Inside The Stock Market ...trends, cross-currents, and outlook

The stock market leader in the first month of the new year has an above-average chance of persisting during the remaining eleven months. Historical results showed this to be true, not only for index results, but at various other levels of granularity, including sectors, themes, and asset classes.

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As detailed elsewhere in this section, the notion of an economy with unstoppable momentum is undermined by an historic divergence between real growth estimates (GDI vs. GDP), and by the weakness in full-time jobs and total hours worked.

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Remember the nickname for retired San Antonio Spurs star Tim Duncan? “The Big Fundamental.” The stock market itself is a big fundamental—and that’s probably truer now than in past cycles, since market capitalization relative to U.S. GDP is larger today—with the exception being the most extreme phase of the post-COVID mania.

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The S&P 500’s inflation-adjusted gain over the last twelve months is 21%, far above any previous reading seen on the doorstep of a U.S. recession. In other words, the wealth effect—a major contributor to the 2021-2022 inflationary spiral—is back again.

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There are reports that 40% with student loans did not make an initial payment when installments resumed in October. Meanwhile, among seniors aged 65-79, the share with a mortgage rose to 41% in 2022, up from 24% in 1989, while the percentage of those aged 80+ with a mortgage increased from 3% to 31% during the same time! 

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The S&P 500 upswing from its October 2022 low reached +34% at the 2023 high point on December 28th. That’s roughly ten percentage points behind the average gain at the same point of the past 15 major advances since 1957.  Still, it’s a solid gain.

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After the S&P 500 lost 25.4% into its low in October 2022, the fundamental characteristics surrounding the market at that time were hardly the type that pave the way for a multi-year bull market. We’ve therefore maintained that even the most rabid bulls need to temper their expectations. 

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The shortfall of 12.7% in the Equal Weighted S&P 500 compared to the Cap-Weighted version was its second-worst annual showing. Thanks to the lagging action, the valuation profile for the average Large Cap stock has improved.

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There’s a huge difference between having an awareness of the myriad calendar phenomena impacting the stock market, and actually acting on them.

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In the theme that’s reminiscent of all but a couple of the last 15 years, the optimal strategy for equity managers and asset allocators in 2023 was the same: Buy the S&P 500, and then hit the links.

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There’s an old stock market adage that says if the bulls come for Thanksgiving, then the bears will have Christmas. Last month though, Thanksgiving was one of the few days stocks didn’t go up (… but only because the NYSE was closed). No problem. The market found plenty of other November excuses to rally.

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Equities have dodged the impact of this year’s monetary tightening, and Large Cap Growth stocks have once again proved to be the most artful dodgers.

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Our Major Trend Index is not an economic forecasting tool. Still, we thought a U.S. recession might be imminent when the MTI dropped into bear territory on October 6th.

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It’s no surprise that investors have become giddy after the November upside explosion brought the year’s S&P 500 gain to near 20%. The question is whether the giddiness is excessive in light of the price action. The answer is that it is extremely close.

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Lately a few readers have asked how or when we will know that the still-negative leading economic indicators have failed. We don’t have a good answer, other than to observe market-based economic measures for sharp recoveries, like cyclical stocks, corporate credit spreads, and industrial commodity prices.

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The retail investor is warming up to the stock market. We also see the “smart money” is also taking a shine to stocks. It’s rare to see these two classes in agreement. Usually when the retail public becomes euphoric, insiders become fearful.

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We don’t dismiss the widespread belief that the Federal Reserve has lifted asset prices as well as wealth inequality over the last dozen or so years. Keep in mind, though, the Fed was far from the only central bank to greatly expand its bond purchases in this era.

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Some well-known asset allocators see tremendous value in EM equities. Yes, their P/E ratios are low. However, their “PEG” ratios (P/E-to-growth) are not, if the post-GFC period provides an accurate snapshot of sustainable growth.

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It would take a solid December gain of about 5% to bring the S&P 500 back to its all-time high of 4,796.56—printed on January 3, 2022. Well then, what’s been accomplished in the nearly two-year trip to nowhere? For one, valuations for the cap-weighted S&P 500 have receded from truly bubbly readings to levels we’d merely consider “pretty damn high.” 

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The S&P 500’s 8.9% November gain ranks as the 18th largest over the 800 months since the index’s inception in March 1957. Are such short-term market spikes typically followed by additional upside? The evidence is not quite as compelling as the data-mined analysis we found on X (formerly Twitter) initially had us believing. 

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