The Week Ahead - 12/1/24
A comprehensive look at the upcoming week for US economics, equities and fixed income
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As a reminder, some things I leave in from prior weeks. Anything not updated is in italics. As always apologize for typos, errors, etc., as there’s a lot here, and I don’t really have time to do a real double-check (and it’s a staff of 1).
The Week Ahead
I hope you took advantage of the basically 4-day weekend provided by the Thanksgiving holiday, because we get right back to it this week with our standard first week of the month reports headlined by NonFarm Payrolls Friday (more on that below) but with a solid supporting lineup of more employment reports (JOLTS, ADP, jobless claims, Challenger) as well as final Nov PMI’s and auto sales, the Fed’s Beige Book, Oct construction spending, consumer credit, factory orders, and trade balance, Dec preliminary U of Mich consumer sentiment, and weekly jobless claims, mortgage applications, and EIA petroleum inventories.
Also heavy this week will be Fed speakers, their last chance to impart their wisdom ahead of the blackout period which starts Saturday, and we’ll get no less than the Chair himself on Wednesday afternoon appearing at the NY Times Dealbook conference. It just so happens that this appearance occurs with the markets split 50/50 on a December rate cut. We haven’t gone into a Fed meeting with that sort of uncertainty, and I doubt we will once we get to Fed week, but I have a feeling that with the talk coming ahead of the aforementioned payrolls report Friday and CPI on the 11th, something that a “data dependent” Fed will have to take into account, he might remain elusive to preserve optionality to later steer the markets through his media outlets (Nick Timiraos & Colby Smith). Might just be me, but perhaps the blackout period has outlived its usefulness if this is how the Fed has to communicate policy.
We’ll also hear this week from a number of other Fed members including Fed Governor Christopher Waller at the central bank’s framework conference and the NY Fed Pres John Williams on Monday, and Austan Goolsbee, Adriana Kugler, Alberto Musalem, Beth Hammack, Mary Daly, and Michelle Bowman later throughout the week.
US Treasury auctions will be light though with no note or bond (>1yr duration) auctions this week.
And earnings season will continue to wind down mostly outside of the SPX where 98% of companies have reported. This week we’ll get 11 SPX components all in the middle of the week (Tues-Thurs) w/two >$100bn in Salesforce and Royal Bank of Canada. TD Bank is just below ($99bn).
From Seeking Alpha (links are to their website, see the full earnings calendar):
Earnings spotlight: Monday, December 2 - Zscaler (ZS), and Credo Technology Group Holding (CRDO).
Earnings spotlight: Tuesday, December 3 - Salesforce (CRM), Marvell Technology (MRVL), Okta (OKTA), Donaldson Company (DCI), and Core & Main (CNM).
Earnings spotlight: Wednesday, December 4 - Synopsys (SNPS), Hormel Foods (HRL), Chewy (CHWY), Dollar Tree (DLTR), and Campbell’s Company (CPB).
Earnings spotlight: Thursday, December 5 - Kroger (KR), Lululemon Athletica (LULU), Cooper Companies (COO), Brown-Forman (BF.A)(BF.B), DocuSign (DOCU), and Dollar General (DG).
Ex-US the focus will be on Canada’s own payrolls report and a plethora of inflation, trade and growth numbers from across the globe. Also, the OECD will publish new economic forecasts on Wednesday, ECB chief Lagarde testifies to lawmakers the same day ahead of the blackout period, and there are monetary policy meetings in India and Poland (no changes expected) among others.
In Canada, November jobs figures will be the last key data point before a Dec. 11 rate decision. October’s report showed a small gain that fell below expectations, underscoring labor weakness. Meanwhile, the Canadian Association for Business Economics conference will bring together leading economists.
Asia gets a flurry of PMI figures to start the week, with reports Monday from South Korea, Indonesia, Malaysia, the Philippines, Thailand, Taiwan and Vietnam. China gets Caixin PMIs in two batches, starting Monday with the manufacturing gauge, which has bounced between the boom-or-bust 50 level over the past four months. Australia takes the spotlight on Tuesday with the release of current account data that may affect third-quarter gross domestic product statistics due a day later. Those GDP figures are expected to show a marginal acceleration of growth after a tepid performance in the previous period, with a consensus estimate of 0.5% growth from the prior quarter and 1.1% versus a year earlier.
Elsewhere, South Korea also gets GDP data and Japan sees several sets of third-quarter corporate figures, including key capital spending data that will give a steer as to how GDP data for the period may be revised. Japan also publishes cash earnings and household spending data for October, with attention focused on whether a continuing slide in real wages will weigh on spending. South Korea’s consumer inflation figures are expected to show price growth of 1.7%, the third straight month below the central bank’s target. Also releasing CPI reports are Thailand, Vietnam, Taiwan, the Philippines, Indonesia, Pakistan and Kazakhstan. Trade data are due from South Korea, Australia, Pakistan and Vietnam. Among central banks, the Reserve Bank of India is likely to stand pat on policy on Friday, while Bank of Japan board member Toyoaki Nakamura, a dove, gives a speech on Thursday.
Testimony by ECB President Christine Lagarde to the European Parliament may be a highlight. Wednesday’s appearance will allow her to have the final word before a blackout period kicks in ahead of the Dec. 12 rate decision, where a quarter-point cut is widely expected. Questions she will face may touch on the path of inflation, which just jumped to a four-month high. Indicators on the strength of the private sector will draw most attention in the euro zone. Surveys of purchasing managers in Italy and Spain will be released on Monday for manufacturing and Wednesday for services. Industrial production figures for France and Spain are due on Thursday, while Germany’s are scheduled for Friday.
Outside the euro zone, some notable inflation numbers are on the calendar. Switzerland’s on Tuesday is seen accelerating slightly to 0.7%, while the Swedish gauge policymakers track is expected to have jumped to 1.9% when it comes out on Thursday. In Turkey on Tuesday, the central bank will hope annual inflation slowed enough in November from the previous 48.6% reading to allow for a possible rate cut in late December, marking the start of an easing cycle. Investors will also closely watch the monthly gauge, which was 2.9% in October and is officials’ preferred measure. The same day, South Africa will publish third-quarter GDP, the first indication of the impact a coalition government formed by the African National Congress in June is having on reversing years of stagnant growth. The central bank reckons the economy grew 0.5% in the quarter versus 0.4% in the prior three months. Russia’s manufacturing PMI, due on Monday, will point to the health of that country’s war-focused economy.
A handful of rate decisions are scheduled around the region:
Poland’s central bank will set borrowing costs on Wednesday, with no change expected. Governor Adam Glapinski briefs reporters the following day.
Also on Wednesday, Namibia, whose currency is pegged to the rand and is experiencing a slowdown in inflation, is expected to follow South Africa and cut its rate by a quarter point.
On Thursday, Botswana, with one of Africa’s lowest inflation rates at 1.6%, is set to keep borrowing costs steady on expectations that price pressures may drift higher as the economy recovers from a prolonged slump in diamond prices.
In Lat Am, The spotlight will be on Brazil’s output report. Faster-than-expected GDP-proxy readings for July through September have prompted analysts to more than double their forecasts for third-quarter growth, to just under 4%. Surveys of economists’ expectations are on tap from the central banks of Argentina, Brazil and Mexico, along with Citi’s bi-weekly readout of analysts covering Mexico. Expectations for borrowing costs and inflation are melting up in Brazil, while the Citi survey may show more converts to the view that Banxico doubles the pace of easing in December to 50 basis points. In separate reports in Brazil, the early consensus among analysts has October industrial production in the vicinity of a piping hot 6%, while the readings on three separate purchasing manager indexes have been humming along above 50 all year. Chile’s September GDP-proxy reading hit a two-year low following August’s negative print, pointing to a weak start to the fourth quarter. The week will more than probably end on a high note for two of the region’s big central banks: data out Friday are expected to show consumer prices cooled in both Chile and Colombia last month. As to the latter, annual inflation has slowed in 17 of the last 19 months from a cycle peak of 13.34%
And here’s BoA’s cheat sheets. As a reminder they took this week off so the first page includes data for both weeks, the rest is just for the upcoming week.
And here’s a calendar of 2024 majontral bank meetings.
Market Drivers
So let’s go through the list of items that I think are most important to the direction of equity markets:
Fed/Bonds
As noted previously this was one of the sections that had grown unwieldy, so I’ve really pared it down. Given I provide daily updates on Fed expectations, Fedspeak, and analyst thoughts on the Fed, it’s duplicative (and time consuming) to gather it all again so, again, I encourage you to look at those (the daily posts) for updates. I will just give more of a quick summary.
I noted two weeks ago that
with the overall more hawkish Fed speakers including Powell, I think what is being telegraphed is a switch to quarterly cuts following what remains a likely December cut. I think the only thing that would change that is a strong November payrolls report and hotter than expected CPI (which comes during the blackout period so would need to be telegraphed by a Nick Timiraos/Colby Smith article(s)). But I do think if we get those types of reports the December cut is in serious jeopardy. For now, though, we wait.
And that wait will start lift this week with a speaking appearance from Powell Wednesday and the payrolls report Friday perhaps providing some clarity to the December meeting which remains a little better than 50/50 towards a cut. We did this week though see some increase to 2025 cut expectations with around an additional half cut priced in (so 75 bps in cuts including a potential Dec cut), consistent with my thinking last week that “I feel that we’ve gone from one extreme (way too many cuts priced) towards the other extreme (too few cuts priced).” I continue to think that absent a very strong (over 250k) payrolls number and a hot CPI print on the 11th we’ll get a December cut. But we’ll see.
Looking at the Treasury markets, with yields falling across the curve last week, the 2/10 curve was little changed at +0.05% Fri according to the St. Louis Fed, remaining in its narrow (0.04 - 0.17%) range over the past 2 months just above the inversion level.
As a reminder, historically when the 2/10 curve uninverts following a long period of inversion the economy is either in a recession or within a few months of one. Given we just got a 2.8% GDP for 3Q and are currently estimating well over 2% for 4Q, it seems like the days of the 2/10 curve as an infallible recession indicator may be numbered.
The 3mos/10yr yield curve (considered a better recession signal than 2/10’s w/the last four recessions on average coming a few months after the curve uninverted (prior to that it generally uninverted after a recession had already started)) which had seen a dramatic resteepening from late Sept until 2 weeks ago fell back another -18bps from the steepest since Nov ‘22 to -0.40% (still up +1.06% since Sept 11th).
Long term inflation expectations (as measured by the 5-yr, 5-yr forward rate (exp'd inflation starting in 5 yrs over the following 5 yrs), specifically mentioned by Powell at the Nov FOMC press conference (he said the metric was “right where it’s been, consistent with 2% PCE inflation”), fell to the least since mid-Sept at 2.20% -5bps w/w (and -7bps since the Nov FOMC) moving towards the bottom of its range this year.
With nominal Treasury yields and inflation exp's both falling, 10yr real rates using 10yr TIPS did as well to just under 2% at 1.99% as of Wed, down -8bps w/w, but still +50bps since Sept 17th (& remaining well above the 2010-2020 peak of 1% (but down from the post-pandemic peak Oct ‘23 of 2.5%)).
10yr real rates using 5-yr, 5-yr forward inflation expectations (subtracted from the 10yr nominal yield) fell as well but remained above 2% at 2.05%, -12 bps w/w from the highest since May, also well above the 2013-2020 average of around 0.5% (but down from the post-pandemic peak of 2.5% in October '23).
And according to BoA the importance of real rates on equity returns has seen the largest increase in the factors they track over the past 5 yrs.
Shorter-term real yields (Fed Funds - core PCE) also are making their way towards 2% now at 2.03%, the least since Oct ‘23, down from 2.70% in June, which was the highest since 2008.
And the real prime rate (using core PCE) continues to edge lower from the 5.9% in June, which was the highest since Sep 2007. Now down -60bps at 5.2%, still though more than double the 10yr pre-pandemic avg.
And with the 25bps FOMC Nov cut, the gap between 2yr Treasury yields and the Fed Funds continues to close, now just 0.24% versus the record of 1.77% before the Sept FOMC meeting, still though remaining at levels historically indicative of further FOMC cuts. Also even if it crosses, note that the 2yr often follows rather than leads, and we’ve seen this type of action before (rising 2yr crossing through a falling Fed Funds) such as in 2008 when the market thought fewer rate cuts were coming only to be wrong-footed).
And looking out longer term, one thing to note is the FOMC’s long run projection for the endpoint of the Fed Funds rate (the “neutral rate”) has steadily increased this year, now the highest since Sep 2018 at 2.9% (and not unlikely to go higher). [This gets updated in December].
And the 10yr term premium from the St Louis Fed (who uses the Kim and Wright (2005) model which differs from other models in that it incorporates non-yield curve factors such as inflation & GDP) eases off a bit from the highest since Oct ‘23, -2bps w/w to +0.56%, still +52bps since Sept 11th & just 12bps under the post-pandemic peak in June ‘22.
I had been a broken record since the Spring that I thought at some point (most likely around the election) this could resurface as an issue that will push yields higher perhaps cause some mild equity indigestion as it did in Oct of last yr, but while the issue has resurfaced we didn’t see the drawdown we did in Oct (which was close to -5%).
Also as Simon White of BBG noted following the first FOMC rate cut, it’s typical for term premium to rise in the 3 mths following, although this was well above the historic avg.
The extended discussion on term premium (what it is, why it’s important, etc.), can be found in this section in the Feb 4th Week Ahead.
As the MOVE index of expected 30-day bond volatility fell again last wk to the least in 2 mths now back to where it was (even a little below) the jump when the election entered the 30-day window (early Oct).
Despite the drop in bond volatility, 30yr mortgage spreads moved higher last week to 2.50%, +12bps w/w to the highest since mid-Sept. Spreads are now up +22bps since Oct 10th (even as bond volatility has dropped to the least since late Sept). They are now around 75 bps above the 2010-2020 avg level.
Chicago Fed National Financial Conditions Index and its adjusted counterpart (which are very comprehensive each w/105 indicators) in week through Nov 22nd each dropped in bigger than normal chunks for a 2nd week, three tenths each, to now the loosest since Oct & Nov ‘21 respectively.
https://www.chicagofed.org/research/data/nfci/current-data
Looking at the Fed’s balance sheet/QT and its impact on RRP, we continue to get steady, sizeable auctions of T-bills (<1 yr duration) of around $800bn/month as well as the $60bn in balance sheet runoff which quickly drained ~$1.75 trillion from RRP in the year through March 1st. From then until early July RRP levels had remained relatively stable in the $375-$500bn range, but since early July they resumed their decline (in fits and starts), falling to just $144bn on Election Day. Since then RRP levels have not fallen below that level, remaining mostly in the $150bn to $200bn range ($197bn as of Friday). They remain the lowest since May ‘21 (when RRP went from $129 to $485bn), meaning at this point the Fed has “sopped up” most of that “excess liquidity” (as they consider it).
As noted previously, despite this drawdown Dallas Fed Pres Laurie Logan (who is an important voice given her extensive experience in the NY Fed's markets group) like Powell believes current liquidity is “more than ample” and said she's looking for RRP to fall to "negligible" levels. As I said previously “she's the expert so I'll defer to her, but I continue to be on the lookout for funding stresses now that RRP has crossed below $200bn, and I still think at zero RRP the Fed may need to stop QT to avoid another liquidity shortage as they did in late 2018.”
And as noted previously, BoA, who had previously estimated that RRP would fall to zero in Oct has pushed that out now to Jan ‘25. Citi in contrast had thought it would remain around the $300bn level until RRP rates fall.
And Powell’s and Logan’s lack of concern with liquidity was echoed by New York Fed’s Roberto Perli who said bank reserves remain “deep inside the ‘ample’ range,” even as the difference between peak and avg bank overdraft levels with the Fed has been increasing, traditionally a warning sign of bank reserve scarcity, although it may also just be a sign that banks are becoming more comfortable using the overdraft program. “We’re reluctant to draw strong conclusions from the latest data, as we don’t know exactly what is driving the trend,” said Wrightson ICAP senior economist Lou Crandall, and “if some banks are in fact more willing to rely on their Fed overdraft privileges to meet intraday working-balance needs, they may be less inclined to hoard reserves going forward,” Crandall wrote. “That ultimately could allow the Fed to shrink its balance sheet more than would otherwise be the case.” And Perli was out again this week brushing off concerns this time regarding the widening of rates at quarter end.
Meanwhile the yellow flags continue to grow with overnight repo rates (intra-bank lending fees) for year-end pushing higher, up over a half percent in just the last week, pressured not just by QT & a looming wall of Treasury settlements on Dec 31st, but also unprecedented demand for equity financing from dealers w/equity exposure hitting record levels.
Meanwhile BTFP loans (the emergency loan program created by the Fed in the aftermath of the SVB collapse) continue to fall as loans come up for refinance. As noted previously the Fed has wanted to clear these loans out and raised the rates to make them unattractive starting Jan 1, 2024. As these are 1yr loans, that means that by the end of this year all borrowers will have had to either pay off or refinance their loan at the now unattractive rate.
As you can see from the chart below, many are choosing the former with the program down to around $19bn (from $167bn at the peak in March of this yr), -$2bn w/w, the least since Mar ‘21 (when it went from $0 to $64bn) which I think will fall to near zero by year end (we’re almost there already). Given the relatively small amount outstanding at this point, I will likely stop reporting on it.
For more on BoA’s forecasts for RRP to drop to near zero ($60bn) by Oct you can follow the link and look in this section (but it’s mostly due to RRP yields falling below those of money markets and will be soaked up by bonds (from Fed QT), the Treasury (with a higher TGA), and currency growth (in dollars). If bank reserves increase that would also pull from RRP. They see it building again into early 2025 before declining again towards zero.
For more on BoA pushing back their est for the end of QT to Mar ‘25 from YE ‘24 “which could create a funding blind spot for the Fed” in the event the debt limit (which expires at YE) is not resolved you can follow this link and look in this section. In summary their thinking is that, similar to earlier this year, the Treasury’s depletion of its General Account (TGA) will offset what would otherwise be a continued drawdown of liquidity. That will keep liquidity stable but will rapidly reverse once the debt limit is ultimately raised (which BoA est’s will again be in July as they assume Congress will take it to the very last second as is their habit), which could lead to a funding squeeze. However if the debt limit is raised in advance, the liquidity issue will come quickly as noted above, and we could very easily find ourselves in another 2018 scenario (which resulted in a near bear market).
Bank reserves were also little changed this week remaining around the highest since Sept 11th in the week through Wed at $3.26tn, -$10bn w/w, keeping them with some breathing room from the $3tn level which we haven’t revisited since the indigestion in the credit markets in March ‘23 (which contributed to the banking issues (SVB, etc.)).
Overall, though, they remain just -$100bn below June 1, 2022 levels ($3.36tn), when the Fed started QT, a much better result than even the most optimistic estimates at the time.
For background on various estimates of when reserves will be “too low” see the Feb 4th Week Ahead.
Getting back to rates, I said 8 months ago 2-year Treasuries were a good buy at 5%, and as I noted once the Fed started its cutting cycle the ship has likely sailed on seeing those yields anytime soon (meaning years (see BMO’s note below)). In terms of 10’s I had advised grabbing some at 4.7% which I had thought seemed like something we wouldn’t see anytime soon, but as I noted two weeks ago “we’re already back to 4.45% and 4.7% doesn’t seem so far away. I still think it will take something ‘new’ to push over 4.5% (a hot inflation print, very strong payrolls report, etc.), but we’ll see.” So far we haven’t gotten anything “new” so rates have drifted lower, now down over 50bps (on the 10yr) since they touched 4.5% post-election, consistent with my thinking pre-election that getting past the election would be the catalyst that saw rates ease off (it just took a couple weeks). In terms of much lower yields, though, while I think we can certainly fall further, as I said 8 weeks ago, we have probably seen the lows until we get a recession:
“while we didn’t quite see 3.5%, I think 3.6% is close enough, and I think we might have been at or near the lows at this point, particularly as the Fed has been raising their neutral rate estimate. If the endpoint for Fed Funds is around 3% (or higher) then it’s hard to see the 10yr trading much lower absent a recession. Similarly 2yrs at 3.6% seem to be very rich and almost certainly too low absent a recession consistent with my statement last week.” In short I’d expect to see 4% on these before we see 3.2%:
At around 3.6% on both the 2 & 10yrs absent a recession I think there’s not much value in either (I’d rather park my cash in short term Treasuries (0-3mths) or safe dividend paying stocks with a track record of growth (dividend aristocrats, etc.) at these levels.
And a reminder about BMO’s good point about the richness of the 2yr yields (they rarely trade above the Fed Funds rate unless rate hikes are expected:
For all the old “final hike” and “first cut” materials, you can reference the Feb 4th blog post.
BoA updated their FOMC Dove-Hawk Chart. Note it’s missing Hammack in ‘26 (Cleveland and Chicago vote every 2 yrs), but otherwise looks right. Also note that Philadelphia Fed Pres' Harker’s term is up next year (which is why they don’t have a name for Philadelphia), something I didn't realize.
Also, I had a little back & forth with them arguing that Schmid should be "Hawkish" considering that he didn't dissent (versus Bowman) and that Goolsbee seemed more dovish than Harker. Here was their response (which makes some sense):
In a recent dot plot (I think June), Goolsbee identified himself as not the outlier, which led us to conclude Harker is the outlier. On the other end of the spectrum, there were two people forecasting 50bp of total cuts this year. We think they’re probably Bowman and Schmid. If we had more granularity, we’d rate Bowman as more hawkish, but with only five categories, I’m comfortable with putting them in the same bucket.
It seems like there might be more changes coming soon though with Collins saying this week a December cut wasn’t a “done deal”, a fairly hawkish statement. Similarly Kashkari has blessed a December cut so seems less hawkish. Logan, Musalem, Bowman & Schmid though did their “hawkish” best last week.
Earnings
As a reminder, I have removed most of the background material, which you can get in the Feb 4th blog post. As you know I’ve moved on to 2Q and beyond. You can reference this post from 5/12/24 for stats on 1Q.
With over 95% of earnings reports in, updates to this section will be spotty until we get to 4Q reporting season in January. No update from Factset this week. Some posts at the bottom.
As noted last week,
Given we’re past the 90% mark in terms of earnings reports, I will update this section but it generally doesn’t change much. Things that are basically the same I will leave italicized, things that have seen more than a small change I will not.
As we continue to move through Q3 earnings season, now with 95% of SPX earnings weight having reported through Thursday Factset reports 75% have beaten expectations (the same as last 2 weeks), below the 5yr (77%), but above the 10yr avg (74%). Overall companies are reporting earnings that are +4.5% above expectations (up from +4.3% last wk but down from +6.1% six wks ago), still below 1yr (+5.5%), 5yr (+8.5%) & 10yr (+6.8%) avg's.
And with the better beat amount, we’ve seen 3Q earnings expectations edge higher to 5.8% y/y growth from 5.4% last wk (and 4.3% on Sept 30th). 5.8% though would be the lowest growth since Q2 ‘23.
Which means we didn’t see this quarter the normal level of “earnings inflation” which happens as companies beat the lowered bars they set for analysts (37 of last 40 quarters have seen actual earnings beat expectations at the end of the previous quarter (exceptions were Q1 '20 (Covid) & Q3/Q4 '22)). As Factset reminded us at the start of the season, even with those outliers, the past 10yrs earnings have ended +5.5% higher than the start of the quarter, which would equate to +9.9% earnings growth. However as I noted last week “it seems highly unlikely we’ll come anywhere close to +9.9%. In fact, I’d bet it’s not much changed from the current +5.8% which would mean we’d have seen the least earnings inflation (~1.5%) since Q4 ‘22 when it was -1.4%.” With now 90% of SPX earnings in by weight, it seems now certain we won’t come “anywhere close” to the historical earnings increase from the start of the quarter.
On the top line, 61% of companies have beaten expectations for Q3, below the 5yr (69%) & 10yr avg’s (64%). Companies are reporting revenues that are +1.2% above expectations (up from +1.1%), still below the 1yr & 5 yr avg’s (+2.0 & 1.4%).
Like earnings, revenue growth exp’s for Q3 increased w/w to +5.6% from +5.5% (which will be the 16th consecutive quarter of earnings growth and most since Q3 ‘22). It is up from +4.7% on Sept 30th (start of the quarter).
Expectations for earnings in future quarters were mixed this week, not falling across the board for the first time in weeks. While Q4 was down another tenth to +12.0% (now down -3.0% the past 7 wks), Q1 ‘25 was unch at +12.7% (-1.4% last 5 wks) & Q2 ‘25 was up a tenth to +12.1% (-1.2% last 5 wks).
Looking more specifically at Q4, according to Factset, just 5 industries are responsible for most of the 12% in exp'd earnings growth in Q4: Banks (181% exp'd growth), Semiconductors & Semiconductor Equipment (34%), Pharmaceuticals (64%), Interactive Media & Services (25%), and Broadline Retail (48%). "Excluding these five industries, the estimated earnings growth rate for the S&P 500 for the fourth quarter would fall to 1.6% from 12.0%."
Taking it down to the company level, it's Truist Financial $TFC ($0.88 vs. -$3.85), Citigroup $C ($1.21 vs. -$1.16), Bank of America $BAC ($0.78 vs. $0.35), JPMorgan Chase $JPM ($3.88 vs. $3.04), and Wells Fargo $WFC ($1.33 vs. $0.86) in Banks, NVIDIA $NVDA ($0.84 vs. $0.52), Micron Technology $MU ($1.73 vs. -$0.95), and Broadcom $AVGO ($1.46 vs. $1.10) in Semiconductors & Semiconductor Equipment industry, Merck & Company $MRK ($1.84 vs. $0.03), Eli Lilly & Company $LLY ($5.47 vs. $2.49), and Pfizer $PFE ($0.48 vs. $0.10) in the Pharmaceuticals industry, Alphabet $GOOG ($2.11 vs. $1.64) and Meta Platforms $META ($6.72 vs. $5.33) in Interactive Media & Services industry, and Amazon.com $AMZN ($1.47 vs. $1.00) in the Broadline Retail industry for the fourth quarter.
Putting it together the lift to Q3 expectations along with next 3 quarters stopping their deterioration sees FY ‘24 move up to $240.09 from $239.84 (now +73 cents above the low 2 weeks ago), representing +9.4% growth. Looking further back, it remains down just around -2% from July 1, 2023, much better than the typical -6% or so drop we historically see.
2025 earnings expectations also moved higher for a 2nd week +24 cents to $275.16 (+15.0% growth), up +57 cents from low 2 wks ago which was the least since February.
In terms of how markets are handling earnings beats & misses at this point, looking 2 days before to 2 days after an earnings release, Factset continues to see beats rewarded more than average at +1.6% vs 5yr avg of +1%, and continues to see misses punished more than average (-3.1% vs 5yr avg of -2.3%).
Despite the softening in earnings expectations, Factset’s analysis of analyst bottom-up SPX price targets for the next 12 months as of Thursday was up another 59pts w/w to 6,610, now up ~1,587 points over the past 37 weeks. Health Care remains with the largest upside seen by analysts (+18.2% (up from +13.1% 2 wks ago with the selloff)) while Financials (+3.1% with the rally in those stocks) is expected to see the smallest price increase.
As a reminder the last 10 yrs they have been on avg +2.9% too high (+3.4% last 5 yrs). Of course, that avg range masks a wide discrepancy between big up and down years.
In terms of analyst ratings, buy and hold ratings continue to dominate at 53.7 & 40.6% (from 53.6 & 40.8% respectively (sell ratings remained at 5.6%)). Communication Services (62%), Energy (61%), and Information Technology (61%) sectors have the highest percentages of Buy ratings, while the Consumer Staples (40%) has the lowest percentages of Buy ratings.
And some other earnings stuff:
Economy
Over the past 2+ years part of my earnings optimism has been due to the economy holding up better than expected. While earnings only track the economy loosely (and markets look forward 6-12 months), there is a clear correlation between recessions, lower earnings, and lower stock prices (although stock prices (being as noted forward looking) generally fall in advance of the recession and bottom 6-9 months before the end of the recession). So if you can see a recession coming it is helpful, although very difficult (especially ahead of the market). You can reference this Week Ahead (see the Economy section) for a lot of material on how every recession is preceded by talk of a “soft landing” as close as a month before the start. On the IRA infrastructure act, the November 26 report has good info on how that should be supportive at least through the end of this year. That report also has the notes about how small caps have shorter debt maturity profiles and more of it.
As I’ve been stating since I switched to the Week Ahead posts in mid-2022, the indicators to me are consistent with solid (which at times has been robust) economic growth, and I have been a broken record that I “certainly [did] not think we’re on the verge of a recession (although as noted above every recession starts out looking like just some economic softening).” But several months ago I added: “That said, I’ve also noted over the past __ weeks or so [it got to 22], we have clearly started to see some moderation in key areas like consumption, manufacturing, construction, exports and housing.” Then 10 weeks coming into last week though I’ve noted “the data [has been] fairly strong, more consistent with what we’d been seeing at the start of the year.” That though took a turn this week with some weaker than expected data, although some of it (new home sales and perhaps capital goods (biz spending)) was clearly hurricane impacted, goods imports were a drop off from a big jump in Sept to beat potential strikes, and others like GDP and personal spending while softening remained at robust levels. Similarly, initial jobless claims remained low while continuing claims continue to rise to 3yr highs. All of this evidences an economy that is slowing from elevated levels but continues to grow at or above trend.
Overall, as noted 9 weeks ago, “the situation continues to seem like manufacturing is subdued but trying to bottom, housing perhaps has inflected off the bottom [although that is going to take a step backward with the jump in mortgage rates in the short term], labor markets (and the services sector and construction in particular) are solid [although hiring has clearly slowed and the last NFP report does raise some questions, we’ll get an update this week], and productivity appears to be very healthy (something I think you’re going to be hearing more and more about)…I continue to feel that any softening does not appear to be morphing into a recession.”
Overall, as I said 15 weeks ago:
without question, the evidence is building that the days of >3% real GDP growth are behind us (although we nearly got there in Q3), and we should be happy to settle into something more around trend (1-3% real (infl adjusted) growth). That though is far from a disaster. The important thing will be to see the softening level out (L-shape) rather than continue to fall turning the “soft landing” into a recession.
So far that’s what we’ve seen.
The overall weak data this week saw the Citi Economic Surprise Index fall for a 2nd week to a 1-mth low of 27.8 from 43.3 two weeks ago, still for now closer to the highs of the year (47.2 in Feb) than the lows (-47.5 in July).
And GDP estimates are for now consistent with a no recession call (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)). After coming in at 2.8% for Q3, most trackers are looking for a little below that level for Q4.
Goldman (who was 3.0% for 3Q vs 2.8% actual 1st est) left their 4Q GDP estimate at +2.5% (from isabelnet.com).
Atlanta Fed (who was right in line in its 3Q est of #GDP (and just a tenth off for 2Q from the 1st est)), edges its 4Q GDP estimate up a tenth to +2.7%.
BoA hasn’t released their 4Q tracking estimate yet. Their 3Q GDP tracking ahead of the GDP print was 3.0%, the highest since it initiated tracking. As a reminder, their “official” house est was 2.5% y/y growth in 3Q.
They did though update their 2025-2026 expectations.
NY Fed’s 4Q GDP Nowcast (as a reminder, they had 2.91% for 3Q vs 2.8% 1st est) fell again this week to 1.81% from 1.91%, mostly on the worse than exp’s drops in durable goods shipments and new home sales offset by real disposable income coming in better than exp’d.
As a reminder, the NY Fed’s model is dynamic and so adjusts in real time as data evolves, but no “parameter revisions” this wk.
And the St. Louis Fed GDP tracker, which outside of Q1 this yr (where it was the closest) has undershot actual real GDP since Q3 ‘22, continues to see sub-2% growth at 1.35% for Q4 from 1.55% the prior week.
While the Weekly Econ Index from the DallasFed (scaled as y/y rise for GDP), which runs a week behind other GDP trackers, fell back for the 1st time in 3 wks to +1.80% in the week through Nov 23rd from +1.86% the prior week (rev’d from +1.98%), moving under the midpoint of its range this yr (1.49 - 2.66%). The 13-wk avg also fell three tenths to 2.01%, evidencing overall economic momentum around trend.
https://www.dallasfed.org/research/wei
Here’s the components.
Other economy stuff:
Multiple
Like the other sections, I’ll just post current week items regarding the multiple. For the historical stuff, see the Feb 4th blog post.
With the rise in equities this week, forward P/E’s rose again as well, outside of the “Megacap-8,” getting close to or all the way back to the levels 2 wks ago which were the highest since 2021.
The SPX forward P/E this wk increased one tenth to 22.1 (-0.1 below the highest since mid-'21).
Mid-caps (S&P 400) remained at 17.1 (the highest since late ‘21).
Small caps (S&P 600) were up two tenths to 17.1 (the highest since mid-‘21 and now catching mid-caps which they've trailed all year).
Yardeni's “Megacap-8” P/E remained at 29.1, still up 2.7 pts from the 26.4 it hit 10 weeks ago (which was the least of the yr) but below the 31.5 it hit 19 wks ago (which was the highest since Jan ‘22)).
https://yardeni.com/charts/stock-market-p-e-ratios/
Other valuation stuff:
Breadth
Breadth which had steadily weakened since the election until Nvidia’s earnings release continued to improve for the most part the past week, although more so on the NYSE than Nasdaq.
The McClellan Summation Index ("what the avg stock is doing") continues to head higher after bottoming around the area it's bottomed previously this year.
% of stocks over 200-DMAs remains around the highest since the start of August, although didn’t make much further progress this week and continues to lag prices as it has since Sept.
% of stocks above 50-DMAs edged to a 1mth high on the NYSE, although also with a large gap to prices, but Nasdaq remains off the highs of the month.
% of stocks above 20-DMAs continues to look a little better than those over 200 & 50-DMAs, on the NYSE edging to a 2-mth high (and from a higher low) while the Nasdaq to a 1-mth high, now starting to catch up to price (but lagging for now).
Value/Growth edged lower from the highest of the month after making its first higher high since the local peak in September. Still not seeing the dramatic jump we got following Trump’s victory in 2016 but at least moving in the “right” direction. As a reminder, after peaking in 2016 the ratio fell through Trump’s first term until it finally bottomed post-Covid. Also note that it has never revisited those levels.
The equal-weighted SPX vs cap weighted ratio like value/growth fell back last week from a 1-mth high after also seeing its first higher high since the local peak in Sept. Like value/growth its jump post-election is much smaller than we saw following Trump’s victory in 2016, and, again like value/growth, after that peak in 2016 the ratio fell throughout Trump’s 1st term until it finally bottomed post-Covid. Also note that like value/growth it has never revisited those levels.
It continues to me to bear some resemblance to the 2009 pattern where we saw an initial bounce from historic lows, then a pullback for several months before it embarked on a rapid multi-year recovery, although the Trump analog above raises caution signs.
Stop me if you’ve heard this before, but IWM:SPY (small caps to large caps), like value/growth & cap-weighted to equal weighted SPX fell back last week and for remains not far from 24yr lows. Like those other two ratios we haven’t seen the same level of post-election bump we did in 2016. Unlike those, though, the ratio didn’t really start falling until mid-2018.
Equity sector breadth based on CME Indices last week remained very strong with again 10 green sectors w/seven up at least 1% (from 10 the prior week). Energy was the only down sector this week (Communications the prior week) falling -2%, but cyclicals in general lagged, taking 4 of the bottom 5 spots (along with tech).
SPX sector flag from Finviz consistent showing lots of green outside of some pockets particularly in energy and tech. Nvidia a notable laggard.
Other breadth stuff:
Flows/Positioning
BofA using EPFR data in the week through Nov 27th saw equities with another inflow (9th in 10 wks & 26th in 28 wks), +$29.4bn, now +$133.1bn the last 4 wks (since election) & $653bn YTD annualizing to ~$718bn:
US 8th wk of inflows, accelerating to +$36.1bn, $141.1bn last 4 wks (since the election), largest on record, +$441bn YTD annualizing to a record $485bn.
EM though saw a 7th week of outflows, remaining at -$1.8bn for a 2nd wk after the most since Aug ‘15 the prior week & largest 4 wk outflow since May ‘20 (now -$29.2bn last 8 wks, but after 20 wks of inflows), still at +$147.1bn YTD (after $91bn in all of ‘23). #China saw another -$0.5bn (now -$23.0bn the past 7 wks (but like EM overall only after 20 straight wks of inflows before that)) still +$130.7bn YTD, while #India saw a 6th wk of outflows (but only 7th this yr), -$0.2bn and since election largest 4-wk outflow since Jun '22, leaving it at +$20.4bn YTD.
#Japan saw 2nd outflow accelerating to -$5.0bn, still +$8.3bn YTD after +$7.3bn in 2023.
Europe 9th straight outflow & 83rd in 89 wks, -$3.6bn for a 2nd wk, now -$56.1bn YTD after -$66.9bn in 2023.
US large caps see 8th consec inflow & 49th in 59 wks +$21.4bn, now +$99.5bn last 4 wks (since election), ~+$177bn last 10 wks & ~+$465bn last 53 wks after +$125bn in all of 2023.
Small caps return to inflows +$3.6bn, now +$14.3bn last 4 wks (since election), +$26.8bn last 20 weeks and +$18.5bn YTD.
US value another inflow +$1.4bn (still -$68.7bn in 2024 after a record -$73bn in 2023).
US growth though returned to outflows, 6th in 8 wks, -$1.6bn, -$39.4bn last 22 wks but ~+$111bn YTD.
Sector specific equity flows were again very positive in EPFR data in the week through Nov 27th:
Inflows:
Tech led inflows for a 2nd week w/+$3.1bn after +$5.4bn in prev wk, now +$21.0bn last 18 wks & +$55.5bn last 47.
Materials saw 11th inflow in 12 wks +$1.1bn, now +$16.3bn last 10 wks).
Financials another inflow +$2.3bn (+$8.0bn last 4 wks (since election), most since Jan ‘22).
Utilities 1st inflow in 5 wks +$0.4bn, largest in 11 wks (still -$0.9bn since election).
Consumer returns to inflows, 2nd in 7 wks +$0.8bn (still -$26.8bn last 57 wks).
Outflows:
Healthcare 2nd outflow -$0.7bn, after most since Dec prev wk (-$20.4bn last 59 weeks).
Real estate 7th consec outflow -$0.6bn (-$3.0bn since election).
Energy returns to outflows -$0.2bn, 14th in 16 wks (and inflows just +$0.145bn in total), now -$7.3bn last 15 wks, -$0.4bn since election).
Looking at EPFR data in the week through Nov 27th for fixed income saw an 86th inflow in 87 wks (and 18th straight) +$10.3bn now ~+$603bn YTD (annualizing to record $663bn) but still BoA private client bond holdings as % of AUM lowest since '22:
IG/HG a 57th consec inflow (& 83rd in 85 wks) +$7.1bn, ~+$387bn YTD, on track for a record $425bn in 2024 after +$162bn in 2023.
Munis the 41st inflow in 45 wks (and 22nd straight) +$1.3bn (+$3.2bn since the election).
HY 16th consec inflow & 22nd in 23 wks (and 47th in 56) +$0.4bn, now ~+$63bn last 54 wks (+$3.9bn since election).
Bank loans 8th wk of inflows, +$1.5bn, largest 4 wks of inflows (since election) since Feb ‘22 (+$11.0bn last 6 wks).
Treasuries return to inflows (6th in 7 wks & 25th in 31), +$0.5bn, after largest 2 wk outflow since Dec ‘23 (still -$1.7bn since the election).
TIPS another rare inflow just 3rd in 16 wks & 4th in 21 (& 10th in 65), but just +$0.1bn after +$1mn in prev wk. TIPS saw record outflows of -$33bn in 2023.
EM debt though 6th consec outflow -$2.7bn, (-$12.7bn last 6 wks).
In week through Nov 27th, EPFR saw cash w/2nd consec outflow, only 3rd in 10 wks, but just -$2.9bn after -$1.3bn in prev wk, still +$988bn YTD (annualizing to +$1.086tn after a record +$1.3T in 2023 and +$3.3T 2019-2023). BoA private client cash holdings as % of AUM though remain well under the historic avg, even as AUM in money markets is at a record high ($6.7tn).
Gold/Silver return to inflows for 1st wk in 4 (& 17th wk in 22) +$0.3bn, +$13.2bn last 26 wks, but -$2.5bn since election.
Crypto funds (Bitcoin) another inflow (10th in 11 wks) +$1.1bn +$21.5bn last 29 wks and +$7.4bn since the election. The 8-wk inflow is the most on record ($13.5bn) & = 30% of total crypto fund inflows since 2019.
ICI data on money market flows saw an inflow of +$26.8bn in the week through Nov 20th vs EPFR’s -$2.9bn outflow (although the prior week ICI had a much larger outflow than EPFR), pushing the YTD flows into money market funds to ~+$750bn and total MMF assets at $6.68tn, a record high. Most all of the inflow (+$25.7bn) was institutional (after -$31bn the prior wk), while retail added +$1.1bn (after +$8.7bn). In terms of totals, 60% is institutional, 40% retail.
Looking at CTA (trend follower) equity positioning, BoA says “CTA positioning in US equities is likely elevated but can grow further into year-end if equity realized vol continues its current decline. Price trends remains less bullish outside the US where CTAs are likely now short EURO STOXX 50 and closer to flat on the Nikkei 225.”
So, CTAs look like this week there’s a bias to buy or hold in the SPX & NDX. While the RUT has also has a bias to buy which would take exposure levels to the highest in a year, it also is modeled to have the potential for a big selloff if price turns south. As noted things are less positive ex-US where the bias is to sell with not much scope for buying.
The $RUT continues to have the strongest trend strength at 75% (up from 55% two weeks ago) while $SPX & $NDX still are at 67 & 63% (from 64 & 61% last week). Japan fell to 6% from 26% three weeks ago while Stoxx50 is -55% (from -23% two weeks ago).
In terms of gamma positioning, as a reminder BoA said last week that “if equities do climb higher early next week, then the current profile suggests gamma may climb quickly,” and it appears we saw some of that with as they note this week “SPX gamma has been well supported this week and was long $9.0bn (83rd %ile year-to-date) as of Wednesday’s close. Going forward, the current by strike profile suggests gamma may be at a local min (i.e., baring new flows/expiries SPX gamma may climb if spot declines or rises from here). Our estimates suggest SPX gamma may have reduced S&P 1m realized vol by only 0.9pts (6% of the level). Importantly, this vol impact figure is backwards looking and still includes the start of Nov when gamma was less extreme. Therefore, if gamma stays near current levels, then the impact on realized vol may climb.”
As I’ve noted weekly this year, very high levels of gamma have acted as a market stabilizer for most of this year dampening volatility in both directions. When it’s fallen below $2bn or so (as it did 4 weeks ago) we’ve seen heightened volatility (which we did), and while it’s rarely been negative that has been associated with even higher volatility (which is what BoA saw 3 weeks ago, and which we saw (to the upside)). With gamma now moving back into the higher end of its range this year (and with a bias to move higher), it should act as that stabilizing force as long as markets remain less volatile. Currently it would take a sharp move below 5775 to see gamma flip negative.
As noted above with gamma positive it continued to act as suppressant to volatility but much less so recently than in July before volatility spiked. We’ll see if this starts to head lower as BoA noted.
And BoA est's that risk parity strategies continue to heavily overweight bonds and underweight commodities & equities. I suggested 6 wks ago given the (relatively) lower equity volatility on a 30-day lookback window vs bonds, the gap should narrow, but for now it remains quite wide. Commodities not so much given the continued elevated volatility in that asset class.
BoA est’s that volatility targeters (vol control), were back to buying last week in line with the reduced volatility the prior week, and it would seem that should continue in the upcoming week. They remain below the recent peak in mid-Oct & well under the peak in July.
In that regard, BoA is looking for some buying on Monday as well as from CTA’s.
And BoA notes “the amount of both S&P 500 and NASDAQ-100 futures that leveraged & inverse ETFs would theoretically need to trade for each 1% move increased over the last week as upside resumed,” with the SPX hitting an ATH now responsible for $907mn in buying/selling per 1% move in the NDX. The NDX at $1.96bn remains off its highs from 3 weeks ago. This trading typically happens the last 5 minutes of each day, and they estimate is responsible 4 & 32% (unch from last wk) respectively of all volume in that period.
And some other notes on positioning:
And BoA continues to see buybacks continuing above seasonal norms.
But something to watch out for towards the end of the year (we might have seen some of this last week).
Sentiment
Sentiment (which I treat separately from positioning) is one of those things that really only matters at the extremes (and even then, like positioning, it really is typically helpful more at extreme lows vs extreme highs (“it takes bulls to have a bull market”, etc.)). As we have seen the last couple of weeks, sentiment is mixed although continued to edge higher with some metrics pushing towards (or above) Sept levels (which I said were a “caution signal”) while others remain more subdued. So still not a good read to me but if anything a moderate headwind as it relates to US equities (particularly the put/call positioning).
The 10-DMA of the equity put/call ratio (black/red line) which had started to lift from near the lows of the year (investors starting to grow more cautious) in late Oct, turned back lower 4 weeks ago, returning to around the lows of the year and has again started to bump along sideways as it did for most of Oct indicating investors remain bullish (buying upside over downside protection). When it’s increasing it normally equates to a consolidation in equities and increase in volatility and vice versa.
The CNN Fear & Greed Index improves +5pts w/w to 66, the joint highest in 2 wks (still a little below the recent peak of 69 Nov 11th) remaining in “Greed” territory.
Looking at the components:
Extreme Greed = market momentum (SPX >125-DMA) and 5-day put/call options Greed = safe haven demand (20-day difference in stock/bond returns) and junk bond demand
Neutral = market volatility and stock price strength (net new 52wk highs) (from Fear) Fear = stock price breath (as measured by the McClellan Volume Summation Index) (from Extreme Fear) Extreme Fear = None
https://www.cnn.com/markets/fear-and-greed
After “surging” 7 wks ago the most this year to 7.0, BofA’s Bull & Bear Indicator has done nothing but fall as ex-US metrics dominate (it’s a global metric) falling for a 6th week a big -0.7pts, the most since Mar ‘23, to 5.4, an 11-mth low “on stocks/debt outflows, poor stock market breadth (45% of regional equity indices trading < 50 & 200dma), and higher FMS cash; decline in B&B indicator – broadest indicator of global sentiment & positioning – from 7 to 5 past 6 weeks illustration of extreme disconnect between investor bullishness on US assets and bearishness on Rest-of-World.”
While Helene's followers remain very bullish, just off last week’s levels which were the most bullish since April ‘21, at 61.3% next 100pts up from 66.8%. For this group very high bullish (or bearish) levels are generally not a contrarian indicator.
And Citi’s Panic/Euphoria continues to push off the chart around the highest in the past year+. As a reminder, “[h]istorically...euphoria levels generate a better than 80% of stock probabilities being lower one year later.” In that regard, it first entered euphoria in late March (when the SPX was around 5200) and then reentered in late October (around 5800).
Seasonality
As I said 5 weeks ago, “now we’re pushing into the the very strong end-of-year period which starts Oct 28th and runs to the beginning of Jan, although some think perhaps we pulled forward some of those gains.” Consistent with that we did go basically nowhere for a month, but now we’re starting to extend off those levels. And if you’re basing your decisions just on seasonality, it doesn’t get any better than this through the end of the year (and into next year). Looking at December specifically, it’s very strong in a typical year (up 74% of the time w/an avg return of +1.32%), but that return is somewhat backloaded into the 2nd half of the month. In Presidential years though it’s even stronger (up 83% of the time w/an avg return of +1.51%) and its more equally distributed. But that will fight with a seasonal quirk in that December starts the week after Thanksgiving, which is not strong, down 67% of the time w/an avg return of -1.12% (median -0.68%).
BoA (Suttmeier): When the SPX is up through 3Q in an election year, 4Q is up 89% of the time w/avg return of 4.98% (4.26% median), which equates to SPX 6000 into yearend.
And looking into next year.
And as we consider seasonality, a really nice post from Callie Cox about how you need to take historical analogies w/a grain of salt (unless you've dug into the history). Her chart on Presidential election yr performance w/ & w/o 2008 (when the SPX was -17% in Oct) is a wonderful example.
https://www.optimisticallie.com/p/a-history-lesson
For references to all of the “up YTD through Feb” see the March 3rd post. For all the very positive stats through March (strong 1Q, strong two consec quarters, etc.) see the April 14h post.
For the “as January goes so goes the year”, see the February 4th Week Ahead.
Final Thoughts
As noted last week,
we did get a resumption of the rally, particularly in the “other 493” on Thursday and Friday. Does that continue into this week? Well, we continue to have seasonality on our side, along with buybacks, and it appears retail continues to buy. Earnings sentiment improved this week, the economy remains in good shape, breadth is improving (even as it lags prices for now), and it feels like things can’t get much more bearish on the Fed side (fewer cuts) with less than 3 total priced in. Rates seem ready to perhaps cool off a bit, and it looks like it won’t take much to get systematic strategies reengaging which would be a powerful force. There are certainly quibbles. Stocks are relatively expensive and sentiment is pretty complacent, but this is certainly not a market I would want to short.
And last week’s Final Thoughts proved to be a decent roadmap, with markets moving higher on all of the noted factors. I really don’t have anything much to add, as I think all of those forces remain in play and could (should?) continue to drive stocks higher for now. We do have Powell talking on Wednesday, but he has been relatively market friendly since the Fed pivot earlier this year, and as noted I don’t think he’s going to make any big proclamations ahead of the payrolls report on Friday, and you can never know what Trump tweet(s) might be in store this week, but otherwise no particular reason to expect anything different than what we’ve been seeing.
So as I’ve said all year:
Overall this feels like a bull market (the economy is growing, earnings are growing, the Fed is much more likely to be cutting than hiking as its next move, the technical picture and seasonality are strong overall for this year, balance sheets are solid, there’s lots of liquidity, and there’s lots of stocks other than the biggest ones that are performing well (the equal weight SPX hit a new ATH in March, etc.). So if/when we do get that sharp pullback I would think it will likely be an opportunity to buy (like most sharp pullbacks are), not a reason to run for the hills.
And as always just remember pullbacks/corrections are just part of the plan.
Portfolio Notes
As with last week some tax loss selling in here. Sold out of SPG, IBB. Trimmed CQP, FSK, TPR, MAC, JWN, IMBBY, MTB, BMY, BBWI, CVX, MPLX, CTVA, AM, CTRA, VALE, AES, E, HBI, KSS.
Bought SHY, SLV, M.
Cash = 18% (held mostly in SGOV, MINT & BOXX (BOXX mimics SGOV but no dividend, all capital appreciation so get long term capital gains if you hold for a year) but also some non-TBill (>1yr duration) Treasury ETF’s (if you exclude those longer duration TBill ETF’s, cash is around 11%)).
Positions (after around the top 20 I don’t keep track of their order on a frequent basis as they’re all less than 0.5% of my portfolio).
Core positions (each 5% or more of portfolio (first 2 around 10% each, total around 25%) Note the core of my portfolio is energy infrastructure, specifically petroleum focused pipelines (weighted towards MLP’s due to the tax advantages). If you want to know more about reasons to own pipeline companies here are a couple of starter articles, but I’m happy to answer questions or steer you in the right direction. https://finance.yahoo.com/news/pipeline-stocks-101-investor-guide-000940473.html; https://www.globalxetfs.com/energy-mlp-insights-u-s-midstream-pipelines-are-still-attractive-and-can-benefit-from-global-catalysts/)
EPD, ET, PAA
Secondary core positions (each at least 2% of portfolio)
ENB
For the rest I’ll split based on how I think about them (these are all less than 2% of the portfolio each)
High quality, high conviction (long term), roughly in order of sizing
ENB, XOM, DIS, CTRA, CVS, GILD, SCHW, BMY, O, PFE, PYPL, SHEL, KHC, ADNT, T, BWA, APA, GOOGL, GSK, EQNR, CMCSA, AM, TPR, DVN, ADNT, OXY, JWN, RHHBY, TLH, NTR, TRP, E, ING, VZ, KMI, VSS, ARCC, BAC, URNM, URA, VNOM, TFC, MPLX, VOD, FSK, CVX, ING, HBAN, STLA, NEM, CCJ, BTI, AES, RRC, FRT, VICI, DGS, WES, INDA, CURLF, MPLX, OWL, BUD, KEY, CVE, KIM, MTB, BAYRY, SOFI, BEP, BIIB, SAN, TEF, KVUE, SLB, KT, SQM, ALB, F, VNM, MFC, GPN, SEE, CI, LYG, NKE, ORCC, LVMUY, EMN, ZS, ADBE, NVDA, BCE, MDT, BAX, SNOW, DAL, RTX, HAS, DELL, NOC, M, BIO, GIS, OCSL, MSM, PHM, VRSN
High quality, less conviction due to valuation
Higher risk due to business or sector issues; own due to depressed valuation or long term growth potential (secular tailwinds), but at this point I am looking to scale out of these names on strength. These are generally smaller positions.
ILMN, AGNC, FXI, PYPL, URNM, URA, LADR, STWD, PARA, CFG, YUMC, ORAN, KSS, CHWY, TIGO, TCNNF, TCEHY, JD, WBA, ACCO, KVUE, KLG, CLB, HBI, IBIT, UNG, EEMV, PK, VNM, SABR, NSANY, VNQI, VALE, SBH, ST, SLV, WBD, BNS, EWS, IJS, NOK, SIL, WVFC, VTRS, NYCB, ABEV, TPIC, PEAK, SEE, LBTYK, RBGLY, LAC, CMP, CZR, BBWI, LAC, EWZ, CPER, MBUU, HRTX, MSOS, SIRI, M, CE, EL,
Note: CQP, EPD, ET, MPLX, PAA, WES all issue K-1s (PAGP is the same as PAA but with a 1099).
Reminder: I am generally a long term investor (12+ month horizon) but about 20% of my portfolio is more short term oriented (just looking for a retracement of a big move for example). This is probably a little more given the current environment. I do like to get paid while I wait though so I am a sucker for a good well supported dividend. I also supplement that with selling calls and puts. When I sell a stock, I almost always use a 1-2% trailstop. If you don’t know what that is, you can look it up on investopedia. But that allows me to continue to participate in a move if it just keeps going. Sometimes those don’t sell for days. When I sell calls or puts I go out 30-60 days and look to buy back at half price. Rather than monitor them I just put in a GTC order at the half price mark.
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