out why. The high probability of at least one interest rate cut by March this year was a major contributor to the December melt-up and we’re seeing some of those gains being given back now that that particular probability is deemed to be much lower.

The skies brightened on Thursday, however, and all the stock indexes moved in a northerly direction, helped partly by a very optimistic outlook from Taiwan Semiconductor Manufacturing (TSM), which supplies chips to Apple and Nvidia. Also, the Senate passed yet another Continuing Resolution, a temporary spending bill to avert a partial U.S. government shutdown this weekend, which once again just kicks the can down the road, this time to March 1st (partial shutdown) and March 8th (lights out).

A calmer mood settled over markets on Friday with the sense that, yes, recent hot economic data readings might well defer interest rate cuts beyond initial expectations, but they also imply that whatever meaningful recession fears remain for 2024 may be unfounded and that can only be good for future corporate earnings.

After a sluggish start, stocks ripped higher after lunch on the back of this new interpretation of the Retail Sales numbers and also a buoyant-again tech sector which is helping to offset some of the growing caution elsewhere with a new burst of AI optimism following TSM’s earnings report, to erase the week’s losses and we finally reached a new all-time record closing high for the S&P 500. Hurrah!

Asset prices in the U.S. are priced for perfection in what is a very crowded trade and that’s a concern. Markets are still assuming that even if the Fed doesn’t cut on January 31st or March 20th, it will definitely cut on May 1st and that the current expectation of a total of at least six rate cuts in 2024 will, more or less, stay intact.

But we are getting closer to the wire whereby if the Fed doesn’t signal at least one interest rate cut either before or at the May meeting then markets could well freak out. No rate cuts through May will mean that Wall Street will have to accept that it is wrong about its aggressive expectations for Fed easing that underpinned the entire Q4 rally. Pull that punch bowl away and you could be looking at a 10-15% decline in stock prices or more.

From a market standpoint it doesn’t matter so much when the rate cuts start, as long as the expectation for a lot of policy easing (let’s call it > four interest rate cuts) remains intact. Ironically, a real risk for this market is that the Fed does exactly what it currently says it will do and only cuts two or, at a real stretch, three times.

So far, there is no budging on the expectations of a rate cut before or at the May meeting as they remain intact at a 100% probability. However, where that number goes, stocks also will go and, in some ways, this is the most important data point to keep track of right now. As long this probability remains at or very close to around 100%, stocks will be able to continue to move higher. But if doubt sets in and we see the reading fall to like 75% and continuing lower, then look out below.

Consequently, I am now adding tracking for the May meeting probability to this report each week (see FEDWATCH INTEREST RATE TOOL below).

OTHER NEWS ..

Home Sales Have Collapsed .. Sales of existing homes crashed last year to the lowest level in nearly three decades, after elevated mortgage rates and a lack of homes for sale shut out buyers. The number of existing home sales tumbled 19% in 2023 from the prior year to 4.09 million, the National Association of Realtors said on Friday. That total was lower than during the sub-prime crisis of 2007-08 and the lowest full-year level since Montell Jordan told us that this is how we do it in 1995.

After two years of soaring home sales that started during the pandemic as people sought more space and new locations, the housing market skidded to a halt in mid-2022 as rates began to rise again and the supply of homes for sale stalled at very low levels. But there are some signs of life as mortgage rates ease to their lowest levels since last May and it’s possible that last year represented a bottom for sales activity.

Recession Indicator? .. I don’t normally take too much notice of regional economic activity readings, but the New York Fed Manufacturing Index is prized by some as an early tip-off each month on where the manufacturing sector in the country as a whole is heading. The sight of this index dropping deep into negative terrain for January – a truly horrible reading and the lowest since the COVID was raging in the Spring of 2020 – convinced some observers to warn that the jig is up and a US recession is now near. Maybe, but it’s hard to make a high-confidence call based on one indicator, especially when it is one regional manufacturing indicator that draws only on survey data from manufacturing executives in the NY Fed’s district.

Remember When Chinese Stocks Were Supposed To Be The Future? .. Chinese shares sank to the lowest in nearly five years after another bout of weak economic data. The largest brokerage in China is said to have suspended short selling for some clients in mainland markets following the rout in Chinese stocks at the start of the year. State-owned Citic Securities made the move after so-called window guidance from regulators.  A Hong Kong gauge of Chinese stocks has notched up its worst week since March, while global passive funds are adding to the pressure by joining in with the selloff in another sign of deteriorating investor confidence.

UNDER THE HOOD ..

The market’s primary uptrend appears intact, although recent increased selectivity in Demand favoring Large Caps makes markets increasingly vulnerable to another short-term dip in prices. This phenomenon should not perhaps be unexpected as it was Small Caps that led the charge in those turbo-charged final weeks of 2023.

The number of S&P 500 stocks trading above their 50-day and 200-day moving averages declined modestly last week (see below) despite the continued gains and a new record in the index at the same time. At this time, this is not an alarming drop in the measures of market breadth, …

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This was the week that Microsoft edged past Apple to reclaim the title of the world’s most valuable company. The software giant now has a valuation of $2.89 trillion, slightly ahead of Apple at $2.87 trillion.

The week also saw the US and UK launch joint airstrikes against rebel targets in Yemen after a spate of attacks on merchant vessels in the Red Sea. The rebels responded by vowing to continue their attacks. An absolutely vital commercial shipping artery becoming a war zone is pushing both oil and shipping costs higher, raising fears of a widespread knock-on effect on global inflation and, as such, the evolving situation is being monitored by markets.

Following the news that congressional leaders had apparently struck a bipartisan deal over the weekend on top-line spending levels for the current fiscal year, thereby lessening (but not entirely eliminating) the chances of any imminent government shutdown, markets reacted favorably on Monday and stock indexes shifted higher. Boeing and some airline stocks took a hit, however, after its 737 Max 9 planes were grounded for inspection following an incident the previous week.

A mostly sideways Tuesday followed, with light losses for the S&P 500 and light gains for tech stocks. One one hand, the World Bank’s growth forecasts for the U.S. and E.U. this year were upgraded, helping to offset a lower-revised outlook for the Chinese economy. On the other hand, some pretty wild, apocalyptic talk from Trump’s lawyers in a DC courtroom served to remind markets how much volatility is probably going be generated by domestic politics in this election year.

Wednesday was mostly uneventful with the important inflation data due out the following day and Q4 2023 earnings season kicking off the day after. Trader positioning in advance of these events was cautiously optimistic with most indexes creeping a little higher, although the recent Small Cap retreat continued. The day’s news flow was dominated by the anticipation and eventual confirmation of the SEC’s rather reluctant approval of multiple Bitcoin ETFs (see OTHER NEWS below).

When it came out on Thursday morning before the opening bell, the Consumer Price Index (CPI) measure of inflation showed that the pace of retail price increases actually picked up a little at the end of 2023. Overall headline CPI rose 0.2% from November to December and the 3.4% annualized rate was higher than the previous month’s 3.1%.

However, the more important Core CPI reading, which excludes energy and food costs, rose 0.3%, the same as for the prior month and is up 3.9% from a year ago, a slight decline from the 4.0% annualized rate of a month previously. The biggest contributors to inflation in December were increases in the prices of used cars, clothing and especially homeowners’ and auto insurance.

The stock market initially decided to interpret the report as another sign of a potential speed-bump for its hopes of imminent and frequent interest rate cuts and prices declined across the board. A late rebound, however, saw the indexes finish pretty flat on the day.

On Friday, there was somewhat more positive inflation news from the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers which actually fell 0.1% for the month and ended 2023 up just 1.0% from a year earlier, as compared to 2022’s total increase of 6.4%.

Some of Wall Street’s biggest banks kicked off the Q4 2023 earnings season on Friday and a common theme seemed to be that last year may have been the peak for their biggest source of revenue, net interest income (the difference between what they pay to borrow money and earn to lend it). In keeping with the preceding few days, the stock market session was a bit of a yawn and prices eked out marginal gains, despite continued ongoing declines for stocks of any companies related to the airline industry.

It’s not a very complicated market right now. Unlike the past several years, there aren’t a lot of influences on stocks and bonds at the moment as there are really just three of them driving markets in the short term:

* Fed policy expectations and resulting anticipated economic growth (hard landing/soft landing)

* inflation

* corporate earnings

In the near term, the stock market has an expectation problem and the early year cooling-down hasn’t been so much because something bad happened and instead just because the first data points of 2024 didn’t quite validate the extremely aggressive (and possibly unrealistic) market expectations for the year.

But just because the outlook isn’t perfect, it doesn’t mean it still can’t be good. It’s possible to be constructive on the rest of the year, but also feel that Wall Street needs to get over some short-term jitters. Some indigestion is probably to be expected following the kind of shocking rally in the S&P 500 index that we just experienced.

OTHER NEWS (BITCOIN ETF EDITION) ..

Green Light .. After a false start on Tuesday brought about by crypto hackers hijacking the U.S. Securities and Exchange Commission (SEC) X/Twitter account and putting out false information, the SEC did reluctantly vote on Wednesday to clear the way for the first U.S. exchange-traded funds (ETFs) that hold Bitcoin to be sold to the public, allowing mainstream investors to finally be able buy and sell the digital currency as easily and transparently as stocks and mutual funds in a fully regulated environment. This followed years of resistance from regulators based on concerns about rampant fraud, misrepresentation and manipulation in crypto markets (concerns that will not disappear following this SEC decision).

Until now, everyday investors who wanted to buy and sell digital currencies have had to either:

* take their chances incurring hefty transaction fees trading on risky and user-unfriendly crypto exchanges (a good number of which were operated as criminal frauds with little or no asset protection for investors) and with limited confidence that their assets would not simply disappear or be stolen, or

* purchase high-cost products that only approximately tracked the price of Bitcoin in much less direct ways, like through futures contracts, which are far from ideal.

All eleven ETF applications filed by asset managers including BlackRock, Fidelity Investments, ARK Investment Management, Invesco, WisdomTree, Bitwise Asset Management, Valkyrie and Grayscale Investments were green-lighted to list as early as the following day.

SEC chairman Gary Gensler, who openly admitted that his hand was forced in this decision by a recent court ruling, didn’t hold back when he was asked how the Bitcoin ETFs will compare to existing ETFs that track, say, the price of gold ..

“I’d note that the underlying assets in the metals ETFs have consumer and industrial uses, while in contrast Bitcoin is primarily just a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing.While we approved the listing and trading of certain spot Bitcoin ETF shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and any products whose value is tied to crypto.”

Ouch.

I will shortly be publishing an article on this platform about how these new Bitcoin ETFs work, what they mean for Bitcoin investment and what my advice would be when it comes to using these new products.

UNDER THE HOOD ..

The S&P 500 in 2024 has notably retraced back to where it was before the last Fed meeting, effectively erasing the gains earned since then. Key technical support levels have held, however, indicating that the first couple of weeks of the year have represented nothing more than a pause in the upward trajectory of stock prices that began in late October.

It would be helpful to see the S&P close at a new all-time closing high (currently 4,797 - so only 14 points away from Friday’s closing price), to confirm the uptrend. The early 2022 intra-day h…

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The happy clappy days of late 2023 already seemed like a bit of a distant memory at times last week. This was the worst four-day start to a calendar year across all stock and bond asset classes since Shakira indicated that she was available whenever, wherever in 2002.

The chance to enjoy a second long weekend in a row seemed to have sobered Wall Street traders up a bit. Upon re-entering the arena on Tuesday, they appeared to have reined in some of their more outlandishly optimistic interest rate cut expectations and the market kicked off 2024 by battering 2023’s winners.

In fact, the NASDAQ had its third worst opening day this century as limits on semiconductor exports to China and questions about iPhone demand particularly weighed on tech stocks during the session.

Things didn’t get much better on Wednesday when we learned that the number of available jobs in the U.S. decreased pretty much in line with expectations to 8.79 million, the lowest level since early 2021, according to the Job Openings and Labor Turnover Survey (JOLTS).

The superstar stocks of 2023 were further punished by profit-takers as the publication of the minutes from the last Federal Reserve rate-setting meeting failed to show any hint of interest rate cuts being planned for the first part of 2024. Indeed the minutes showed that officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably”.

That’s Fed-speak for “Easy, tiger!” aimed at those who are anticipating an absolute orgy of interest rate cuts this year. The futures market probability of interest rates being lower than they are now after the Fed’s March meeting quickly plummeted from 87% the previous Friday to 65% by Wednesday’s close (see FEDWATCH INTEREST RATE TOOL below).

Things stabilized a bit on Thursday morning as attention began to turn toward the consequential Jobs Report the following day. But prices drifted lower again in the afternoon for a third straight day of declines to start 2024 with NASDAQ stocks and Small Caps once again being hit hardest.

When the Jobs Report dropped on Friday morning, it further undermined the case for imminent interest rate cuts. It indicated that the road to 2% inflation may be longer and bumpier than markets were anticipating. 216k jobs were added last month, way higher than analysts had predicted. Unemployment remained stuck at 3.7% as the labor force shrank. Year-on-year wage gains are now at 4.1% vs. the 3.9% analyst estimate and far above the 3.5% that the Fed believes is consistent with its 2% inflation target.

Instead of freaking out, however, stock markets rather uncharacteristically chose a more nuanced and balanced response to the report, recognizing that while the continued high employment levels and wage growth do pose risks in the form of an inflation rebound potential and the resulting possible deferral of those long-awaited interest rate cuts, the report also paints a rosy picture of an economy in good health and one in which corporate earnings may flourish and stocks finally enjoyed their first up-day of 2024, albeit a pretty modest one.

As I have repeatedly emphasized, the market’s assumptions coming into 2024 were aggressively optimistic and it is how events unfold versus these high expectations that will determine how stocks and bonds trade in Q1, which is why every major economic data point (jobs, GDP, inflation and retail sales) is important right now because 1) they’ll directly influence rate cut expectations but also 2) because of the implications for soft vs. hard landing.

If the economy is going to slow in a disturbing manner, we will likely see evidence of it during this first quarter via 1) the data and 2) Fed-speak (especially following the January meeting) from central bank officials. If rate cut expectations are significantly dialed back, that’s going to be a real problem for stocks.

Earnings season is looming with results starting next Friday. If reports in aggregate disappoint - particularly when it comes to the big dogs of the market - that will be another headwind.

And finally, brace for politics. It will become a larger and larger influence on markets as the year goes on. For Q1 2024, as well as risk of an imminent politically-motivated government shutdown (see OTHER NEWS below), the first Republican primary is almost upon us. Trump could have the nomination secured by Super Tuesday (March 5th), although his legal difficulties will likely not be resolved by then.

None of these issues will for sure derail any stock rally in 2024 even with such rich valuations, indeed there are a lot of reasons to think that stocks could very well end up having an exceptional year. But we all need to be aware that there is certainly potential for some meaningful bumps in the road along the way resulting from all this stuff and possibly other as-yet-unknown factors that could always emerge.

OTHER NEWS ..

Silly Stat .. I’m not one for drawing big conclusions from small samples, but here goes anyway .. According to Barron’s; since 1950, there have been 28 instances in which the S&P 500 has lost ground over the first four trading days of the year. On average over those 28 occasions, the index has still managed to finish the year in positive territory, up by 1.6%, but that figure badly trails the S&P 500's typical performance; in all years since 1950, the index has gained an average of 9.3%. The good news? Past performance, as they say, is no guarantee of future results.

Not Looking Good On The Shutdown Front .. President Biden’s top budget official said that she is now very concerned the US government will partially shut down later this month with the lights fully going out in February as Congress and the White House remain deadlocked over border security and spending levels. “I’m typically optimistic. Don’t mark me down as optimistic this morning,” Shalanda Young, director of the Office of Management and Budget, said on Friday.

Financial markets seem to be remarkably unconcerned about this issue at this point, although I suspect that may change soon if there’s no progress. Conventional wisdom says to not worry too much about these skirmishes as politicians will always find some sort of fudge or compromise at the last minute to kick the can further down the road, just as they did twice in 2023.

But this time it may just be different. The chances of a January 20th shutdown are high because, caving to pressure from the crackpots on the Burn-It-All-Down wing of his party, new Republican Speaker Mike Johnson has expressly vowed not to pass any more stop-gap pending bills this time. It remains to be seen if he is a man of his word.

Happy New Year Elon - not! .. The turning of the page on the calendar has done nothing to signal an upturn in the fortunes of beleaguered billionaire Elon Musk.

First, a Fidelity valuation put X/Twitter as being worth 72% less now than on the day Musk massively overpaid for it. And that’s before any real effect has been felt of the very public advice he gave that his advertisers should “go f**k themselves” following their boycott in response to their ads on the platform being placed next to the proliferation of Nazi-style posts and other violent hate speech found all over the platform and Musk’s open endorsement of anti-semitic sentiments.

Even one of the very biggest “white whales” of social media influencers and online personalities, MrBeast, has now dropped X/Twitter as a platform, essentially saying that it was an irrelevance and that his presence there was simply not worth his time and effort any more.

Last Tuesday, we learned that Tesla has officially lost its title as the world's top seller of electric cars. BYD, a Chinese automaker, delivered 526,409 cars in Q4 2023, comfortably surpassing Tesla's 484,507.

It was then announced on Friday that the company has had to recall all of the 1.6m vehicles that it has ever sold in China due to problems w…

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We will all have to wait at least a little while longer for that new all-time record high in the S&P 500 index. Despite teasing us at times during what was a very subdued week, stock prices never quite got high enough to break the record closing level of 4796.56 achieved almost exactly two years ago on January 3rd 2022. This was the first time since 2012 that the S&P 500 had failed to close at a record high at least once during the year, but the index still earned a total return for 2023 of almost 27%.

Wall Street traders came back from the long weekend filled with Christmas cheer on Tuesday, pushing stocks higher again - albeit in a thin volume environment that allowed for prices to drift upwards without needing much conviction behind the move other than just continuing momentum fueled by the fumes of a very impressive last couple of months. The S&P 500 index got to within 25 points of its previous record high.

There was really nothing to report from Wednesday’s snoozer of a session. Stocks spent the day treading water, inching slightly higher but left us still waiting to launch the confetti for that new record high.

Thursday was not much different, a rock bottom-volume journey to nowhere (only two-thirds of the annual daily average number of shares changed hands) with the indexes finishing unchanged on the day and still short of that new all-time record territory.

Stocks sank on the final trading day of the year on Friday, led downwards by the brightest stars of the recent boom, tech and Small Caps. The S&P 500 briefly got to within nine points of its elusive magic number, but ended the day, month, quarter and year at around 4770. Santa Claus departed for another year and there are a few concerns that he may have taken his rally with him.

Typically, the price action in the week before Christmas and then the week between Christmas and New Year can be considered as just noise and not particularly instructive or predictive of anything that’ll move markets in the upcoming year. But I do think that this time we are seeing an excessive amount of complacency and giddy optimism over the festive period and a quickly developing very high-conviction view from Wall Street that corporate earnings are going to look really good in 2024. And really, what is the recent track record of the end of year narrative? It’s not good.

In December 2021, there was universal optimism for the year ahead. Then the S&P 500 hit a new all-time record high on the first trading day of 2022, but it was all downhill from there. The consensus for 2022 was entirely bullish .. and entirely wrong. The Fed was much more aggressive than expected on rate hikes, inflation exploded, growth slowed and the S&P 500 dropped 20%. The stock price of Amazon and Nvidia got cut in half over the course of the year, while Alphabet/Google fell 40% and Meta/Facebook crashed 65%. Meantime, unprofitable tech (the likes of Zoom, Peloton and others) got absolutely annihilated, with shareholders watching their investments lose 80-90% of their value in many cases.

Now, think back a year to December 2022. Investors were despondent and miserable. The S&P 500 was ending the worst year in over a decade and bonds had just experienced pretty much their worst year ever. Thoughtfully constructed, balanced portfolios had taken a beating like never before. The Fed was incessantly hiking interest rates at every meeting, inflation wasn’t breaking and everyone (and I mean, everyone) was convinced that we were facing an imminent recession. The consensus for 2023 was entirely bearish .. and once again entirely wrong. Growth and earnings remained resilient, inflation was broken and the Fed pivoted to a more accommodative stance. Those same stocks that had had the crap kicked out of them in 2022 led the way higher in 2023 which ended up being a bonanza year for the indexes.

Now, in December 2023, the consensus is universally bullish again. Investors seem to passionately believe that an economic soft landing in 2024 is all but assured. The Fed will cut interest rates six times next year, but not because of slowing growth and instead because inflation is about to go into some sort of free-fall. Despite there being numerous geopolitical hot spots, none of them will get materially worse. U.S. politics won’t be a problem (even though it’s an election year and there’s no debt ceiling solution in sight) and despite a potentially slowing economy and margin compression, companies in the S&P 500 will grow earnings by nearly 10% this year. The 5000 mark on the S&P 500 isn’t a matter of “if” , but “when”.

All of those things may well come true. It might be exactly how 2024 works out. It’s just that we need to watch for warning signs that it isn’t and probably brace ourselves for some volatility if that turns out to be the case, since so much of this good news is already baked into the current level of stock prices, leaving markets highly vulnerable to any disappointment.

The plain fact is that there are real, legitimate risks lurking out there in the new year. We can still have a growth slowdown and a recession. Earnings growth can falter as demand slows and margins compress. Geopolitics can easily worsen from here, providing negative surprises, sometimes seemingly out of nowhere. Inflation could bounce back. And around the world, but especially in the U.S., there are going to be elections in 2024 that will be highly consequential and maybe brutally contested (both before and after polling day).

We can expect markets to normalize this week and immediately get to work answering some of these pretty important questions about economic growth, actual vs. expected Fed policy and corporate earnings.

Stay with me in 2024 and I’ll try and make some sense of things for you as we go along. Meantime have a safe, healthy and happy New Year!

OTHER NEWS ..

In such a zzzzzzzzzzzz week, finding any interesting “other news” was pretty challenging. Normal service will be resumed next week.

On the plus side, my latest Quarterly Market Review looking back on financial markets in Q4 2023 should be completed and sent to subscribers by sometime in the middle of this coming week. Keep an eye on your email inbox.

UNDER THE HOOD ..

Five technical caution signals that I will be watching for in 2024 that could indicate a market top and act as warning signs for a possible reversal in stock prices (which could still be months or quarters away if they come about) ..

1) Market Breadth.

Participation is often one of the first things to fall away in an equity bull market so if the number of stocks trading above their long term moving average starts to meaningfully decline, that can be an early warning signal of a potential reversal. You can track this reading each week in this report, see % OF S&P 500 STOCKS TRADING ABOVE THEIR LONG TERM MOVING AVERAGE below.

2) Investor Sentiment.

Overly bullish or optimistic sentiment is consistent with a crowded long side of the market and typically precedes market peaks. So a divergence between the broader stock market (still moving higher) and sentiment (beginning to fall) would be a notable caution signal for stocks. You can track sentiment each week in this report, see both the WEEKLY US INVESTOR SENTIMENT and the FEAR & GREED INDEX below.

3) Treasury Bill Yields.

Futures are pricing in a March rate cut which is now less than three months away, however the 3-month Treasury Bill yield held steady at between 5.40% and 5.45% for all of December. If we do not see the 3-Month Bill yield begin to move down towards 5% in the coming days and weeks, that will be a negative development for stocks. You can track the state of the yield curve each week in this report, see US TREASURY INTEREST RATE YIELD CURVE below.

4) The CME’s Fed Watch Tool.

This is largely a continuation of the previous point, but if the Fed Watch Tool begins to show less rate cuts or rapidly fading odds of a March rate cut (currently 87%), that could be a major headwind for stocks…

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