In two weeks, the first act of the year is playing pretty close to the bull-market script. After a nine-week long run to end 2023, bulls and bears alike pointed out that the tape was overheated and stretched, and it has duly cooled down with a two-week pause, causing the S&P 500 He is only half a step below me. Record high from two years ago. The crackdown of November-December beneath the surface has yielded some results. The small-cap Russell 2000 has fallen nearly 4%, versus a partial gain for the S&P 500 so far this year. ARK Invest, a proxy for low-quality high-beta technology, is down more than 12% from its high in late December. It was necessary, predictable, and possibly incomplete. What we know about the rare breadth and momentum scores achieved from the bounce off the October low is this: The forward-return implications over several months or a year are quite positive based on history, yet near-term. Often features some backsliding. And blatant profiteering. This chart from Ned Davis Research shows that the overall rally to late 2023 was a worldwide affair, taking 92% of all national stock markets above their 50-day averages, and during the recent market pause ” Hardly a dent has been seen.” “The broad data entering the year indicate a decisive improvement in global participation,” says Tim Hayes, NDR’s chief global strategist. The equally weighted All Country World Index has been on the rise since 1998. This gauge is above 75% when growing at a 24% annual pace. As Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, said late last week, “The setup is neither completely good, nor completely bad,” the economy is resilient but stocks are lower than a year ago. Very few are sad and hateful. He believes we are dealing with “some form of a bull market,” so it is right to expect further progress, although “2024 will be much more volatile and much more volatile than 2019-2023.” Will bring less velocity.” More broadly, the S&P 500 could retrace to 4600 – down about 4% from here – and still be in regular technical check at its latest launch point in early December. A pause on the New Year’s rally, negative returns for the S&P 500 in the first five trading days of the year is not meaningless, but nor is it a loud alarm, as history shows that it has essentially had a positive calendar year. The odds have been reduced from about 70% to approx. 50%. The week of January’s monthly options expiration, which is next week, tends to be weak for stocks as well. Mindful of such strategic threats and potential upside, stocks have taken a two-year round trip in a broader framework, during which they absorbed 500 basis points of Fed tightening, a mild earnings decline and a decline in earnings in 2024. Consistently predicted recession to emerge with moderation. The economic descent thesis remains intact (if disproved) and deflation is on the horizon as expected. .SPX Mountain 2022-01-10 S&P 500, 2 Years Henry McVay, KKR’s head of global macro, is banking on the fact that October 2022 was a bear-market bottom, and after such a low, stocks on average Above deliveries make a comeback in the next few years. “We believe many investors are still clinging to the belief that the S&P 500 is trading at elevated headline valuations and that the U.S. economy has peaked and is headed for a hard landing,” McVey says. “We don’t see things that way.” While not forecasting spectacular index-level gains or US GDP growth accelerating this year, McVey has kept appropriately valued equities away from the coveted glamor mega-caps, and importantly points out that the top None of the 25 central banks are as stringent in comparison. Up to 85% in 2022. Meanwhile, the combination of mergers-and-acquisitions, IPOs and high-yield debt issuance relative to GDP is trending at its lowest level since 2009. Mergers and IPOs missing Morgan Stanley keeps a leading indicator of M&A activity that has recently been elevated, suggesting that dealmaking – a recent plot hole in the bull-market script – should soon reawaken. . Is it likely that the bull market will end before the Animal Spirits merger and IPO comes, while the average Wall Street strategist is predicting no rise in the S&P 500 this year and the index going nowhere for two years? ? Whether the recent real surge in acquisition activity (seen in biotech, energy and software) accelerates and helps small-cap companies resume their catch-up move against giant growth names remains to be seen. It is not clear yet. There was much celebration as small-caps ramped up from multi-decade relative depth in late 2023. And, of course, greater confidence in the economy averting a recession with rate cuts should be a cushion. Big Money Bets on Scaling But in two weeks the Russell 2000 has already given up nearly half its outperformance compared to the Nasdaq 100 over the past two months. And again I can’t help but notice that if this market starts favoring the majority of stocks over the Magnificent Seven names, it will represent a consensus that it is getting what it wants. Wants – something that does not work on market command. Strategas’ Todd Sohn says flows into the Invesco S&P 500 Equal Weight ETF (RSP) rose to $13.5 billion last year, up 30% from its previous 12-month record. The fund’s total assets are now $49 billion, so the new money betting on broader tape is a big part of the total. Perhaps it makes sense to expect less dominance from the biggest seven index leaders, but markets don’t have to be zero-sum. No Mag7’s Forward P/E is higher than two years ago. And, helpfully, they are not moving in unison, with Apple and Tesla trending downwards recently. Betting on ‘Peace Time’ Whether Fed cuts are right or wrong, the market debate right now may never go far before it turns into a Fed-policy-path discussion. Last week’s CPI and PPI data added to the market’s collective conviction that the pace of inflation decline is strong, opening the way for a “peacetime” Fed rate cut. We know that Fed Chair Jerome Powell has acknowledged that easing will be done even before the 2% PCE inflation target is met, ensuring that policy remains too restrictive with the current fed funds rate of 5.25-5.5%. Don’t be. We know that the Fed considers a 2.5-3% fed funds rate “neutral” and that its members have predicted three quarter-point rate cuts this year, even though they have expected to reach the 2% target until at least 2025. Didn’t expect. All this points to an easier path ahead. Now, the Fed funds futures market is confident that this will cut prices by a total of 150 basis points starting in March and now through the end of 2024. (1 basis point is equal to 0.01%) This mismatch in Fed-versus-market expectations is cited by more cautious or difficult-to-please observers as a major potential source of market dislocations. But after a few months, Fed funds futures pricing is quite unreliable, capturing a wide range of possible hedging and speculative scenarios, whose prices move along a spectrum, and the market sometimes becomes overextended. . However, for now, there remains a reassuring trend for inflation to decline more rapidly and solidly than labor market and consumer weakness. The Fed’s stated willingness to try to accommodate a soft landing (such as in 1995 with some rate cuts if the economy picks up again) is also a mental backstop. A lot could go wrong, including deep consumer fatigue (discretionary stocks have traded poorly for three weeks) or a wave of accumulating layoffs that jeopardizes the growth side of the soft-landing thesis. But just because the S&P is now trading near 4800 again and the Fed funds futures market is considering six rate cuts this year, doesn’t mean the former caused it.Thank you for reading this post, don't forget to subscribe!