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Market Outlook

The Inmates Are Running The Asylum?

12/20/2024

The Inmates Are Running The Asylum?

Sometimes, you get the feeling that the inmates are running the asylum after the two-day fiasco in Washington sent the government into a temporary shutdown without passage of any stop-gap funding. Not that it hasn’t happened before; we’re all too familiar with and cynical of the antics of our esteemed elected officials, but the drama is causing serious damage to an already rattled market.

The S&P dropped 2% overnight after a smaller stop-gap funding bill rushed through by the GOP in the house failed to secure enough votes with a large number of Republicans opposing the bill as well. Briefly, Musk had torpedoed an already agreed bipartisan stop-gap bill, which would have kept the government funded through March 2025, because it did not include a debt ceiling increase and far too much pork. Republicans scrambled to put together a much smaller bill including a debt ceiling increase, but couldn’t get enough representatives on board, and this time a betrayed democratic side didn’t lend a hand.

As we barrel through the uncertainty, already exacerbated by a rising 10-year yield and the likelihood of only two cuts next year, the huge drop in overnight futures suggested that the S&P could break 5,872 and completely erase the post-election rally. Everybody appreciates the animal spirits, lower taxes, lesser regulation, and so on, but it comes with the price of high drama! No free lunches…

Slightly better than expected inflationary numbers with the core PCE rising 2.8% YoY against the 2.9% has stemmed the fall a bit. I had planned to buy the dip – may get some of my limit buys today, or even lower them.

Though this is a far less onerous shutdown. In a shutdown, government offices continue essential work, but tasks deemed nonessential are put on ice, paychecks stop and many workers are furloughed until Congress passes new funding. The impact of a shutdown varies, critical services continue, as would military and border-control functions. But, most federal workers, whether essential or not, won’t receive a paycheck. Under a 2019 law, workers will automatically get back pay when the shutdown ends. Private contractors who work with federal agencies and are furloughed during a shutdown aren’t guaranteed back pay.

How would this shutdown compare to previous ones?

From the Wall Street Journal
“Congress has missed its deadline to pass 12 federal funding bills and failed to extend itself more time in about two dozen instances since 1976, but those lapses have often been short, with minimal impact.”

Quite the dysfunctional record but thankfully the impact has never been severe.

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Market Outlook

A Flicker Of Hope After The Fed Flameout

12/20/2024

The Fed’s favored inflation gauge – core PCE – cools slightly in November

The core PCE Price Index, the Federal Reserve’s preferred inflation measure, edged up 0.1% M/M in November, less than the +0.2% consensus and cooling from the +0.3% pace in October. Personal income and spending also came in slightly lower than expected in the month.

On a year-over-year basis, core PCE increased 2.8%, just under the 2.9% consensus, and running at the same pace as in October.

PCE Price Index, which includes food and energy, also ticked up 0.1% M/M vs. +0.2% consensus and +0.2% prior.

That measure translated to a 2.4% Y/Y increase, less than the +2.5% consensus, but slightly hotter than the 2.3% rise in October.

Personal income: +0.3% M/M vs. +0.4% expected and +0.6% prior.

Personal outlays: +0.4% M/M vs. +0.5% consensus and +0.4% prior.

At the time of writing, premarket S&P 500 Futures are down 0.6% after being down 1.5% overnight after the second stop-gap funding bill failed miserably to get through the House of Representatives.

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Market Outlook

Don’t Ignore The 10-Year Yield

The likelihood of only two Fed rate cuts in 2025 sent the markets tumbling yesterday, even as Chair Powell was still answering pointed questions about the resilience of the economy and where inflation was headed in 2025. The S&P 500 eventually closed 2.96% lower. shattering the post-election rally.

The markets had been ignoring the 10-year yield for far too long. The 10-year went from 3.6% in September when the Fed started cutting to 4.40% before the FOMC meeting, signaling that inflation wasn’t completely done and that stock valuations were getting frothy. It unraveled yesterday. Analysts are talking about the 10-year possibly reaching 5%, which will remain bad for stock multiples. The S&P 500 and the Nasdaq Comp are down 4.5% from their highs. Let’s see how the PCE report is on Friday.

The last time the S&P 500’s P/E ratio was 22, it was 2021, and the 10-year treasury yield was 1%! We are at 4.5% and climbing! The expectations of 4 cuts in 2025 had kept the markets hopeful that the 10-year would follow suit and head back below 4%. Clearly, that’s not happening. Either the index has to come down or the 10-year has to drop to justify these valuations….

Also don’t forget the Fed’s reluctance to cut big for forecast more cuts in 2025 was based on the Sep, Oct and Nov inflation readings, they’ve not even talked about the possible inflationary impact of tariffs and larger fiscal deficits – somebody has to fund the government when they’re not collecting enough taxes, and the weaknesses in the past two treasury auctions suggest that lenders are demanding better rates to lend to the government.

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Market Outlook

A Hawkish Cut

12/17/2024

A Hawkish Cut

As expected the Fed cut interest rates by 0.25% bringing the Fed Funds rate to 4.25% to 4.5% To be sure, this is a hawkish cut. The S&P 500 gave up its gains of 0.5% and has dropped 1.5% in a reversal as has the Nasdaq Composite, down a full 2% to 19,703.

The 10-year treasury yield has shot to 4.5%, a harbinger of how the markets believe that the Feds will have to pay more to finance the deficit, with analysts even talking of 5% – a rate seen last October.

The hawkishness stems from the FOMC Median 2025 PCE Inflation Forecast, which rises to 2.5% vs 2.1%

The median forecast of Fed policymakers for the benchmark rate for the end of next year is now 3.9%. That compares with 3.4% back in September. That suggests 50 basis points of easing compared with 100 basis points in September (including the impact of today’s rate cut).

Today’s cut means policymakers have now lowered their benchmark lending rate by a full percentage point since mid-September. The median estimate of Fed officials now sees just two cuts next year. Most folks were expecting three in the forecast.

Fed officials are tipping an unemployment rate of 4.3% next year a shade higher than the current 4.2%. Chair Powell in the conference that followed stressed that he wanted to ensure that labor markets didn’t get derailed when asked about the need to cut.

The Fed’s policy statement also alluded to a slower pace of cuts by saying “the extent and timing” of additional adjustments would depend on the outlook. This too was stressed in the conference that it would always be new data that would matter.

The neutral rate discussed (the rate at which the economy is neither inflationary nor disinflationary) is now 3%, higher than the original 2%, which the Feds were hoping to achieve by 2024, now highly unlikely before 2027.

Given the strength in the economy, with the GDP at 2.8% and projected to grow above 2% next year, a strong labor market with an unemployment rate of only 4.2%, this is not a bad call and regardless of how the market reacted, the caution to cut slower in 2025 is warranted in my opinion.

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Market Outlook

Market Outlook – The Case For Market Breadth

The Russell 2000 (IWM) ETF and the S&P 500 Equal Weighted Index have been outperforming the S&P 500 and the NASDAQ Composite since the election. Last week was no exception.

The IWM comprises 2,000 of the smallest capitalized companies in the market.

The IWM has gained 8.5% compared to the S&P 500’s and the Nasdaq Composite’s 4.5% gain since Nov 4th, 2024, and 4.5% in the last week, significantly higher than the 1.7% each gained by its larger counterparts.

Last week, breadth was better across the board. The NYSE Advance/Decline Ratio or $ADRN, finished on Friday 11/22 at 3.6, (3.6 stocks advancing V 1 decline), it averaged 2.29 for the past week, and 1.81 since the Nov 5th election against an average of 1.61 for the Year To Date.

Clearly, everyone wants in and has been wanting in since the election – money has shifted from chasing the M-7 and other large caps to a larger pool of small-cap stocks. The markets have aggressively seized that opportunity and have bid them faster than the large caps. Is the breadth a bullish sign or is the euphoria unsettling?

Let’s look at some of the main reasons:

Business-Friendly Populist Government: To some extent, there is a perception that small caps are closer to the economy than the M-7, and other tech behemoths, which explains why the prospects of tax cuts, pro-business policies, and less regulation would improve their fortunes much more than the large caps.

Small Caps are cheaper: Large-cap tech is also perceived to be much more expensive – the average earnings multiples are lower for small caps.

Everybody and their uncle owns Nvidia: Investors and traders are likely overexposed to big-tech stocks and need to diversify, but were afraid to do so. A Bank of America study found “Long M-7” the most crowded trade in the markets just two weeks back.

Animal spirits are up: More risk-taking, Hell the markets are likely to go up with the pro-market Trump administration and I should add. Consumer sentiment seems to have boomed since the election.

FOMO – The small caps are up and I don’t have exposure, I need to jump on this train.

Should we remain invested or does breadth call for caution?

Business-Friendly Populist Government: I agree with the tax cuts and deregulation, but we need to see if the proposed tariff plans could derail this.

Small Caps are cheaper: Small caps may be cheaper, but if you take out the premium that should go to secular growers with sustainable competitive advantages, and look at the risks associated with smaller, struggling businesses, the difference is not that stark, and sometimes it’s the opposite. Some businesses are just terrible, with no competitive advantages, and low prospects of growth, and their stock prices are driven purely by momentum. These are risky businesses you don’t want to own, period. For now, I believe this rotation may continue for a few weeks more, but the bottom line — if I’m looking at a small cap or even a small cap index, I’m going to look at the underlying fundamentals before making a call. I’m not riding any gravy trains here.

Everybody and their uncle owns Nvidia: That is true – the overownership is well documented, and when there is overownership, the scope to continue rising is much, much lower. To some extent, the earnings have to catch up with the valuation or the stock will just drift, and you’ll find large-cap investors rotating into small-caps.

Animal spirits are up: Drill, Baby, Drill, DOGE, etc, all sound great during the honeymoon period, but the jury is still out, we’ll have to see how everything works in 2025. I’m on the fence on this, it’s still a show-me story, and the possibilities of this going south are not small.

FOMO: This I am seeing first hand – For example, Navitas (NVTS) one of my weak small-cap picks, which sank from $4 to $1.60, has suddenly bounced back from the dead to $2.40 in a week! I’m not going to look a gift horse in the mouth, I didn’t add but I’m hoping it bounces back to at least where I can exit. Navitas is actually in the right place at the right time – its focus is on power saving for data centers, which could be a huge business, but it’s currently, heavily exposed to China with 57% of sales there, (it is in 60% of all the cell phones in the world). Besides Navitas, several other stocks popped in the previous week, without any changes in fundamentals.

Conclusion

Breadth is good for the market, just not at the expense of the usual due diligence.

All five reasons helped a fundamentally sound, and highly high-quality small-cap stock like Confluent, (CFLT) a favorite, that I’ve owned and written about. It’s a $1Bn revenue company with an $8Bn market cap, which shot up from $27.50 to $31.50 in the past week for several reasons.

The business-friendly and animal spirits bounce – because now enterprises seem to be spending; The halo effect from Snowflake (SNOW) the 4x larger data warehousing, market leader had a great quarter and guidance last week; Confluent, which serves the same enterprise market with data streaming is also being seen as a beneficiary and now gets the higher multiple.

The over-ownership bounce: I would rather add more Confluent and Klaviyo (KVYO) shares because my portfolio already has high exposure to large caps.

Small Caps could continue to outperform in the near term, just to catch up. As we saw from the chart, on a YTD basis they’re still behind at 19% to 25%.

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Market Outlook

Positives And Concerns About The Trump Presidency


I’m sure you’ve been inundated with opinions on domestic politics, which is not usually a subject of this investing group. But politics is likely to affect our investment decisions so a note highlighting its impact on business is important.

So far, at, 5,994 the S&P 500 is up 5% from the Nov 4th close of 5,713, and from the forecasts of the likes of Goldman Sachs – we should be crossing 6,300 easily in 2025. Other forecasts have higher targets and we are seeing some of the traditional post-election bounce, a lot of short covering, lower volatility, FOMO, and so on…. It is a good time to be invested now.

There are a few policy areas that will affect equities.

Taxes – A big positive: The 2017 Tax Cuts and Jobs Act was due to expire on December 31, 2025. It lowered corporate and business income taxes, which was a big positive. The Biden administration was lining up a new set of “tax the rich” proposals, which are now dead. Given the proclivity of the new administration, we should see lower taxes.

Tariffs – A big negative: but could be mitigated: THESE WILL BE HIGHLY INFLATIONARY
The Trump administration could impose tariffs at will by executive order, which is disastrously high. As part of an overall policy to rebalance trade with nations such as China, the tariffs will try to level the playing field.
According to some of the administration’s policy papers, which are part of Project 2025, – granting MFN (Most Favored Nation) status seems to have resulted in chronic U.S. trade deficits with much of the rest of the world, at the expense of American manufacturing; an unfair practice with systemic trade imbalances serving as a brake on GDP growth and capping real wages in the American economy while encumbering the U.S. with significant foreign debt.
This administration will point out China’s quest for global dominance, via protectionism, dumping, and so on, which though debatable, will be the bedrock of its tariff policies. (Who doesn’t love China bashing) The US is on the back foot regarding manufacturing and regardless of whether it is even feasible to reverse overseas manufacturing – this administration will go after it with a vengeance and tariffs will be their biggest tool to get manufacturing jobs back in the US. Tariffs ranging as high as 60% on Chinese goods, a 20% blanket tariff on all imports, and a 100% tariff on automobiles made in Mexico are possible impositions. THESE WILL BE HIGHLY INFLATIONARY
Regardless of the eventual tariffs, they’re bad for some of America’s biggest companies such as Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) that rely on Chinese manufacturing for hardware products.
When Trump first imposed tariffs on Chinese goods, he made exceptions for certain consumer goods such as smartphones. Whether that will happen again is unclear.
Besides, we have not even talked about retaliation from global competitors to whom America exports goods and services.
Even as I anticipate tariffs to be a big negative, I’m hoping that wiser counsel prevails or perhaps the stock markets will swoon, which is reportedly a huge factor in this administration’s decisions, and not something they can control. Ironically, a stock market swoon may be the biggest reason for keeping tariffs under control.

Export controls: Some of it is already happening and is unlikely to get worse.

US technology with military applications is already banned from export. But if all exports of US-designed and engineered semiconductors, even those for consumer applications are banned it would hurt Apple, Nvidia, and Microsoft. But it would also hurt the trade imbalance that the Trump administration seeks to correct. Very unlikely.

ASML’s (ASML) EUV lithography machines could be a target if the Dutch government complies with restricting sales to allied countries such as Korea, Taiwan, and Japan. Again, unlikely.

Antitrust regulation: Positive for the markets – Under Biden, the government had lurched left, even trying to emulate the EU’s Digital Markets Act. The new administration will likely curtail some of the regulatory excesses, but we’ll have to wait and see if they try to undo recent antitrust litigation against Google (GOOG) and Apple.

Environment, energy, and inflation: More domestic drilling could be a positive, as more domestic oil reduces the need for imports, lowers gas prices, and could result in lower inflation. Its too early to comment on environmental policies and I’ll update at a later date.

Mass DeportationHighly inflationary, when one finds it difficult to fill jobs that Americans are not willing to do. Again – I believe it to be more rhetoric and not likely to be administered en masse, I suspect this could be cosmetic.

For sure, we live in interesting times and the next 4 years should be a roller coaster.

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Market Outlook

S&P 500, Nasdaq Composite In Free Fall


The S&P 500 and the Nasdaq Composite are in a free fall today with drops of 1.5% and 2.4% respectively, and it’s just 11:30 am. This could develop into a rout as traders and investors turn their noses up at Meta and Microsoft’s earnings. Even Google has given up its 5%. Should Apple and Amazon disappoint post-market today, I think a correction could be on. The main bullish factor countering a volatile election week, a VIX over 21, and a rising 10-year yield at 4.32% were strong earnings, especially from the M-7. Clearly, that doesn’t seem to be happening.
Meta – Initially, it seemed like a perfunctory one percent drop on a small beat and in-line guidance, but it’s gone a lot further as Meta is down 4% to 570.
Why the rout? Analysts and investors panned high Capex plans of $40Bn and costly high-risk bets such as Meta’s Reality Labs unit, (the developer of augmented and virtual reality technologies), which logged a staggering operating loss of $4.4 billion
Microsoft – (down 6% to $408) is getting clobbered for a different reason. Even as Azure grew 34%, the pace wasn’t enough, and guidance of 31% to 32% in constant currency was lower than expected. However, this is due to supply chain constraints as President Amy Hood noted that the 1 or 2-point deceleration Microsoft has guided is mainly due to some supply pushouts, in terms of AI supply coming online that the company counted on. (Read, not as many Blackwells/Hoppers as they would have liked)
“We expect consumption growth to be stable compared to Q1, and we expect to add more sequential dollars to Azure than any other quarter in history,” Hood added.
The indomitable Dan Ives remains as bullish as ever…
“We actually disagree with this initial take as the new Azure reporting standards have moved Street numbers all around and a slight deceleration is totally expected by many investors with some supply constraints and reacceleration in 2H25, and we would be strong buyers of MSFT on any weakness this morning,” Wedbush analysts, led by Daniel Ives, said in a note.

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Market Outlook

The S&P 500 (SPX), (SPY) Could See Significant Gains In The Next Two Months

The Heisenberg report includes an interesting article by Goldman Sachs’ Scott Rubner about trading from the end of October through the end of the year.

Rubner suggests if you’re looking to buy the election dip, you may not get it, for the following reasons: 

For the past 100 years, the last week of October through year-end has been one of the best trading seasons, and even more so during election years. That is, the median return from 10/28 through year-end is 5.2%; in election years, it’s 6.3%.

The fiscal year-end for most mutual funds is October 31, and as October winds up, the supply overhang from mutual funds and pensions lifts. 

The corporate Buyback blackout period, which is usually two weeks before the quarter ends through 48 hours after earnings are released publicly, also starts lifting, 

Buybacks are one of the largest sources of demand for US equities. November stands out. Goldman’s corporate execution desk expects $960 billion worth of executed buybacks this year. So, simple math suggests next month could see ~$100 billion worth. 

Then there’s the thinner markets around Thanksgiving and Christmas, which could lead to a more pronounced effect of large-scale buying on stock prices.

Scott was straightforward. “The global consensus on Wall Street is that we will dip after the election, and investors are waiting for the (-5%) dip to add,” he wrote, adding that he doesn’t see it. “I think the US election will be a clearing event for risk assets and re-risking may happen quickly,” he said.

In another article he goes on to add that FOMO or the (Fear Of Missing Out) would be another factor driving stocks higher, should the much-anticipated pullback during and after the elections not materialize.

Rubner has a 6,000 year-end target for the S&P 500, which may turn out to be conservative.

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Market Outlook

NFP Short Of Expectations

The unemployment rate ticked down to 4.2%, as expected, from 4.3% in July.

Nonfarm payrolls rose by 142K in August, accelerating from the 89K added in July (which was revised down from +114K), but still lagging the +160K consensus, 

“August #jobsreport is a touch better than July but not by much: the job market is clearly cooling,” said Daniel Zhao lead economist at jobs site Glassdoor in a post on X.

Wages gained more ground than expected in the month, with average hourly earnings climbing 0.4% vs. 0.3% consensus and 0.2% prior On a Y/Y basis, average hourly earnings rose 3.8% vs. 3.7% consensus and 3.6% prior.

“Wage growth moved up a bit to 3.8% from 3.6%, but not enough to get in the way of the Fed’s pre-announced rate cut later this month,” said Brian Coulton, Fitch Rating’s chief economist,

The labor force participation rate was unchanged at 62.7%, matching consensus.

There was a  combined 86K downward revision for June and July. 

With the weaker-than-expected jobs growth, traders have increased expectations for a 50 basis-point Fed rate cut on Sept. 18, bringing the probability to 47.0% from 40.0% on Thursday. The 25-bp cut probability dipped to 53.0% from 60.0% a day earlier, according to the CME FedWatch tool.

Broader markets are drifting, there’s really nothing in this payroll report that suggests the September swoon is over, I would stay on the sidelines and let the markets correct a little more.

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Market Outlook

A Steep Fall on weaker PMI???

The big drop of 2% in the S&P and 3% in the Nasdaq Comp was ostensibly on the weaker manufacturing PMI number, which came in below expectations at 47.2 v 47.5, and was the weakest in 7 months. However, looking at the broader picture the same manufacturing index has been below 50 for 21/22 months – we have been in a factory recession for a while now. The American economy is 70% services and consumption so by itself manufacturing indices are not a great indicator of the overall economy. The only silver lining was the employment index, which is part of the same study – that was slightly better for August at 46, compared to 43.4 for July. 

Why did the market fall so steeply then – there were declines across the board, no industry/sector spared – the rout was complete. The advance decline ratio was terrible at 770 to 2,029 for the NYSE and and a worse 963-3,346 for the Nasdaq. 

Besides the PMI I suspect there were other techical forces at play.

We opened after a long break and thin volumes due to summer vacation and thinnly manned trading desks.

Now that interest rate cuts are confirmed the health of the economy will the prime focus.

Computerized, algo trading was a huge factor yesterday – the VVIX, which simply put is a derivative of the VIX (Volatility index) shot up to 137.64, triggering and escalating selling in a doom loop. The exposure was very high in semis and M7 dominated ETF’s, and given Nvidia’s relative small beat and subsequent poor stock performance after earnings exaggerated the situation. The leveraged product rebalance, was especially painful [given] the concentration of the assets, with semi and big-tech vehicles selling into the lows of the day.

The VVIX outperformance compared to spot was as high as August 5th – the day of the Japanse carry trade crash….

Given that we’re only two days away from the payrolls report on Friday Sep 6th, I suspect that we could see a further drop till there is some vindication that the economy is not going to hell. Traders, and investors are understandably worried about a possible recession and the market has been stretched for a while. There’s no point being caught in algo trading/volatility trading crossfire.

We’ll take a look at unemployment claims and the ADP report tomorrow, I’ll update after that.