Now dasher, now dancer and all the rest – Stocks continue to rise

“Now Dasher, Now Dancer, Now Prancer and Vixen, On, Comet, On Cupid, On Donder and Blitzen – to the top of the porch, to the top of the wall, Now dash away, dash away, dash away all!”   - The Night Before Christmas – Clement Moore 1823.

And stocks keep dashing away as investors keep putting money to work as those ‘sugar plums’ (think ongoing gains) dance in their heads…….and it has been a thing of wonder for sure…..All of the indexes up nicely….as 2023 comes to an end…and Wednesday didn’t disappoint either – by the end of the day the Dow was up 112 pts or 0.3%, the S&P gained 6 pts or 0.14%, the Nasdaq added 25 pts or 0.16%, the Russell up 7 pts or 0.35%, the Transports lost 78 pts or 0.5% while the Equal Weighted S&P added 8 pts or 0.15%.  Remember that on October 30th – this index was down 5% on the year….and as of this morning it is up 12% - a significant 17% rally in 4 weeks….as investors searched for value away from the Magnificent 7 that had dominated the conversation for much of the year….broadening out this latest rally….giving new life to the idea that investors are confident that the FED has navigated a ‘softer landing’ rather than that crash landing that had been feared for much of the year.  

By now you know that investors are betting on multiple rate cuts by the FED in 2024 – in fact – what had been 2 or 3 anticipated cuts, has now turned into 6 or 7 anticipated cuts…(which I will say again seems illogical to me) and that has been the driver this past month…..it now seems that investors are pricing in an additional quarter point cut at each meeting starting in March - … I mean it’s been a bit nut…. but it is what it is – but that also doesn’t mean that you completely change your mind or plan…but it might mean that you take a look – and re-evaluate (think tweak) your portfolio just a bit….to accommodate the latest narrative on the economy…. Or maybe not….

Look – concerns are rising that we are now in a ‘very’ overbought condition, that the narrative has turned way to dovish…. that we have allowed that ‘multiple’ rates cut story to drive the action…. And we have…. all you have to do is look at the action ever since they started the speculation in late October and then how they interpreted his commentary after the December FOMC meeting …. The question you have to ask now is – Is this rally the start of a new leg UP or are we about to correct when the calendar turns to 2024?  

While some will say it is the start of a new advance that will take the market to new highs, I’m in the camp that says – ‘not so fast big boy’…..While the eco data has been ‘not so bad’ – the market has already discounted so much of that…..and now earnings season is only 2 weeks away…and last week we heard from FDX, GIS and NKE – and while the earnings were good (they are history) it was the forward guidance (which was not very bullish) that drove those stocks lower….recall how quickly they took 12% out of FDX and NKE and 4% out of GIS on the day they reported…Leaving FDX up 45% on the year (which is still a win) while NKE is down 9% and GIS down 18% on the year…

So now, Will the ‘weaker forward guidance’ be the story this time around and if it is – then we can expect to see the broader market correct a bit…. which doesn’t mean it crashes – it just means that this Santa euphoria will disappear.  Remember – earnings estimates have been revised lower – as they usually are – so the EPS bar is low….and I expect that we will continue to see the usual 75% - 80% beat rate on that metric…but what will be the ‘beat rate’ on forward guidance – because investors price stocks on what they think they will earn going forward NOT on what they earned in the prior quarter. 

The latest data is:

Earnings are expected to grow by 2.4% this quarter…which is down from the 4.9% rate seen in the 3rd quarter – but recall – in September that 4th quarter number was +8.1% - but downward revisions to those lofty estimates have now taken it down to +2.4% - 72 S&P 500 companies have issued negative guidance vs. 39 that have issue positive guidance…..and the forward 12 month P/E for the S&P is now 19.5 x’s – which beats the 5 yr. avg of 18.8 x’s and the 10 yr. avg of 17.6 x’s….

Consumer Discretionary is expected to be the best performing sector of the 11 S&P sectors – with earning growth rate of 43.9%, Communications up 23%, Industrials up 11%, Financials +8%, Utilities + 7%, Information Tech +5%, Real Estate +3%, Consumer Staples +2.5%, Energy is expected to be the worst sector with earnings declining by 29% with Basic Materials down 23% and Healthcare down 21%. 

Now you would think that that would give pause to some investors to be a bit more cautious – BUT when they shove the multiple rate cut story down your throat – they negate any negative sentiment in the near term…..but remember – it all comes out in the wash….and while that sounds like I’m being a party pooper, I am just trying to keep it real….Trees do NOT grow to the sky – just keep that in mind….and that doesn’t mean that you get out of the market – it just means know what you own, why you own it and do NOT go chasing the big outperformers with new money….You own them already – so you are NOT missing out….

Benchmark bond yields have plummeted…. the 10 yr. (which is THE benchmark) is now yielding 3.8% - a level not seen since July 2023…. Short duration bonds – 3 month and 6 months are now yielding 5.18% and 5.01% respectively (on an annualized basis – remember you receive ¼ of that rate for the 3month and ½ of that rate for the 6 month – Unless you keep rolling for the year – Capisce?)

Mortgage rates have also come down as the treasury markets have corrected….30 yr. conventional money can now be had for about 7%, 15 yrs. at 6.4%, 10 yrs. at 6.1% and 5/1 ARMS can be had for 6.4%.........but don’t expect housing prices to decline very much – that decline is expected to send housing prices up in the coming spring selling season….and don’t expect the decline in the treasury market or the hoped for decline in interest rates to bring down inflation (which is still running at 3% at the CPI level) or prevent rising defaults on student loans, revolving credit card accounts, HELOCS or existing mortgages etc.…..They are NOT tied to that rate so they do not respond to changes in that rate….  In fact – one could argue that a decline in rates is stimulative to the economy – which is exactly what JJ says he doesn’t need or want at the moment….and you could say that the decline in the ‘benchmark’ rate is already offering that relief….

Oil has been in a tight trading range….and this morning it is trading at $73.30/barrel…. Yesterday the API (American Petroleum Institute) reported that US crude stockpiles rose by 1.8 mil barrels last week…. Of course it did – the US is now producing oil at record rates…We discussed this…And concerns about the shipping channel in the Red Sea are easing just a bit – Maersk announces that they are going to try to send container ships thru the Red Sea into the Suez Canal next week….and that is being viewed as a positive…..…....but we realize that tensions remain high in the Middle East - so do not discount the potential difficulties that the Iranian’s and Hootie’s could still create….. and do not discount the Saudi’s next move…. My gut says – oil prices are going up in the weeks ahead….

Gold shot back up towards the $2100 level over the past couple of days on the ongoing rate cut narrative….and strong demand for Treasuries which only supports that argument…. This precious metal is up 14% ytd – Much of that gain has come in the past 6 weeks as that multiple rates cut narrative takes root. 

US futures are lower this morning….again I am not reading too much into this at all…….It’s now the year end and it’s another long weekend - stocks have shot higher and so any weakness doesn’t suggest good or bad, it just suggests churning in my opinion….Why, because nothing has changed….the narrative is what it is….as of this morning – the market continues to expect ‘multiple’ rate cuts.  

European markets are a bit lower…. but not really doing anything again as the year comes to a close…. No one is making any big decisions in the next 48 hours….

The S&P closed at 4781 up 7 pts…. leaving it just points away from the January 2022 high of 4793…. this morning’s action – weaker futures – should not be a surprise nor should it cause you to do anything. Enjoy the holiday, spend time with your family….

I continue to urge caution into the new year……investors that want to sell stocks to lock in some of these incredible gains  but want to put off paying those taxes for another 16 months will hit the Sell button in early January….Remember if they sell stock now – they will have to pay Uncle Sam in 4 months… and anyone with any sense will wait until the new year to hit the sell button unless of course there is a driving need for the cash now….

In the end - don’t get caught up in the euphoria of it all…. Keep a level head – make a plan and then stick to it. You can keep new money in your gov’t mm acct – that is paying you 5% to hold it there while you wait to put it to work….and when you do – don’t do it all at once….

Ricotta coffee cream

One greater and simpler desert for the holidays -

Ricotta Coffee Cream - If it takes you longer than 1 min - you did something wrong!

This is a combination of Ricotta cheese, rum, and espresso coffee.

You need:  1 12/ lbs. of Ricotta Cheese, 2/3 cup of sugar, 5 tablespoons of dark rum, 2/3 cup of espresso.

Get out the food processor (or blender) - add the ingredients.  Blend until you have a nice creamy consistency.

Pour the mixture into individual glasses or small desert cups/bowls.  You can use white wine glasses for a more dramatic effect.  Place it in the fridge and allow it to cool overnight.  After your dinner party - remove from the fridge - adorn with fresh coffee beans and serve.