Things you need to know.

–        Stocks staged a 4-week rally that has seen the indexes gain more than 10%.

–        Bonds back off just a bit, yields rise just a bit.

–        Lots of eco data this week – Wednesday is the PCE report – the FED’s favored inflation gauge.

–        Oil down, OPEC+ meeting scheduled for Thursday.

–        Gold UP, Dollar down and VIX? That is crashing!

–        Try the Limoncello for the holidays.

Stocks ended the week higher on Friday’s abbreviated session….….causing the  November rally to continue to sizzle…the Dow added 117 pts or 0.3%, the S&P rose 3 pts, the Russell rose 12 pts or 0.7%, the Transports gained 62 pts or 0.4%, only the Nasdaq ended the day lower (but did end the week higher) losing 15 pts or 0.1%.   The indexes are now on track to put in their best monthly performance in more than a year (all up more than 10%). Even the equal weighted S&P Index (the index that removes the effect of the Magnificent 7 and gives all members an ‘equal weight’ thus the name) –advanced by 19 pts or 0.3% taking it up 3.8% ytd…. I mean on October 27^th – this index was down 6.1% on the year…- so we’ve seen a 9% rally in this index over the past month…all as investors are going all in – assuming that JJ’s next move is down and not ‘hold’ or ‘raise’.

Bond prices declined on Wednesday and again on Friday sending yields up a bit – after inflation expectations rose – and that allowed bond traders to lock in some profits after the recent surge in bond prices…. trading was muted across the board though as many asset managers and investors were away from their desks…. Look – the latest U of Michigan inflation expectations have now risen to 4.5% for next year – Which is higher than what the CPI is showing us, in addition – American’s expect it to run at an avg of +3.2% over the next 5 -10 yrs.….which continues to support my argument that the FED is about to change the rules – moving the target from 2% to 3% sometime next year… since 2% no longer really feels achievable…..unless of course we go off the rails…something I would not expect that to happen in a Presidential election year cycle.

My good friend Quincy Krosby – Chief Global Strategist for LPL had this to say about the inflation expectations….

“For a data dependent FED, this is not good news as they do not want to see consumer inflation expectations become unanchored, since historically it becomes increasingly difficult to reset consumer psychology towards a lower inflationary environment.”

So, while it feels good that stocks continue to advance – don’t go betting the total ranch…. that they have this inflation thing under control just yet….

There has been lots of talk about the coming shopping season now that it has officially begun…..We are hearing of big discounts at a lot of retailers as some analysts are warning of a weakening consumer….The NY Fed’s latest Household Survey is suggesting that a ‘record high share of consumers are saying that it is much harder to obtain credit’….Ah, yeah….have you seen what rates have done? Have you seen the strain that is putting on those households? Mortgage rates pushing 8% while revolving credit card rates can run as high as 30%, The PayPal Credit Variable Purchase APR is now 29.24% and will vary with the market (as defined in your agreement). 29.24% Let that sink in….

I suspect that we are going to see 40% – 50% OFF sales sooner rather than later…. But let’s see.  

Eco data today: New Home Sales – expected to be down 4.7% and The Dallas Fed Manufacturing Survey which is also expected to remain a bit weak at -16.  Later in the week – we are going to get the 1st revision to 3 qtr. GDP – which is expected to tick up to 5% – suggesting that the economy is strong.  Personal Income and Personal Spending – each expected to be up 0.2%.  Then on Wednesday – we will get the Fed’s favored inflation gauge – the PCE Deflator. Top line is expected to be +0.1% m/m and + 3.1% y/y.  Core PCE is expected to be + 0.2% m/m and + 3.5% y/y – all of those estimates are below last month’s read, but still far away from the 2% target and that will give further evidence of the idea that the FED will remain in pause mode in two weeks.  Again – those figures would not suggest that the FED needs to CUT rates anytime soon.  

The next FED meeting is on December 12^th and 13^th…..CPI and PPI are also due out on the 12th and 13^th….so it will be interesting…..I do not expect the FED to do anything else this year…I think they made it quite clear that they are in official pause mode….and unless we get hit by something out of left field – I do not think they change the narrative….

Earnings season is only 6 weeks away before it starts again….4^th qtr. announcements begin in early January…  4^th qtr. earnings are expected to rise by 2.9% y/y while revenues grow at a 3.2% rate…..bringing the 2023 yearly growth rate at 2.3%….2024 though is a different story – earnings are expected to grow by 11.2% ($245)…which is a very healthy pace…and that is what is setting the tone for this year-end rally – The question is – Is that guidance too healthy?

Currently the market is trading at 20.55 x’s 2023 earnings….which appears rich, but you need to look at where it is for 2024…and it is currently trading at 18.6 x’s those expectations – now while that is closer to historical avg’s it is a level I still think is high considering the headwinds we face….think ongoing inflation, think the massive bond sales that are coming to the mkt in December ($600 bil) and the 1^st qtr. of 2024 ($860 bil) and think about an uncertain economic environment.  Never mind it is also a Presidential election year that will prove to be an interesting one……. Remember that while politics can create chaos in the short term – they rarely price stocks in the long term.

OPEC+ delayed their meeting that was supposed to take place last weekend…but internal strife among the African nations has delayed it (The Saudi’s want them to cut their production and they don’t want to) – so the question is – Who will?  If no one does and production remains the same – we could see oil move lower – and it did and it is lower again this morning – Why?  Because production at non-OPEC nations is rising…think US at the top of that list…  Resulting in more supply – In fact – the IEA (Int’l Energy Administration) is now forecasting a surplus of oil next year – this is while the Saudi’s and the EIA (Energy Information Administration) are both raising their estimates for demand growth….At the moment it appears as if the surplus is winning….My gut stills says that the Saudi’s want $80+/barrel and I expect them to curtail OPEC+ production to help push prices to that level.

This morning – Oil is trading at $74.95 – down 60 cts. It’s a simple supply/demand story…… and that is the challenge facing the Kingdom.  In addition – The ongoing ‘cease fire’ in the middle east is also taking some of the pressure off of oil. 

Gold traded up $10 on Friday to end the week at $2023/oz….and this morning gold is up another $7 at $2031/oz.  Leaving it just below the October high of $2040…and you can credit the weaker Dollar for helping to fuel that move higher…the Dollar index fell by 0.5% on Friday leaving it at $103.41 and this morning it is also a bit lower – down 10 cts at $103.31 – just south of the long term trendline at $103.62…a failure to retake the trendline could see us churn in the $102.90/$103.60 range and if that’s the case – I would expect gold to continue to trade higher. 

The VIX – the Fear Index – is trading at $12.46 – a level NOT seen since January 2020…It is telling us that there is NO fear, nothing to see here, now just move on…. – which in itself should be a huge RED flag……It is screaming complacency….do I need to remind you what happens when you get complacent?

US futures are lower this morning…. the Dow – 50, the S&P – 7, the Nasdaq -22 and the Russell -8. 

Overnight Asian markets fell.  China, Taiwan and Australia fell by more than 0.75% across the board as Chinese Industrial Profit growth showed signs of slowing…..it is not falling it is just growing at a slower pace (which is being viewed as a negative) – suggesting that the Chinese recovery ‘remains uncertain’…..Japan lost 0.5% while South Korea lost less than 0.1%.  There is a fair amount of Chinese economic data due this week – so expect to hear more about the Chinese economy and how that impacts the global economy. Never mind the fact that Beijing has “asked’ major shareholders not to sell stock for fear of killing the excitement.  And I use the word ‘ask’ sarcastically!

European markets are mostly lower as well.  Italy off by 0.25% while Spain is ahead by 0.5%.  The others are just off by about 0.2%. Oil and Gas stocks leading the charge – the sector down about 0.7% as investors try to quantify what Thursday’s OPEC+ meeting will bring. The action suggests no new announcement.

The S&P closed at 4559 – up 3 pts.   It feels like the algo’s want to re-test the 2023 high of 4608  (40 pts away)– just because they can – but if we do, I suspect that it will find plenty of resistance….…and while it may not happen today, I would not be surprised to see that one last push before we see any meaningful pullback.  The market is priced for perfection – We are priced for a soft landing, we are priced for double digit earnings growth in 2024 earnings, we are priced FED to cut rates sooner rather than later, we are priced for bonds to rally. Need I go on?  Anything short of that will cause an ‘adjustment’ in prices.

Given the backdrop of moderating – yet still elevated – inflation, the FED cannot deliver the easing that the market is currently pricing in and that is the risk.  The labor market while easing,  remains robust (according to the FED) and we would need to see the labor market devolve into a broader deeper weak state in order to see the FED ease and if that happens, we can expect weaker growth (not stronger) and more economic challenges – and that is not the song that is currently being sung….

The market and investors appear to be ok with current rates at 5.25% – 5.5% – which btw – are historically normal rates… so my investments will reflect a ‘steady as she goes’ mentality – Not a ‘Fear of Missing Out’ mentality…. remember – it is time IN the market and not timing THE market.

Over the weekend – we all witnessed a ceasefire in the Israel/Hamas war – and the release of Israeli hostages and Palestinian prisoners held in Israeli jails.  The move is also suggesting that this temporary cease fire could be extended beyond today and if that is true – then we should start to see the geo-political temperature decrease…

If you are invested – you’re good, if you have money to put to work, be patient and if you are just starting out – go slow….…create your thesis, begin by feathering it in, time is on your side…Remember – there is always a starting point….where you end will depend on how you play the game.  Call me to discuss.

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment.  The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kenny Polcari or SlateStone Wealth.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Limoncello

For the holidays…

This is a traditional Italian after dinner drink that works like a digestive…it helps to settle your stomach after a big meal and is soothing to the soul.  This is the recipe I used. It comes from Everclear – a brand made by Luxco – https://url.avanan.click/v2/___www.luxco.com___.YXAzOnNsYXRlc3RvbmU6YTpvOjliMzEwM2Y1ODk0M2I1MTA0NWUxZTI3NjFlMDk3ODhhOjY6MmVlODphYjJkMmM0M2UxZTc0NzE5NjgwZWVkMTZjZDY1ZjVjODA0ZGM5NmYwZGVmN2I4MzAwOTQwMGQ5YTU3MjEzOThlOnQ6VA

Ingredients:

10 freshly washed organic lemons, 1 (750-ml) bottle Everclear®**, 3 ½ cups water, 2 ½ cups sugar.

**Everclear is 190 proof grain alcohol

Instructions:

Peel 10 freshly washed, organic lemons. Lemons may be reserved for future use.

Remove the pith.

Combine lemon zest and Everclear® in a large, sealable container, at least 2 qts.

Let it sit for at least 4 days and up to 4 weeks in a cool, dry place.

Now the simple syrup –

When ready to complete the process – combine the sugar and water in a medium saucepan.

Bring to a boil, stirring regularly until sugar is fully dissolved, approximately 5-10 minutes. Let syrup cool to room temperature and combine simple syrup and lemon infused to taste.

Strain mixture. Chill in freezer. (this is key – you keep it in the freezer – it doesn’t freeze).   Enjoy.   You serve this is a shot sized glass BUT you don’t ‘shoot’ it…. You sip it, nice and slow, enjoy the moment. 

Buona Salute (Good Health)