Welcome, Sandbox friends.
Today’s Daily discusses:
reasons to support the bull case
Let’s dig in.
Markets in review
EQUITIES: Russell 2000 +1.67% | Nasdaq 100 +1.01% | S&P 500 +0.76% | Dow +0.59%
FIXED INCOME: Barclays Agg Bond +0.40% | High Yield +0.22% | 2yr UST 4.322% | 10yr UST 4.076%
COMMODITIES: Brent Crude -1.22% to $82.53/barrel. Gold +0.76% to $2,051.5/oz.
BITCOIN: +3.37% to $43,151
US DOLLAR INDEX: +0.04% to 103.478
CBOE EQUITY PUT/CALL RATIO: 0.66
VIX: +2.56% to 13.60
Quote of the day
“It is better to do something than to do nothing while waiting to do everything.”
- Winston Churchill
Making Money with Charles Payne
Coming up to Manhattan and the big city lights is always exhilarating. There are countless friends/colleagues to catch up with and meetings to take, yet it’s the food and fine dining experiences where I find most memories are made.
This afternoon I joined Charles Payne on Making Money to discuss the year ahead, the Fed, market risks, and what assets we like best over the next 6-12 months.
Guests never receive enough time on their TV hit to express detailed and exhaustive arguments; this is what makes podcasts so much more informative and fun. So, I am taking a few minutes here to express several reasons why we should be constructive on markets early here in 2024. This is not meant to be an exhaustive list, rather a selection of objective truths that tip the scorecard (i.e. probabilities) in favor of upside market risks.
The U.S. economy is on stable footing.
* Real GDP increased 2.5% in 2023, up from 1.9% in 2022.
* The U.S. economy added 2.7M jobs in 2023, while the unemployment rate is hovering near multi-decade lows at 3.7%. Average hourly gains are finally making meaningful strides as inflation subsides, offsetting some of the erosion in purchasing power.
* Wealth effects: equity and home prices have recovered from their declines in 2022, strengthening household balance sheets. What’s more: the median, inflation-adjusted net worth for the typical U.S. household grew 37% to $192,900 from 2019 to 2022, the highest on record – fueled by higher home prices, investment account balances, and pandemic-era stimulus payments.
* New business applications surged from 2021 to 2023, with 16 million applications filed – an important leading indicator for jobs and innovation.
* The world finally got religion on savings accounts paying nothing and moved cash en-masse into money markets paying 5%+. Savers are getting paid on cash, for now.
* Tech: AI is having an iPhone moment, a transformative technology only in its 1st-2nd innings – true productivity and earnings gains haven’t even started.
Monetary policy is transitioning from aggressive jaw-boning tactics to one of accommodation.
* Real interest rates remain elevated as inflation continues to moderate (PCE, GDP personal consumption, CPI, headline, core, trimmed, etc. – you name it, its moderating). This allows the Fed to keep financial conditions restrictive for now because economic growth and the labor market can support it.
* Yet, inflation remains a key driver for the Fed reaction function, which in turn is the key driver for equities. Inflation should continue falling like a rock, but the Fed and markets have to embrace that view and believe it.
* The Fed has signaled that rate cuts are coming later this year. We don’t know the timing or magnitude yet – the Fed doesn’t either – but cuts are a significant moderation in policy. Assuming the recession is avoided, interest rate cuts are generally supportive for risk assets.
* The Fed is currently shrinking its balance sheet via ~$95B in monthly runoff via U.S. Treasuries and Mortgage-Backed Securities (MBS). The whispers of a Fed taper – i.e. the reduction in this restrictive policy of balance sheet normalization – are growing louder, which means the market will lead the Fed’s hand. A taper improves liquidity and the outlook for money availability.
4th quarter 2023 breadth and momentum thrusts cannot be ignored. This is a resilient market with strong undertones of buyers incrementally adding to risk.
* In December, over 90% of the S&P 500 index was trading above their 50-DMA. When this happens, the average forward 12-month gain is +17.2% (success rate 94.7%).
* Zweig Breadth Thrust: rare signal, stocks higher every time 12-months later for an average gain of +23.3%.
* +45% of S&P 500 “overbought” (daily RSI > 70) in December – reaching its highest level on record. Overbought conditions are just one characteristic of bull markets, especially around the formation of new uptrends.
* Advance/Decline lines are moving from the lower left to the upper right on most charts.
* Bottom line, it’s getting harder and harder to find a chart at any geography, index, or sector level that hasn’t completed a primary trend reversal pattern from the bear market. Sellers have been taken out, cleared out at key levels incrementally higher one-at-a-time.
* Not only are we in a bull market… but one that has been expanding and gaining in strength.
* This comes after 2023 when equity flows into ETFs/Mutual Funds was slightly negative.
Market structure is supportive.
* The leaders are leading. Your best players – LeBron, Kobe, Michael – are all dropping 50 points right now. That’s constructive for markets. Tech ($XLK), Industrials ($XLI), Semis ($SMH), Homebuilders ($XHB) all at all-time highs/52-week highs.
* Defensive groups like Consumer Staples, Low Volatility, and Utilities are weaker in absolute and/or relative terms – as it should be during risk-on environments.
* High Yield OAS spreads are hovering around two year lows – confirmation from credit.
* Bitcoin ETFs launched, flows are significant. Two funds already at $1B+. This type of behavior shows investors looking to add to risk.
* Most recent signal: Tesla earnings was a disaster; stock down -11% after earnings. 8th largest stock in S&P 500, yet the S&P 500 and Nasdaq 100 both finished that trading session positive.
Yet…
Any good trader will tell you to trade the market in front of you, not the one that fits your narrative.
So, it’s always important to mind the data in real time and keep your opinions on a short leash.
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.