Sunny Skies: Week of 11/25/24

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I just returned from Scottsdale, where our colleagues to the north hosted yet another outstanding investment conference.? It was great to see and listen to our PMs from both sides of the border.? With that said, the hour is getting late, so I will keep this week’s report brief.?

Bullish Broadening

The bullish broadening continued last week, with the headline indices reaching all-time highs while the level of participation continues to improve.? Note below how 31% of the stocks in the S&P 500 index made new 52 week highs last week, without compromising the number of relative new highs.? This means that the tide (or should I say red wave) is lifting most boats for now.

The Soldiers are Marching

Both the top 10 and bottom 490 stocks remain in healthy uptrends, albeit at different slopes.

Equally Good

The S&P 500 equal-weighted index continues to make new highs.

And the cap-weighted index still makes for a great chart, with 74% of stocks in up-trends.

Meme That!

The market’s strong momentum is even waking up the junkier parts of the market, in the form of the Goldman Sachs “high retail sentiment” basket below.? This could be a massive base.

Two Sigma

Trend-wise, while the cap-weighed S&P 500 continues to float above its trendline, the chart below shows that the index is only two standard deviations above trend.? At major extremes it can reach three standard deviations.?

Soft Landing Analogs

The market has continued to follow the soft landing playbook, although at this point it has outlasted three of the four analogs that I track.? Only the 1995 analog kept going form here, and not just by a little.

Mountain of Cash

I am still hearing lots of talk about all that cash on the sidelines, and I have pointed out that the $7 trillion in money market fund (MMF) assets is mostly a function of cash seeking higher rates than are available at bank checking accounts.? Plus, as a percentage of equity market cap, the cash sitting in money markets is about average at 10.6%.? Having said that, the chart below shows that the ratio of cash to equities is higher than what is suggested by credit spreads.? If credit spreads are “right,” the ratio of MMF cash should be closer to 8%.? That’s at least a trillion of buying power right there.

Investment Clock

As for the fundamentals, P/E multiples are high (at least for the cap-weighted index), but equities remain in the sweet spot at the upper left quadrant.? That’s where liquidity has been ample and earnings have been growing.

As Good as it Gets

One of my concerns for 2025 is that it might be hard to repeat this year’s double-barreled growth in both earnings and valuation.? With term premia likely rising and the Fed likely easing less than expected (if it isn’t already done), the P/E side of the total return equation could be a heavy lift next year.

The good news is that earnings growth is robust.? Q3 earnings season was a good one, producing a 9% annual growth rate (and a 500 bps bounce).? The 2025 estimate is coming down, but that is fairly typical.

On-Trend

On the heels of what will likely be 10% earnings growth in 2024, next year could be another solid year for earnings.? That suggests an on-trend year for the market, even if valuations don’t offer much help.

Top-Line

Revenues also continue to post new highs, and more of that topline seems to be going into both share buybacks and capex.

Bear Steepener

Meanwhile, the yield curve continues to bear-steepen, with the Fed Funds rate now at 4.50-6.2% while the 10-year hovers at 4.4%.? I still see the specter of occasional rate tantrums to 5% as a source of market consternation next year.? They don’t have to end the bull market, but they might interrupt it.

King Dollar

Part of that scenario is a dollar that might get a little too strong.? Per the chart below, the dollar trades on rate differentials, which ebb and flow on the basis of how much or little the Fed is expected to change rates.? The dollar has gone from the bottom of its long range all the way to the top in very short order.? Much more of this could start to affect financial conditions.

Presidential Cycle

Finally, a note of caution from the chart below, which shows that the stock market has perfectly followed the election cycle when the mid-term year was negative. ?Price analogs come and go, but this one has been a winner.? We know that the first two years of a presidential term tend to be positive but below-average, and that is especially the case in the cycle below.? Food for thought as we finish 2024 with a bang.

$100k

With bitcoin hovering at $100k, I can’t leave you without a few parting charts.? Flows into BTC ETPs continue to be strong, and appear to be one of the main forces behind this ramp.

But it’s not just cash jumping on the trend.? The open interest in the futures market is soaring as well, driven by hedge funds and levered speculators.

If the power law of Bitcoin’s expanding network (amplified by real rates and the money supply) is the best way to value this most intriguing asset, then Bitcoin sits squarely in its fair value range.

A happy thanksgiving to all of you, and see you next Sunday.

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