The Week Ahead - 1/5/24
A comprehensive look at the upcoming week for US economics, equities and fixed income
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The Week Ahead
The holidays are over, the decorations are coming down, and it’s back to work for Wall St “A-teams” as we start the first month of the year as we start all months with a slew of data focused on the labor market but extending much further encompassing manufacturing, trade, etc.
In terms of the labor market data, we’ll end the week with the all-important Dec Nonfarm Payrolls report, but before that we’ll get JOLTS, ADP, Challenger, and weekly claims amongst other less watched releases. Other highlights in US econ data will be the final Dec services PMI’s and consumer credit, Nov factory orders and trade balance, and Jan preliminary U of Mich consumer sentiment. Note this will be the first "clean" NFP report since September (which as a reminder was quite strong) after October was impacted by hurricanes and strikes and November was boosted by returning workers from both.
Fed speakers will also return in masse, with a half dozen on the calendar currently (and there are always more). They include Gov’s Cook, Waller, and Bowman and regional Fed Presidents Barkin, Harker, and Schmid. Perhaps more important is we’ll get the Dec FOMC meeting minutes Wed where we’ll get more color on some of the changes to the SEP including uncertainty around inflation, the trimming of rate cut expectations for 2025, and perhaps the neutral rate.
And also picking up will be US Treasury auctions with our first round of duration (>1yr) notes and bonds of the year in 3’s, 10’s & 30’s Mon, Tues, and Wed, respectively (moved a day earlier than usual in the week due to Pres Carter’s funeral Thurs).
And 4Q earnings will resume coming in with three SPX reporters in the upcoming week, but none >$100bn in market cap (largest will be Constellation Brands (STZ) at $40bn). Things really pick up the following week though w/the "unofficial" start of the season with the big banks. IIn terms of company news, there will also be the Consumer Electronics Show (CES), in Las Vegas Monday to Friday. Nvidia (NVDA) CEO Jensen Huang is scheduled to give a speech Monday evening.
Finally, note there’s a market holiday for the NYSE and Nasdaq on Thursday in honor of Pres Carter’s funeral. The bond market will also close early. I likely won’t do an update that day.
From Seeking Alpha (links are to their website, see the full earnings calendar):
Earnings spotlight: Monday, January 6 - Commercial Metals (CMC).
Earnings spotlight: Tuesday, January 7 - RPM International (RPM), Cal-Maine Foods (CALM), and Apogee Enterprises (APOG).
Earnings spotlight: Wednesday, January 8 - Jefferies Financial Group (JEF), Albertsons (ACI), MSC Industrial Direct (MSM), Acuity Brands (AYI), Helen of Troy (HELE), and UniFirst (UNF).
Earnings spotlight: Friday, January 10 - Constellation Brands (STZ), TD Synnex (SNX), Delta Air Lines (DAL) and Walgreens Boots Alliance (WBA).
Ex-US things pick up as well. Highlights are Canada’s Dec jobs and trade data, inflation data from a number of countries (including China, the EU (as well as inflation expectations), Japan (wage growth), Australia, and Lat Am’s largest economies among others), EU industrial output, and a few central bank decisions (Israel, Peru, etc.).
In Canada, jobs data for December will be released after the unemployment rate jumped to 6.8% the previous month. The merchandise trade report will show whether Canada’s economy remains in a deficit with the world, despite a surplus with the US that’s a source of ire for President-elect Donald Trump.
In Asia, Inflation data will dominate, giving investors clues on future monetary policy moves. On Wednesday, Australia is expected to reveal a slight uptick in inflation — although the focus will be on the Reserve Bank of Australia’s preferred measure, which could potentially slip back into policymakers’ 2%-3% target band. On Thursday, China will probably report that its CPI was close to deflation in December while PPI continued to contract, a sign that an array of government stimulus measures haven’t done enough to boost demand. Thailand and the Philippines will also publish inflation figures during the week. India’s government will release its economic growth estimate for the current fiscal year on Tuesday, as concerns mount about weak consumer spending. Industrial production data on Friday will give investors further clues about the growth outlook. In Japan, data on Thursday will likely show a pickup in wage growth.
Inflation will be an overarching theme throughout Europe for the week as well. Data in the euro zone on Tuesday are likely to show a slight acceleration in price growth in December, further above the European Central Bank’s 2% target. That reading, stoked by higher fuel prices, will arrive concurrently with numbers from Italy and after reports from France and Germany within the preceding 24 hours. Each of those three economies is anticipated to have seen faster inflation. Inflation in Switzerland, scheduled for Tuesday, may show further weakening that could put pressure on policymakers to cut rates again this year. Economists forecast an outcome of 0.6% for December. Swedish inflation — also seen slowing — will be released the following day, while consumer-price data from Norway and Denmark are due on Friday. The ECB’s measure of consumer price expectations will also be published on Tuesday. Few public appearances by officials are scheduled.
Elsewhere in the euro area, factory orders and industrial production will be released in Germany on Wednesday and Thursday respectively, each providing the latest glimpse into the poor health of manufacturing in the region’s biggest economy. France and Spain will publish equivalent output numbers on Friday. Two monetary decisions are scheduled in the wider region:
On Monday, Israel’s central bank will probably hold its base rate at 4.5%. Although growth has slowed because of the wars against Hamas and Hezbollah over the past year, inflation at 3.4% remains above the government’s target of 1-3%.
On Wednesday, Tanzania may lower its rate from the current 6%, judging that a 12% appreciation in the shilling against the dollar in the past three months is likely to keep prices in check.
By the end of the week, Lat Am’s big central banks will all have their final 2024 inflation grades — and all but Peru will have failed to hit their target yet again. Colombia will probably see a 19th month of disinflation since March 2023, though consumer prices are unlikely do more than drift slightly lower from 5.2%. In Mexico, too, consumer prices likely cooled for the fourth month in five, from 4.55%.
By contrast, Chile’s consumer prices likely accelerated for the seventh month in nine, from 4.2%, while Brazil’s prints close to 5%, far from its 3% target, with the economy overheating. Brazilian industrial output and retail sales have been running well above trend since May, although the November readings are expected to begin losing steam under the weight of tighter financial conditions. Peru’s central bank meets Thursday and the early consensus call is for a quarter-point cut, to 4.75%. Banxico and Banco Central de Chile post minutes of their December meetings, with investors on alert for any shifts in outlook or guidance. Chile at 5% is near its forecast terminal rate of 4%, while Banxico at 10% is seen to be 500 basis points shy of its likely first-quarter 2027 terminus of 5%.
And here’s BoA’s cheat sheets. As I noted three weeks ago, it looks like that was their last one all the way through Jan 10th, so I included just this week.
And here’s calendars of 2025 major central 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.
To give some background, I noted three weeks ago before the Dec FOMC meeting,
now we have that [CPI] print in hand, as well as the market reaction, and as noted in the Wednesday update, it “sealed a December rate cut by the Fed next week,” but also showed “core inflation remaining well above the Fed’s 2% goal, which all things equal will result in a slower pace of rate cuts than markets were expecting a couple of months ago and raising concerns of a prolonged pause if it continues to show little progress.” In that regard, as I’ve mentioned previously, I foresee what’s being described as a “hawkish cut” by some meaning a pivot to quarterly cuts after December, a reduction in the number of expected 2025 cuts, and some recognition that the endpoint is likely above 3%. Still with the Fed remaining uber-data dependent, Powell will not do much else I don’t think beyond setting expectations that January will likely be a pause. Markets already expect that with just a 25% pricing for a cut (assuming a December cut), so it shouldn’t really cause any sort of market issues.
And then two weeks ago,
the strange thing is, I mostly got that right in terms of what happened, but my prediction on the market reaction was certainly not. First, while I foresaw a reduction in 2025 cuts, as I noted in the daily updates, I did think the market might not like it if they went all the way to two, which is what happened. Second, I think Powell “oversold” the slower pace a bit and confused things with his talk about “exiting the recalibration phase” and a “more traditional Fed posture” even as he talked about rates still being “restrictive” and that “we and most other forecasters still feel that we're on track to -- to get down to 2 percent it might take another year or two from here, but I'm confident that that's the path we're on.”
That implies that rates will continue to be cut towards what the committee (on balance) feels is a terminal rate in the 3’s not the 4’s, “it might just take another year or two”. Markets though are saying we might get one or two more cuts, and that’s it. So there’s clearly a disconnect there, and it’s one that we have seen time and time again the last few years. Markets extrapolate recent trends too far (they were expecting 5 cuts in 2025 not too long ago), and I think this may be one of those cases.
That said, just a few cuts before a prolonged hold would be consistent with the 90’s “soft landing” experience, and it’s certainly not implausible that inflation gets “stuck” around current levels and growth and labor markets remain in good enough shape keeping the Fed to just one or two (or I guess no) cuts in 2025, but I think it’s also not unlikely that we see continued softening in labor markets and the economy, and with just 18% of investors expecting a recession in 2025, it feels like a growth scare and a quicker path of Fed rate cuts is underpriced.
As I said last week, we’ve basically just been marking time until we get to the NFP report this week, as evidenced by little changes in FOMC rate cut expectations and bond yields the past week. Fed pricing did edge slightly in the direction of more cuts at 40bps of cuts (so one cut priced, a second 65%) which still remains less than the Fed saw in the Dec “dot plot” (see posts below). I continue to find this to be likely too hawkish, but until we get some indication of a growth scare or a strong resumption in the trend towards 2% core PCE I don’t see that changing much. A weak/strong NFP could be impactful in that respect.
And looking further out there is an even larger disconnect.
Looking at the Treasury markets, the 2/10 curve was up +1bps w/w to +0.32% Fri according to the St. Louis Fed, the highest since May ‘22. I had said 3 weeks ago “this should steepen further following the FOMC meeting I think,” and it has certainly done so, but I think has more to go given the richness in 2yr yields (more below).
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 3.1% GDP for 3Q and are currently estimating around 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)) eased off slightly to +0.26% (still up +1.39% since Sept 11th).
In that regard (the richness of 2yr yields) the gap between 2yr Treasury yields and Fed Funds remains at just 3bps (after being at a record wide 1.77% before the Sept FOMC meeting), implying that there will be no further net rate cuts over the next 2 years. As I said two weeks ago, “ I’ll bet the under on that.”
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”), edged lower from a 2-mth high -3bps w/w to 2.28% on Thursday (-1bps since the Nov FOMC).
With little change in both inflation exp's and nominal 10yr Treasury yields, 10yr real rates remained near the highest since 2023 (and before that 2007) at +2.24%, well above the 2010-2020 peak of 1% (but down slightly 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) similarly little changed (after jumping +22bps two weeks ago to the highest since Nov ‘23 (and before that 2007)) at 2.30%, well above the 2013-2020 average of around 0.5% (but down slightly from the post-pandemic peak of 2.5% in October '23).
And as a reminder 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 and explains a larger proportion of stock returns (83% correlation) in their data (to 2006), with the dollar close behind the most correlated (76%) since 2015.
Shorter-term real yields (Fed Funds - core PCE) fell following the FOMC rate cut to 1.82%, the least since Sep ‘23 and down from 2.70% in June (which was the highest since 2007), but still well above anytime in the 2010-2020 period. [this will be updated end of Jan]
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 -90bps at 5.0%, still though more than double the 10yr pre-pandemic avg. [this will be updated end of Jan]
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”) is now the highest since Sep 2018 at 3.0% (and not unlikely to go higher as I said earlier this yr). [This won’t get updated again until March].
The ACM model of the 10yr term premium (which is solely based on interest rates) hit +0.49% as of Jan 2nd, the highest on this model since Jul 2015. It’s now +60bps since the FOMC did the 50bps cut in Sept.
I had been a broken record since the Spring that I thought at some point (I thought most likely around the election) the term premium pushing up longer duration yields could resurface as an issue perhaps cause some mild equity indigestion as it did in Oct of last yr, and while the market initially ignored it, it seems to be a factor in the recent weakness over the past month.
https://en.macromicro.me/charts/45452/us-10-treasury-term-premium
FWIW the the St. Louis Fed 10yr term premium estimate (which is based off the Kim and Wright (2005) model (which differs from other models in that it incorporates non-yield curve factors such as inflation & GDP) shows an even higher term premium as of Dec 27th at 0.71%, the highest since May 2011 on this model, and up +68bps since Sept.
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 edged lower starting the year closer to the lows of 2024 than the highs despite the recent jump in 10yr yields.
While bond volatility edged lower, 30yr mortgage spreads edged higher for a 2nd wk from the least since June ‘22, +5bps to 2.33%. They remain around +60 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 the week through Dec 27th saw the former remain at the least since Nov ‘21 (but that was revised up again from the least since Jul ‘21 two weeks ago) and the latter (which attempts to remove the correlation between the various indicators due to broad changes in economic conditions) also unchanged after tightening for 2 weeks from the loosest since Nov ‘21.
https://www.chicagofed.org/research/data/nfci/current-data
Looking at the Fed’s balance sheet/QT, we continue to see liquidity drained from the system. The most visible area has been in reverse repos (which is an overnight secured place institutions (mostly money markets and banks) can park excess funds to accrue some interest designed by the Fed originally to keep excess liquidity from pulling down rates too much in other short term markets). RRP has been steadily drained as money has been redirected to purchase the continued sizeable issuance of T-bills (<1 yr duration) of around $800bn/month (accentuated by the $60bn in balance sheet runoff (meaning the Fed has reduced its buying of maturing Treasuries by that amount which the private market has to fill)) 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), hitting new lows on Dec 20th a $98bn, the least since Apr ‘21 before rebuilding into YE as they have at the end of each quarter. If we follow history this will continue to increase into Tuesday (the 31st) then fall off sharply on Thursday (the 2nd).
With the Fed now cutting RRP rates to the low end of the Fed Funds band, it has made parking funds there (versus lending overnight to other institutions or buying T-Bills) less attractive meaning we’re likely to see RRP continue to fall to whatever is the “minimum” level (some participants will use it just due to ease of use, etc.).
As noted previously, RRP finally started its normal quarter-end process of rebuilding two weeks ago, and that continued up until Dec 31st when it hit $473bn, the most since June 28th (Q2 end). That has come off some but remained elevated (as compared to where it was 2 weeks ago) at $273bn as of Friday. Still I would expect this to resume its decline given the Fed has made parking funds there less favorable when it cut the rate in December in line with their desire to sop up most of this “excess liquidity” (as they have described it).
As noted previously, despite the drawdown in RRP Dallas Fed Pres Laurie Logan (who is an important voice given her extensive experience in the NY Fed's markets group) has said she believes current liquidity is “more than ample” (and the current NY Fed Pres Williams said something similar two weeks ago) and said she's looking for RRP to fall to "negligible" levels. As I said then “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 $100bn, 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. 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 (which is what we saw) before declining again towards zero.
Also, we’ll have to see how the debt ceiling, which comes back into play on the 3rd impacts things. With T-Bill issuance likely to be paused sometime in January (Janet Yellen said last week that “extraordinary measures” would start in January), until the debt ceiling is raised the likely consequence is a build in RRP as money markets, etc., need another home for their short-term lending. This was what BoA predicted back in Sept. Their analysis has been pretty accurate (they saw RRP falling to $185bn by YE (about where it is now).
In that regard, I’ll highlight the below link that I’ve left in for reference regarding the impact of the debt ceiling not being raised on time (this upcoming week which as noted will see the TGA draw start sometime in January). I hope it doesn’t take until July, but if it does go on for a few months, when auctions restart they will need to be resized to “catch up” which will see the influx of liquidity pulled back out. That didn’t really cause any issues when it happened May 2023 (the last late debt ceiling extension), but we also had a lot more liquidity in the system (RRP levels were at record highs above $2tn (arrow) but they fell sharply from there, down around -$1.7tn over the next 10 months). We have nothing like that amount of “free liquidity” this time around.
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).
Also pulling out liquidity from the system has been the repayment of BTFP loans as the Fed looked to wind down that facility by YE. They got close with just $4bn in there as of Wed down from a high of $167bn in March, mostly consistent with my prediction in September that these would be gone by YE. As firms have little incentive to use this program, I’ll stop reporting on it now, and it will no longer be a drain of liquidity (although it was relatively minor towards the end).
And if you’re wondering where that jump in RRP came from (and missed my post on it earlier this week), as BBG reported, it came in large part from bank reserves which fell -$326bn w/w (the most in 30 mths) to a 4-yr low of $2.89tn as of Wed (this is weekly data) which BBG thought was due mostly to banks “window dressing” their books by pulling back on intra-bank lending and instead putting into the “safer” RRP program.
I’ve noted previously that reserves hadn’t fallen to the $3tn level since the indigestion in the credit markets in March ‘23 (which contributed to the banking issues (SVB, etc.)), and if they remain here, I will be more concerned, but if BBG’s analysis is correct, this should mostly reverse in upcoming weeks. As noted we already saw RRP fall over -$230bn since Wed, and I would imagine most of that went back to reserves. We’ll have to wait until next Thurs though for confirmation.
Overall, bank reserves still remain just -$470bn below June 1, 2022 levels ($3.36tn), when the Fed started QT, a 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 9 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). In terms of 10’s I had advised then 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
the Fed saying the ‘recalibration phase has ended’ along with concerns about sticky inflation cropping back up and now questions about the inflationary impact of some of Donald Trump’s policies, has seen rates just about back there. I still am not sure we see 5% absent another ‘something new’ (like the Fed becoming even more aggressive (for example due to Dec’s data coming in hot (payrolls and CPI/PCE prices)).
In terms of much lower yields, as I said 12 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.
At this point I added to 2yrs as noted above, given it’s now pricing no further net cuts from the Fed over the next 2 years, and I will step up my buying of 10yrs if they do make it to 4.7%, but keeping plenty of powder dry for a potential run to 5% .
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.
I think this now needs some dramatic changes with Hammack (who dissented voting for no cut in Dec) clearly one of the most hawkish members, Daly at best a Centrist as she sees only 2 cuts in 2025, and perhaps Collins as well. Goolsbee is clearly the most dovish of the members currently.
And I came across one from BBG. I think it’s pretty accurate except Kashkari is definitely not that hawkish (he was calling for a December cut in early November):
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 4Q and beyond. You can reference this post from 12/1/24 for stats on 3Q.
A limited update from Factset this week.
Expectations for Q4 earnings remained this week at +11.9% (down -2.6% since the start of the quarter, less than the 5 & 10yr avgs (-3.4% & -3.3%) for this period). 11.9% would be the most growth in three years and would mark the 6th consec quarter of earnings growth.
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%."
In terms of Q4 revenues, SPX co’s are expected to see revenue growth of 4.6% y/y (unch w/w), down from +5.2% on Sept 30. It would mark the 17th consecutive quarter of revenue growth for the index.
In terms of profit margins, co’s are expected to report net profit margin of 12.0% for Q4, which is below the previous quarter’s net profit margin of 12.2%, but above the year-ago net profit margin of 11.2% and the 5-year average of 11.6%.
2025 quarter-by-quarter earnings expectations on net fell back this week but not uniformly. Q1 ‘25 fell two tenths to +11.9% (-2.2% last 9 wks) but Q2 ‘25 was up two tenths to +11.6% (-1.7% last 9 wks). Q3 was down four tenths to +15.2%, and Q4 edged one tenth lower to +16.6%.
Curiously though Q4 earnings expectations didn’t fall saw FY ‘24 exp's fell back -59 cents to $239.33 (now the lows of the year), still representing +9.5% growth. Looking further back, it remains down just around -2.5% from July 1, 2023, much better than the typical -6% or so drop we historically see.
2025 earnings expectations fell -10 cents to $275.05 (now +14.9% growth), still up +46 cents from low 5 wks ago which was the least since February.
In terms of the $275.24 exp’d for 2025 Factset notes it will be a record although also notes that there is on average over the past 25 yrs a -6.3% deterioration from where it starts the year (so Jan 1, 2025) w/analysts overestimating in 17 of those yrs. But it should be noted that average includes 4 outlier years (2001, 2008, 2009 & 2020) where the overestimation was b/w 27-43% due to recessions. Excluding those, the difference is just -1.1%.
Factset also notes that “"analysts believe earnings growth for companies outside the 'Magnificent 7' will improve significantly in 2025. While analysts expect the 'Magnificent 7' companies to report earnings growth of 21% in 2025, they expect the other 493 companies to report earnings growth of 13%...a substantial improvement to ...just over 4% earnings growth for these same companies for CY 2024."
In terms of exp’d 2025 revenues, analysts are looking for 5.8%, above the 10-year average of 5.1% (2014 – 2023). Ten of the eleven sectors are projected to report year-over-year growth in revenues, led by the Information Technology sector. The Energy sector is the only sector expected to report a year-over-year decline in earnings.
They also see at a record profit margins at 13%, well above the 10-yr average of 10.8% and the highest since Factset started tracking the metric in 2008 (previous high was 12.6% in 2021).
In terms of how markets are handled earnings beats & misses for 3Q, looking 2 days before to 2 days after an earnings release, Factset saw beats rewarded more than average at +1.6% vs 5yr avg of +1%, and misses punished more than average (-3.1% vs 5yr avg of -2.3%).
Factset’s analysis of analyst bottom-up SPX price targets for the next 12 months as of Thursday was up another +45pts w/w to 6,723, now up ~1,700 points over the past 40 weeks.
Materials (+25.8% up from +16.8% two weeks ago) now with the largest upside seen by analysts followed by Health Care (+23.0% (up from +19.7% two wks ago and +13.1% five weeks ago before the “Kennedy” selloff)), while Consumer Discr remains as the sector expected to see the smallest price increase (+4.1% up from -3.3% two weeks ago (the first negative in over a year)).
As a reminder the last 20 yrs they have been on avg +6.9% too high, but note they underestimated it five of the past six years (including 2024 unless the SPX crashes).
In terms of analyst ratings, buy and hold ratings continue to dominate at 54.2% & 39.9% (from 54.0 & 40.1% respectively last wk (sell ratings up seven tenths to 5.8%)). That 54.2% though is down from 57.5% in Feb ‘22.
Energy (63%), Communication Services (62%), and Information Technology (62%) sectors have the highest percentages of Buy ratings, while Consumer Staples (40%) has the lowest percentages of Buy ratings. Industrials and Utilities have the most sell ratings (8%).
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.” Following that was a stretch of 10 weeks were I changed that to describe “the data [as] fairly strong, more consistent with what we’d been seeing at the start of the year.” That took a turn 6 weeks ago with some weaker than expected data, although as I caveated some of it was impacted by hurricanes or strikes and others like GDP and personal spending while softening remained at robust levels, but the “slew of data” three weeks ago confirmed my statement that “what I can say with confidence is all of this evidences an economy that is slowing from elevated levels but continues to grow at or above trend.”
We didn’t get a lot of data again this week, but what we got remained consistent with pending home sales coming in much better than expected (a precursor to existing home sales), jobless claims falling back, ISM manufacturing much better than expected but still contracting, and construction spending showing continued softening.
So I don’t really see any changes to my overall takeaway on the economy from 14 weeks ago, “the situation continues to seem like manufacturing is subdued but trying to bottom, housing perhaps has inflected off the bottom [although that has softened of late with the jump in mortgage rates (although perhaps now buyers have become “used to” higher interest rates)], labor markets (and the services sector and construction in particular) are solid [although it seems there is slowing from elevated levels] with very healthy wage growth, and productivity appears to be robust (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.”
And as I said 19 weeks ago:
without question, the evidence is building that the days of >3% real GDP growth are behind us (although we 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.
In that regard, the Citi Economic Surprise Index improved for the 1st week in 6 w/w after falling to the least since Sept and into negative territory on Dec 31st at -1.7, pulled back up by the end of week data to 5.7 (jobless claims, ISM manufacturing). It’s still down -37.6pts from the 43.3 five weeks ago, back to around halfway between the highs of the year (47.2 in Feb) and the lows (-47.5 in July).
https://yardeni.com/charts/citigroup-economic-surprise/
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 Q3 was revised up to 3.1%, trackers for Q4 are a bit all over the place but mostly in agreement that we should see around 2% (trend) GDP growth again (although they are as low as St Louis Fed’s +1.23% (which is generally too low) to as high as +3.1% from the Atlanta Fed (who has been pretty accurate, but jumps around a lot).
Goldman (who was 3.0% for 3Q vs 2.8% actual 1st est) lowered their 4Q GDP estimate a tenth to +2.3%.
They also confirmed they’re looking for 2.4% y/y growth in GDP in 2025.
Atlanta Fed (who was right in line in its 3Q est of #GDP (and just a tenth off for 2Q from the 1st est)), saw its 4Q GDP estimate fall seven tenths to 2.4% as of Friday.
BoA (who as a reminder est’d 3.0% for 3Q vs 2.8% actual), didn’t update their 4Q GDP tracking this week. Last week it was at 2.1%. Their “official” house est is 2.0% y/y growth in 4Q.
NY Fed’s 4Q #GDP Nowcast (as a reminder, they had 2.91% for 3Q vs 2.8% 1st est) improved this wk to 1.90% from 1.86%, mostly on the ISM manufacturing index result. 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.
They also raised their Q1 ‘25 GDP forecast to 2.11% from 2.08%.
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 fell back -0.06% to 1.21% for Q4 continuing the pattern of lagging all the other GDP trackers.
The Weekly Econ Index from the DallasFed (scaled as y/y rise for GDP), which runs a week behind other GDP trackers, a little more stable this week, falling back -0.15% to 2.31% in the week through Dec 28th from 2.46% the prior week (revised from +2.33% ) leaving it towards the top end of its range in 2024 (1.49 - 2.66%) that it left only twice (two weeks ago at 2.77% & a month ago when it jumped to 3.21%)). The 13-wk avg edged up three tenths to 2.17%, evidencing overall economic momentum slightly above trend.
https://www.dallasfed.org/research/wei
Other economy stuff:
Valuations
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 equity indices mostly edging lower this week, forward P/E’s did as well outside of mid-caps (which were unch):
-The SPX forward P/E down a tenth to 21.7 (down six tenths the last four weeks from the highest since mid-'21).
-Mid-caps (S&P 400) remained at 15.9 (still down -1.2pts the last five weeks from the highest since early-’21 (17.1)).
-Small caps (S&P 600) were down one tenth to 15.6 (now down -1.5pts the last five weeks from the highest since early-’21 (17.1)).
-Yardeni's “Megacap-8” (adds NFLX) P/E fell seven tenths to 30.2, still +3.8 pts from the 26.4 it hit 15 weeks ago (which was the least of 2024) closer to the 31.5 it hit 22 wks ago (which was the highest since Jan ‘22)).
https://yardeni.com/charts/stock-market-p-e-ratios/
Other valuation stuff:
Breadth
Breadth improved again over the past week, and it’s now starting to show through somewhat in the indicators.
The McClellan Summation Index ("what the avg stock is doing") trying to turn higher after falling to the least since Nov ‘23.
% of stocks over 200-DMAs continued its bounce this week from the least since Nov ‘23 on the NYSE and from the least since Aug on the Nasdaq. The latter is in much better shape than the former, although the NYSE did at least hold the 50% mark.
% of stocks above 50-DMAs, similar to those over 200-DMAs, saw bounces from the least since Nov on the NYSE and since Aug on Nasdaq with the latter seeing more improvement. Still well off where we were entering December.
% of stocks above 20-DMAs continues to see a bigger bounce than those over 200 & 50-DMAs w/NYSE from the least since Mar ‘23 (now to 38% from under 20% last week and Nasdaq to 49% from under 40%).
Value/Growth was little changed for a 2nd week after falling sharply for 3 weeks to the least since Jan ‘22. We didn’t get the dramatic jump we got following Trump’s victory in 2016, so perhaps we won’t see the weakness we saw in 2017 when the ratio fell through Trump’s first term until it finally bottomed post-Covid.
The equal-weighted SPX vs cap weighted ratio like value/growth was little changed for a 2nd week after falling sharply for 3 weeks to the least since July (which is near all-time lows). Like value/growth we didn’t get the dramatic jump we got following Trump’s victory in 2016, so perhaps we won’t see the weakness we saw in 2017 when the ratio fell through Trump’s first term until it finally bottomed post-Covid.
IWM:SPY (small caps to large caps), saw more improvement over the past week than did value/growth or equal-weighted/cap-weighted although just getting back a small amount of the sharp 3 week drop to the least since July. Similar to those other two ratios we didn’t get a post-election bump we did in 2016. Unlike those, though, the ratio didn’t really start falling until mid-2018 in Trump’s first term.
Equity sector breadth based on CME Indices deteriorated last week though with just 2 green sectors from 9 the prior week (although both were up over 1% (energy over 3%)). The megacap growth sectors showed relative weakness taking 3 of the bottom 5 spots all down over -1% (two down over -2%).
SPX sector flag from Finviz consistent w/lots of red outside of energy (where every stock in the SPX was higher) including several megacaps down over -3% (TSLA, AAPL, AVGO, NFLX, MSFT, ORCL, COST, BA, ADBE).
Other breadth stuff:
Flows/Positioning
BoA didn’t give the Flow Show update again this week, so just some limited updates on mostly US only fund flows.
ICI data on money market flows saw a +$42.1bn inflow in the week through Dec 31st, bringing total 2024 flows to ~+$962bn (after $1.15tn in 2023) with total MMF assets ending the year at $6.85tn, a record high. Both institutional (+$23.3bn) and retail (+$18.8bn) saw healthy inflows for a 2nd wk. In terms of totals, 60% is institutional, 40% retail.
Looking at CTA (trend follower) equity positioning, BoA says according to their models “trend followers are still likely long the S&P 500 and NASDAQ-100 but positioning is off peak levels given the decrease in price trend and as well higher realized volatility….Russell 2000 long positioning, if still on, should be close to flattening in the near-term.”
So, after being big sellers on the SPX & RUT three weeks ago, it looks like they didn’t do much again last week, with most of their net length concentrated in the Nasdaq-100 (NDX), but they note that they are watching sell triggers closely. That should raise some caution flags for megacap growth stock holders if prices weaken materially but gives a lot of room for SPX & Russell 2000 positions to add if we see prices continue Friday’s move to the upside.
Price trend strength remains strongest for the $NDX (68% down from 71%), versus the $SPX (55% down from 64%) and $RUT (30% down from 50%). #Japan’s #Nikkei225 continued to improve to 35% (from 8% three weeks ago) and they see CTAs adding there while the Euro #Stoxx50 is now 12% (from -28% three weeks ago).
In terms of gamma positioning, BoA says consistent with their previous notes this month (flagging some large options expirations particularly YE positioning around 6055): “we highlighted the possibility that going into the Dec31 expiration SPX gamma may fall towards 0 in magnitude if the S&P declined (e.g., towards 5940). This phenomenon largely played out as expected: at the close of 30-Dec spot was 5907 while SPX gamma was only +$1bn, a quite modest figure. With the DecQ expiration now long gone, $SPX gamma need not be stationary but extreme volatility in gamma as was observed over the last few weeks (e.g., massive $10bn 1-day gamma swings) seems less likely going forward, in our view. SPX gamma is now +$0.8bn (9th 1y %ile).”
As I’ve noted weekly this year, very high levels of gamma acted as a market stabilizer for most of 2024 dampening volatility in both directions. When it fell below $2bn or so (as it did 7 weeks ago) we saw heightened volatility, and while it rarely was negative, that was associated with even higher volatility (which is what we saw 6 weeks ago (to the upside)). With gamma currently at the 9th %ile it is not providing much a stabilizing force leaving the markets freer to move around (meaning higher volatility).
Interestingly, though, BoA sees a “double hump” in their gamma estimates something we didn’t see last year that I remember. This means gamma will build in a move in either direction but also meaning that if things move lower, they’re more likely to be drawn towards the 5750 level. If they move higher though, they’ll be drawn towards 6100, a big difference.
BoA est's that risk parity strategies were sellers of equities and bonds again last week (particularly the latter), but they bought commodities the quickest in at least the last 3 years bringing allocations above equities. Bonds continue to be heavily overweighted but as I suggested 11 wks ago, given the increase in bond volatility, that has been narrowing (which is likely adding to the pressure on bonds).
#oott
BoA est’s that volatility targeters (vol control), were little changed in their positioning last week after having been big sellers two weeks ago, taking back most of the increase in positioning since October, consistent with my statement last week that “with equities remaining relatively volatile, I doubt we’ll see them rebuild much, if any.” That probably remains the case for the upcoming week.
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] slightly decreased with spot [last] week” although remains off the Dec lows.
And some other notes on positioning:
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.)). Two weeks I had noted “even before the selloff we saw sentiment fading back on some metrics, so I’d imagine when we get the readings this week, people will be much more cautious,” and since then we’ve broadly seen that. Not yet to where I’d say it’s a tailwind, but getting there.
The 10-DMA of the equity put/call ratio (black/red line) finally lifted last week from around the lowest since July (which was the least since Apr ‘22) indicating investors are becoming a little more interested in downside protection vs capturing upside returns.
When it’s increasing it normally equates to a consolidation in equities and increase in volatility and vice versa (although we saw plenty of volatility this week without it lifting much).
CNN Fear & Greed Index was little changed as of Saturday at 32, -2pts w/w, remaining in “Fear,” up from the “Extreme Fear” reading Dec 19th but well below the 62 (“Greed”) it started December at.
Looking at the components:
Extreme Greed = None
Greed = junk bond demand (from Fear)
Neutral = market volatility (VIX & its 50-DMA); 5-day put/call options (from Greed)
Fear = market momentum (SPX >125-DMA); safe haven demand (20-day difference in stock/bond returns) (from Neutral)
Extreme Fear = stock price strength (net new 52-week highs); stock price breadth (McClellan Volume Summation Index)
https://www.cnn.com/markets/fear-and-greed
After “surging” 10 wks ago 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 10th week, -0.3pts now -1.9pts the past 3 wks), to 3.4, an 11-mth low on “HY bond & EM asset outflows, greater hedging against fall in S&P500, very poor global stock index breadth (>50% of global equity indices trading below both 50dma & 200dma);… Indicator levels reflect inability of uber-bullish US AI/tech sentiment to offset significant global cross-asset angst (see China, EM HY debt, EM FX, global cyclicals…).”
Helene Meisler's followers remain bullish for a 9th straight week, the longest stretch since 2021, and more so than the previous week (after hitting the most bullish since April ‘21 six weeks ago), now at 62.1% voting next 100pts up, up from 54.4% the previous week (and 66.8% six weeks ago).
As a reminder this group is generally not a contrarian indicator, although they missed the December pullback.
Seasonality
I had said 5 weeks ago, “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 the start of next year).” Well we’re officially past the the “Santa Rally” period (last 5 sessions of December and first two of Jan) which was down for a second year in a row. Historically that’s meant less robust returns, but it clearly didn’t last year. January overall is generally a good month for stocks. In all years the 1st two weeks of January are strong with solid returns and up two-thirds of the time. And while I don’t have 2-week stats, in yr 1 of the Presidential cycle January is up 58% of the time by an average of 2% before it gets much weaker in February and March (which also coincides with the fact that year 3 of bull markets are generally weak). So while we continue to have a favorable seasonal backdrop for now as we move through 2025 we’ll be going from very strong seasonality to some of the weakest on the cycle clock. Of course, as always remember that seasonality is like climate. It gives you an idea of what generally happens, but it is not something to base your decision on whether to bring an umbrella (as the Santa Rally has shown us).
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 we turn the page into the new year, we’re presented with a very different backdrop than what we saw for much of 2024 when the Fed was moving from hiking to cutting, bond yields were falling, seasonality was mostly favorable, systematic positioning was mostly a tailwind, political risk was low, valuations had room to grow, liquidity was very robust, the economy was firing on all cylinders, volatility (until early August) was more subdued, earnings were rebounding, etc. We took a step back with the yen carry trade, etc., issues in August, seemed to get back on track, but since the very strong September employment report (followed by sticky inflation reads) the road has been much tougher. In fact since the Sept employment report (Oct 4th) the SPX is up just 3%.
Now we enter what is historically a more challenging year (1st year of a Presidential term and 3rd year of a bull market) with valuations well above where we started 2024, high expectations (judging from analyst SPX forecasts), likely higher volatility and political risk, no current tailwinds from systematic positioning, weak breadth (although that wasn’t much of a problem in 2024), much higher bond yields (particularly real yields), a Fed talking more about fewer than more cuts and continuing to drain liquidity that is now hitting levels we’ve run into issues in the past, an upcoming buyback blackout window, high earnings expectations, etc.
It doesn’t mean that we can’t have a good or even a great year. Balance sheets remain very solid as does the economy and labor markets (even if slowing), earnings are expected to be very good, buybacks are expected to be a solid tailwind, there’s a lot of scope for the Fed to become less hawkish, the upcoming administration may provide big tailwinds in tax cuts, deregulation, etc., etc. But we need to see all of those come through, and disappointments are not going to be welcomed given the set-up, so my expectation is for choppier markets more like we’ve seen since October than what we saw before.
And as always just remember pullbacks/corrections are just part of the plan.
Portfolio Notes
Sold out of ADBE, trimmed BWA, PYPL, NEM, RRC, PFE.
Bought NKE, UPS, TD, JD, MSFT, ON, NTR, DVN, CVX, SLB, XOM, CVE, WPC, VEEV, M, F, GTBIF, GIS. Mostly very small adds, a little bigger in the energy names (for a trade).
Cash = 28% (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, SHY
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, CTRA, GILD, GOOGL, PYPL, SCHW, PFE, ARCC, T, AM, TRP, XOM, SHEL, JWN, TPR, KHC, ADNT, CVS, O, GSK, EQNR, CMCSA, APA, DVN, OXY, JWN, RHHBY, TLH, NTR, E, ING, VZ, KMI, VSS, FSK, VNOM, TFC, MPLX, KMI, VOD, CVX, ING, HBAN, STLA, NEM, CCJ, BTI, AES, RRC, BWA,FRT, BMY, SLB, VICI, DGS, ADNT, WES, INDA, MPLX, CVE, KIM, MTB, BAYRY, SOFI, BEP, BIIB, SAN, TEF, KVUE, KT, SQM, ALB, F, MAC, VNM, MFC, GPN, CI, LYG, NKE, ORCC, LVMUY, EMN, NVDA, BCE, KEY, BAX, SNOW, DAL, RTX, BAC, GD, UPS, M, TD, ON, BIO, GIS, OCSL, MSM, 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, LADR, URNM, URA, STWD, PARA, CFG, YUMC, ORAN, KSS, CHWY, TIGO, TCNNF, TCEHY, JD, WBA, ACCO, KVUE, KLG, CLB, HBI, IBIT, UNG, EEMV, VNM, SABR, NSANY, VNQI, ST, SLV, WBD, BNS, EWS, IJS, NOK, SIL, CURLF, WVFC, VTRS, NYCB, ABEV, PEAK, LBTYK, ARE, RBGLY, LAC, CMP, CZR, BBWI, LAC, EWZ, CPER, MBUU, HRTX, MSOS, SIRI, M, CE,
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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