Things you need to know.
And the PIVOT ‘officially’ begins…. investors, traders and algo’s go all in on stocks and bonds!
The headlines are on FIRE….as the FED makes it clear that ‘higher for longer’ isn’t really ‘higher for longer’ – it’s just ‘higher for shorter’ as the DOT plot now shows a strong bias to lower rates in 2024 and into 2025! JJ confirmed that the rate hiking cycle is now over and while he left the door open, he made it clear that they are NOT walking thru it – although he did say.
“It’s far to early to declare victory, and there are certainly risks” – (risks that inflation may be fooling us and the possibility that lower rates will only re-stimulate it)
……. Instead, he focused on the ‘risk of causing unnecessary harm to the economy by leaving rates too high as inflation falls’…. saying that
“We’re very focused on not making THAT mistake”. Recall – the mistake that they made when they held rates at zero for 9 months longer than they should have – when inflation was screaming higher…. – but let’s not go there…. that is water under the bridge now…. Essentially yesterday he confirmed he’d rather cut a bit sooner and try to stay ahead of it vs. chasing it lower if the economy starts to fail…. but by all accounts, – it certainly does not feel like the economy is about to fail at all – does it?
I mean we are hearing the this shopping season is ANOTHER block buster shopping season….Online sales up 9% y/y, Holiday spending up 4%, all while inflation falls, wages rise, unemployment remains at historic lows, we apparently have avoided a recession (even as the yield curve remains inverted for 22 months) leaving investors to celebrate…I mean – How great is that!
The papers put in context –
“Fed Starts the Pivot Toward Lowering Rates” – wsj.
“Fed Prepares Shift to Rate Cuts in 2024 as Price Pressures Fade” – bb.
“Dow Closes Above 37000 for the First Time EVER as Powell Hints at Rate Cuts” – fbn
Some will say that the news caught investors off guard…. curious, no? I mean stocks have rallied strongly for the past 6 weeks…rising better than 15% across the indexes…off that October low – when the headlines suggested tougher times ahead….suddenly the narrative has shifted from caution to celebration….and that sent the S&P into a new century….rising 64 pts or 1.4% to end the day at 4707 – now up 23% on the year! The Dow piercing 37k to end the day at 37,090 up 512 pts or 1.4% – up 12% on the year, the Nasdaq joining it – gaining 200 pts or 1.4% – up 41% on the year, while the Russell (small and mid-caps) jumped 67 pts or a whopping 3.52% – up 11% on the year, the Transports gaining 200 pts or 1.3% – now up 16% on the year and the SPW – Equal Weight – that rose 130 pts or 2.1% leaving it up 9.5% on the year! Amazing….and exactly why – time in the market is the long-term answer….
Sector performance? Guess who the outperformer was? Hint: it was NOT TECH. Come on – think about what sector is soooo rate sensitive that it got crushed when rates rose and should benefit when rates fall and are projected to fall even more? It’s boring, it’s not sexy – Utilities! Bang – they exploded higher…the XLU rising 3.8% on the day…. leaving this sector still negative on the year – creating an opportunity…. if the FED is correct……making it a sector to add money to going into the new year. Remember – investors buy utilities for their relatively boring story but their hefty dividends…. typically, ~ 4%….so when rates shot higher this year – utilities got crushed…falling nearly 20% as investors shifted out of utility stocks – and into 5+% gov’t money funds, short duration treasuries, 1 yr. CD’s etc.
This way they took equity risk off the table and guaranteed themselves 5+% in riskless assets….So now when rates are projected to come down to 3% (as per Goldy) – then 4% utilities look great and since so many of the stocks have gotten pummeled – there is UPSIDE in the stock price and UPSIDE in the yield! NEP is just one example – Nextera Energy Partners was down 70% into early October ($70 in Jan/$20 in October)…as rates rose and the talk of higher for longer was the narrative…It has risen by 40% over the past 6 weeks as the narrative started to change….going from $20 to $29 all while YIELDING 12%….Hello? Anyone home? Now yes, that yield will change as the price rises – but there is plenty of upside in the price – so enjoy the ride!
Every other sector in the 11 S&P sectors was higher…. Real estate was next – XLRE + 3.3%, Healthcare – another underperformer in 2023 – gained 1.8% – leaving that sector flat on the year (capisce???). Consumer Staples – XLP up 1.8% – and that sector is still down 3% on the year….(think opportunity?), Energy – XLE +1.4% (has gotten beaten up this month), Industrials – XLI + 1.1% (think no recession), Financials – XLF +1.6% – (lower rates more loans, maybe less defaults), Consumer Discretionary – XLY + 1.3%, Basic Materials – XLB + 1.2%, Communications – XLC rose 0.9% with TECH coming in – in last place – XLK + 0.88%.
Further down the line – we saw Retail – XRT jump by 3.3%, Disruptive Tech – ARKK + 3.7%, the Value trade – SPYV jumping 1.5%, Semi’s – SOXX +1.5%, Cyber – CIBR + 1.1%, Aerospace and Defense – ITA +1.4%, Oil & Gas Exploration – XOP + 2.5%, Homebuilders – XHB +2.5% – and if you made a leveraged long bet going into yesterday – then you hit the jackpot…the SPXL – Direxion 3x’s levered S&P – rose 4.1%! I mean do I need to go on??? It was a palooza!
And Bonds! OMG – yields plunged as prices rose….…the 2 yr. surged causing yields to fall by 30 bps to end the day yielding 4.32%…..the 10 yr. falling 20 bps to end the day at 4.01% – recall it was yielding 5% only 6 weeks ago – an amazing 20% decline…..and if you went long the bond – then look at what the TLT has done…it was up 2.4% yesterday and has risen 18% since then….the TLH was up 2.1% and has risen 13.5% during the same period. And in a nod the housing market – 30 yr. money is now below 7% – the latest rate quoted is 6.8% (for a conventional loan), 6.25% for a 5/1 ARM and 6.37% for a 10/1 ARM and this should ignite the real estate market once the Spring selling season hits in early February….
Now onto oil – it looks like it found some support right around the $70 line ant his morning is up $1.3 or 2%. News that OPEC’s crude output fell by 100k bpd in November is helping today’s move…. – losses seen in Nigeria, Angola and Iraq……It was operational issues in Angola and weather in Iraq. Saudi volumes were up slightly as Kuwaiti and Iranian output – but not enough to offset the losses. In the end – you know the drill – it’s the non-OPEC producers that are flooding the market and causing agita for the Kingdom…. We remain well below all 3 trendlines as it looks to find support right here at $70…. On the chart – longer term support is really $65 while the first real resistance level is $76.
And Gold – oh boy….Hope you didn’t panic and sell it – because it jumped by $50 to end the day at $2,043 yesterday…and this morning it is up another $5 at $2,048….all this as JJ made it clear that the inflation is over and that rates are going lower…..this will put pressure on the dollar – and guess what? It did…yesterday the dollar fell 1 full point or 0.9% – going from $103.86 to $102.86 – slicing right thru the trendline at $103.52 and this morning it is lower again…. falling another 50 cts to trade at $102.36 at 7 am…. all this because we were told that ‘higher for longer’ isn’t really the narrative….
And the VIX – continues to fall…. confirming all of the rumors…. that investors have nothing to worry about…. rates are going lower, and the economy is doing just fine….it remains robust, and Goldilocks is knocking on the door…. I mean what could go wrong?
Eco data – is all about Retail Sales…. they are expected to be -0.1% m/m – while ex autos and gas is expected to up 0.2%…. Tomorrow we will get US services and Manufacturing PMI’s – Manufacturing in contraction zone at 49.7 while Services is in the expansion zone at 50.5. But remember – the eco data will mean less and less as we move into the end of the year…as so many prepare for the holidays and the new year celebration….
US futures are up again…. even after that surge higher yesterday…. At 7 am – the Dow is up 86, the S&P +12, the Nasdaq +55, and the Russell +20. Treasuries prices are up this morning and that is putting pressure on yields and that is also putting pressure on the dollar and that is helping stocks move higher. The 10 yr. has now broken 4% and is back yielding 3.96%…..the big investment banks now tripping over each other to try and pick a yield on the 10 yr. after yesterday’s drama…..As I said – Goldy and Jeffrey Gundlach of Double line fame – are both calling for the 10 yr. to hit 3% in 2024…..so now expect analysts to call for S&P 500 to have an even higher year end target in 2024…those S&P 5000 target calls will certainly go higher – it’s only a matter of days before we see them all line up….
European markets are also celebrating…on the back of the US moves yesterday and the idea that the BoE left their rates unchanged as well. Suggesting that they too may have hit the peak….and that rates in the UK are set to fall…. Wait till we hear from Christine Lagarde at the ECB – will she join in too or will she remain more diligent?
The S&P closed at 4707 – up 64 pts…. making yet another new closing high for 2023. We are now only 80 pts away from the high seen on January 4th, 2022 – and now it’s not if but how long will it take the algo’s to push us there? The excitement is building…. the 10 yr. is now below 4%, and likely going lower….and if Europe begins to cut too, then watch as global equities surge….
But the other side of this argument is that the FED is cutting because they see economic issues ahead, rather than just a decline in inflation….….never mind the coming election…..which is a bit curious – because the FED should NOT (is not supposed to) move rates 6 months before an election – just to not be seen as ‘political’ – that apparently is not the case during this presidential election cycle… they have hinted that cuts could start as early as March, but more like May and continue thru year end and into 2025…..and that could smack of ‘election interference’! But – let’s NOT go there….
In the end – all of this excitement favors and reinforces my argument for – starting to save early with a tax advantage long term retirement account and having a plan to stay ‘in’ vs. trying to pick tops and bottoms…..Now, while I still think the market feels a bit overdone….on the upside – it just doesn’t want to stop (yet), but that doesn’t mean that you should chase it. There are opportunities – you just need to look for them…. (Think NEP) ….….
We have priced in perfection….we are assuming that S&P earnings will grow at the 12% estimate, we are assuming that inflation is under control and that the FED will cut rates by 75 bps – Goldy and Gundlach assume 200 bps – and we are assuming that the FED has navigated a soft landing and that we have avoided a recession and we are assuming that the unemployment rate does not explode higher…. And while I hope that all comes true – I am remaining committed to the plan…Remember – trees do NOT grow to the sky…. The market will not continue to advance just because it has advanced…. growth become maturity and maturity becomes decline….and the lifecycle and business cycle go from trough to peak and peak to trough…It’s just what it is….
Review your plan, talk to your advisor, and remember – investing is not ‘trading’ it’s investing…it a focus on the long term and not the daily machinations of the markets. Don’t be emotional, do your homework, take advantage of dislocations in names that you own or want to own….do not chase and if you are just starting out – don’t be dismayed – time is on YOUR side.
Call me to discuss. 212-381-6194
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.
Fried Asparagus Spears
This was one of my grandmother’s signature holiday dishes. They are great! And you can make these a day ahead to help you avoid the pressure. Preparation (like investing) is key! ~
For this you need: Fresh Asparagus spears, Italian seasoned breadcrumbs, flour, eggs, olive oil.
Begin by trimming the ends of the asparagus – removing the white part of the stalk. Now place in a frying pan full of water and blanche them for five mins or so Do not allow them to become limp – they should be firm to the bite but not raw…. immediately place in a cold bath to halt the cooking. Remove and pat dry.
Next – make a mound of flour on the counter – beat 6 eggs in large pie plate to make an egg wash – and place a mound of Italian seasoned breadcrumbs in another pie plate – set up like an assembly line. – Flour, Egg wash then breadcrumbs.
Dredge the asparagus in the flour – then dip in egg wash and they roll in breadcrumbs – set aside. Repeat until complete.
Now in a large frying pan – heat up enough olive oil so that you cover the bottom of the pan…. let it get nice and hot so that when you place the asparagus in the pan – it sizzles and browns the breadcrumbs onto the spear. Turn to brown all over – now place in clean plate and serve this on your holiday table…they are delicious.
Buon Appetito.
