We wish you and yours a very happy and healthy new year!
The S&P 500 gained 0.32% this week with Friday's close at 4,769.83. Friday's close is a new all-time high weekly close for the S&P 500, and that's something we haven't been able to write for almost exactly two years!
The index has now increased an astounding nine weeks in a row, its first nine-week winning streak since the week ending January 23, 2004 (and before that September 1, 1989!).
The S&P 500 has gained a whopping 15.85% the last nine weeks, its strongest nine-week stretch of performance since May 2020 after the COVID-crash bottom. One short year ago the S&P 500 limped across the finish line, and from our Update dated 1/1/2023 we wrote:
"The index finished 2022 on a sour note, declining for the fourth consecutive week. In terms of price action, one can certainly say we limped into 2023."
What a difference a year makes as the S&P 500 sprinted across the finish line as we enter into 2024. A year ago it was as if stocks can't go up, now it's as if stocks can't go down! (and both of those statements are incorrect!).
As expected, the trading this past week was quiet. The S&P 500 traded as high as 4,793.30 on Thursday and as low as 4,751.99 on Friday. While Friday's close is a new all-time high weekly and monthly close for the index, it isn't a new anytime all-time high. The S&P 500's all-time high still stands at 4,818.62 from Tuesday, January 4, 2022.
That brings up an alternative, more sobering perspective compared to the excitement the last nine weeks has generated: The S&P 500 hasn't gone anywhere for two full years...literally.
The S&P 500 closed on Friday, December 31, 2021 at 4,766.18, or just 3.65 points below Friday's close. That leaves the S&P 500's trailing two-year returns at just 0.07%. It's a been a wild ride but it's ultimately been a wild ride to nowhere!
From a technical perspective, the index remains face-to-face with "resistance" and is considerably "overbought" across multiple time frames. While we're excited to see the S&P 500 break out to the upside and trade up to new all-time highs, it's hard to ask the S&P 500 to record a durable price thrust higher after a nine-week 15.85% winning streak! Remember, prices don't move linearly forever so don't let a nine-week winning streak fool you.
From our view, it would be normal, healthy and even ideal for the S&P 500 to take a breather over the weeks ahead.
A trade down toward the ~4,600 region in January would serve to recharge the battery for a breakout to new all-time highs in February. We'd prefer this sequence since the alternative is a probably a breakout to new all-time highs in January, and then a pullback in February!
In terms of sectors, the S&P 500 finished 2023 with the "defensives" on top (consumer staples, utilities and health care all gained more than 1% on the week) and the "cyclicals" on the bottom (consumer discretionary falling -0.37%). There is growing consensus regarding the market "broadening" out in 2024 (i.e., most of the market outpacing the "Magnificent Seven"). The idea is mostly predicated on mean reversion, or the concept that the degree of outperformance across the "Magnificent Seven" relative to the other ~493 stocks within the S&P 500 here in 2023 can and should "revert" via outperformance from the other ~493 stocks within the S&P 500 in 2024.
Visually speaking, this relationship can be measured by comparing the performance of the S&P 500 Equal Weight Index (SPXEW) to the traditional market-capitalization weighted S&P 500 (SPX). If SPXEW is outperforming it means the other ~493 stocks are leading the charge. Well, SPXEW outpaced SPX by 0.14% this past week and has outperformed three weeks in a row and four of the last five overall, hence why there is enthusiasm regarding SPXEW relative strength into 2024. From our view, the ratio chart of SPXEW to SPX continues to look attractive when you look at the forest as opposed to the trees.
Zooming over to the bond market, the iShares 20+ Year Treasury Bond Index Fund (TLT) gained 0.41% this week with Friday's close at $98.88. Bonds, collectively, have been roaring higher over the last nine weeks too, just like the S&P 500. In fact, TLT has gained 18.35% over the last nine weeks, outpacing the S&P 500's return of 15.85%.
Throughout our Updates in September and early October we often wrote that it was "imperative that TLT holds support in order for the S&P 500 to also hold support". Therefore, it's not all that surprising to us that a ridiculous rally for TLT has also been accompanied by a ridiculous rally for the S&P 500. The impact of interest rates on stocks can't be understated, especially when said interest rates are a reflection of forward-looking inflation expectations and Federal Reserve policy.
Now, prices don't move linearly forever in the bond market either! TLT has closed higher eight of the last ten weeks, so there's a fairly easy narrative regarding a pullback for the S&P 500 being driven by a pullback for TLT, thus leading to higher interest rates across the yield curve.
Given the bid to bonds the last ten weeks, interest rates have been absolutely plunging across the curve: The yield on a 10-year United States Treasury bond has plunged from 4.98% in October to 3.88% as of Friday's close. A move back to the 4.25-4.50% region would operate like a speed bump to both stocks and bonds in our view.
TLT is face-to-face with "resistance" too, just like the S&P 500. As we wrote a few weeks back, we now think this rally for TLT is probably going to be contained here in the short term. TLT is firmly back in a well-defined zone of "resistance" (see red shaded region) - and prices don't move linearly forever!
As we think about the week ahead and the transition from 2023 into 2024, we're reminded of something we wrote in our Update from 1/1/2023:
"We always marvel about how everything can change on a dime for what seems to be nothing more than a change in calendar year. Well, since we limped across the finish line to end 2022, and since 2022 was mostly a year to forget in terms of price action, we're certainly hoping it all changes come the start of 2023!"
Interestingly, as we head into 2024 we have the exact opposite sentiment to last year - we don't want anything to change! That said, we recognize that change is one of the few constants in the world of financial markets. We'll turn the calendar over the week ahead and we'll get a glimpse into what participants want to do right off the bat in a new calendar year. Will they buy 'em up to new all-time highs or will they open the new year ready to sell 'em? An exciting week awaits!
S&P 500 Primary Trend - Up
The S&P 500 ended the month of December this week at 4,769.83, a new all-time high monthly close.
The index gained 4.42% in December, bringing its trailing two-month return to a whopping 13.74%. If we continue with the Shakespeare analogy of "All's Well That Ends Well", 2023 marks the seventh time the S&P 500 has gained 10% or more over the final two months of the calendar year. Here are the seven calendar years: 2023, 2020, 1998, 1985, 1970, 1962 and 1954.
Interestingly, the very next calendar year went one way, and one way only, in all six of the prior instances where "all" ended well (i.e., the S&P 500 continued roaring to the upside).
It's the old adage of "strength begets strength". As always, this is not something that guarantees us anything for 2024, but it is something that contradicts the idea that the last two months of gains are a sign of impending disaster. No, they're most definitely not.
The monthly chart for the S&P 500 looks a lot like the weekly chart for the index - we're staring "resistance" right in the eyes. Strong calendar years have seen the very next January struggle of late (2022 and 2021 January declines), so again we would welcome any sort of healthy pullback here to kick off 2024.
Our work continues to label the primary trend as up or "bullish" for the S&P 500. During uptrends long-term investors are best served investing in the more traditional sense of the word.
Uptrends are a time to buy 'em and hold 'em and keep your defense on the sidelines. They're a time to mute the talking heads on the television, a time to try to ignore all of the "noise", especially in a year like 2024 where the "noise" will arguably be the loudest it has ever been and will only get louder given that it's an election year.
Now, asset allocation decisions aren't as easy in 2024 as they were in 2014! We no longer live in a world defined by the acronyms "ZIRP" or "TINA" (with the former standing for "Zero Interest Rate Policy" and the latter "There Is No Alternative").
Even with interest rates plunging across the curve the last two months the yield on a 1-year United States Treasury bond still stands at 4.79%, and 4.79% on your money - risk-free and a positive "real" rate of return - is nothing to roll your eyes at.
However, market participants, collectively, are screaming at the top of their lungs that interest rates will be plunging on the short end of the curve in 2024. Participants see a roughly 86% chance of a rate cut in March, and therefore one is left to wonder how this will affect the yield curve.
The hope is that this will operate like a "bull steepener" whereby the short end of the curve plunges while the intermediate and longer end sustains (or at least doesn't fall anywhere near as fast as the federal funds rate). That would create a "Goldilocks" scenario for the S&P 500 for the most part as it's driven by a fundamental narrative of normalized inflation with a stable and strong labor market and economic landscape. Participants ultimately see the federal funds rate finishing 2024 at 3.75%-4.00%, which in theory should be suggestive of a strong year for both stocks and bonds in 2024.
So, "diversification" is your friend as we enter into 2024. Stocks are at and around all-time highs, bonds are showing signs of life, and gold is knocking on the door of all-time highs too. There's something for everyone in this day and age, a welcome change to the 2008-2021 investing landscape.
Finishing with the 2023 futures scorecard, it was a banner year for orange juice (83.34%), cocoa (59.39%) and the Nasdaq 100 (44.87%). It was an abysmal year for volatility (-68.5%), natural gas (-56.32%) and palladium (-39.47%). We can't wait to see how this picture will change one short year from now!
Happy last Sunday of the year!
Steve & Rick