The 2024 election is right around the corner. The recent victories of Former President Donald Trump at the Iowa and New Hampshire primaries have moved Election Day closer, as it seems that the two candidates have been chosen earlier than usual, setting the stage for a contentious rematch of the 2020 race.
With the S&P 500 having recently ascended to a fresh record high after such a strong 2023, it’s natural for investors to worry that valuations have become over-extended. On traditional valuation measures, valuations do appear high and it does seem reasonable to expect more moderate stock market returns going forward. Here we walk through several different stock valuation approaches to get a more complete picture and even make the case that they aren’t as pricey as they look.
Records have been on repeat for the semiconductor space as the outlook for chip demand continues to improve. The proliferation of spending on AI, coupled with an expected rebound in PC demand and increased chip usage across the automotive industry, have helped offset concerns related to elevated inventories and slowing global growth.
As investors discuss the possibility of the Fed cutting rates in March and the extent to which the Fed is willing to acknowledge these cuts, here are a few significant charts to consider.
According to the University of Michigan survey, inflation expectations for the next 12 months dipped to 2.9%, the lowest since the end of 2020. As illustrated in the first chart below, the decline in inflation expectations is certainly good news for the Fed. Inflation expectations over the next 12 months have convincingly improved, giving the Fed the opportunity to cut rates as early as March but only if other data comes in weaker. Clearly, risk appetite improved as investors considered bringing cash off the sidelines and into capital markets.
After stumbling out of the gate to start the year, the S&P 500 has found its footing and broken out to levels never reached before. These new highs might seem a bit sweeter to equity investors considering the notably bumpy ride they endured to get here. We recently explored the historical implications of this arduous path to new highs and what it could mean for future returns. Now, we can officially timestamp the date of the record high, the 512-day duration, and its 25.5% maximum drawdown, displayed in the chart below.
Shipping disruptions in the Red Sea could temporarily impact goods prices but not at the same magnitude as during the pandemic. Tight financial conditions, slowing economic growth, and a disinflationary trend all support the Federal Reserve’s (Fed) pivot away from tightening monetary policy to easing in the new year. Despite these longer term trends, rates possibly got ahead of themselves in recent weeks, exhibiting higher volatility.
The latest weekly sentiment survey data from the American Association of Individual Investors (AAII) released today shows a continued fading of investor bullishness, pulling back from levels that had been approaching extremes at the end of last year.
The mixed start to the year for stocks, with the S&P 500 down almost 2% at one point from its recent high, has brought some bearish individual investors out of hibernation. The scaling back of rate cut expectations by the Federal Reserve (Fed), the related 20 basis points (0.2%) jump in the 10-year Treasury yield, and heightened geopolitical risks may also have contributed to increased investor caution.
Not accounting for inflation, December online sales rose 9.7% from a year ago as consumers focused their attention on non-store shopping.
Restaurant spending grew by over 11% from last year as consumers seem unfazed with higher restaurant prices. However, spending was roughly unchanged from last month.
Excluding auto sales, retail spending was up 0.4% month-over-month on a nominal basis. Adjusting for inflation, sales ex-autos rose 0.1%.
Consumers shunned brick-and-mortar stores in favor of online shopping. The behavioral change that happened during the pandemic will likely persist and successful retailers will adjust to this new model.
Bottom Line: The strength in consumer spending tamped down investors’ expectations of a rate cut in March but still, markets are pricing over a 50% chance of a cut. This morning’s report does not include most of the services sector, so investors must wait until later this month when the comprehensive spending report is released.
Fourth quarter earnings season kicked off last week, and markets were generally left wanting more. That doesn’t necessarily mean this earnings season will be disappointing, especially considering the bar has been lowered so much. Plus, some of the disappointment was around special bank charges and November-quarter-end companies’ results were solid. This reporting period may lack the splashy “earnings recession over” headlines we got last quarter, but it takes on added importance because it sets the tone for 2024. After 2023 was a year in which improving valuations delivered strong gains, this year, earnings will likely have to do the heavy lifting.
With 2023 behind us, we conducted a deeper dive into fund flows in December. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). We analyzed flows to gain insight into investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.
Municipal bond (muni) investors experienced the same roller-coaster ride of returns in 2023 that many taxable investors experienced as well. What started as one of the best Januarys in recent memory for the Bloomberg Municipal Bond Index (muni index), quickly turned into one of the worst Februarys on record. And monthly returns were mixed throughout the year until the index finally found its footing to end the year positive. Following the worst calendar year return in 40 years in 2022, the muni index returned an above-average 6.40% in 2023. The majority of the year’s positive performance arrived during the final two months of the year, as the muni index returned 8.82% in November and December. But despite the above-average returns generated in 2023, we think the muni market still offers value for tax-exempt investors.
As China emerged a year ago from the shadow of the stringent zero COVID-19-related measures that all but shut down its economy for over two years, much was expected in terms of its economic growth prospects. There were numerous reports suggesting the world’s second largest economy would ignite a bout of inflation as its industrial base would require vast quantities of commodities to power a newly energized China. Clearly that didn’t happen. Here we explore why and provide our updated thoughts on investing in China and emerging markets.
The sharp rally in stocks last year caught a lot of investors off guard. A significant rotation in January from defensive to offensive sectors was considered by many as a relief rally off oversold conditions — few believed the strength was sustainable as recession headlines ran rampant. However, as it often does, the market proved the majority wrong, and the pain trade ran higher throughout the year.
Yesterday marked the end of the historically strong seasonal period called the Santa Claus Rally, technically classified as the last five trading days of the year plus the first two trading days of the new year. Since 1950, the S&P 500 has generated an above-average 1.3% return during this short seven-day window, but this time the S&P 500 fell -1.1%. This is the 16th time since 1950 that the S&P 500 closed lower during this period, snapping a seven-year streak of positive returns during the Santa Claus Rally. Now that the streak is over, the market is on the naughty list, with the S&P 500 historically generating an average annual return of only 4.1% when Santa doesn't show up.
To say 2023 was challenging may be an understatement. While stocks had a surprisingly impressive year, there was no shortage of obstacles for investors to overcome, including historic interest rate volatility, recession risk, banking sector turmoil, and a game of monetary policy chicken played between the markets and the Federal Reserve (Fed). LPL Research had some wins and some losses as the market delivered its usual dose of humility to us and many market participants. In an effort to maintain accountability and learn from our mistakes (and hopefully not repeat them), we are starting the new year with our traditional lessons learned commentary.
Following on from November’s “Turkey Rally”, December defied weaker recent seasonality trends and delivered a present for investors in the form of outsized stock market returns. Now as we move into January and the new year, investors are asking where does seasonality point to now for stocks, and have returns been “pulled forward” following a strong festive period?
Narrow leadership has been one of the major themes throughout 2023. The so-called Magnificent Seven mega-caps — Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla — have contributed to 60% of the S&P 500’s 26.5% total year-to-date return (as of December 27). Given this top-heavy concentration and a lack of participation from the financial sector for most of the year (the sector with the second-highest number of S&P 500 stocks), only around 29% of S&P 500 constituents are beating the index on a total return basis this year. The chart below highlights that 2023 will likely have one of the lowest percentages of stocks outperforming the market over the last 40 years.
