Weekly market insights

1. Market Concentration and Mega Cap Tech Stocks: Market concentration in a few mega-cap technology companies with ultra-large market capitalizations remains high, driven by their ability to leverage artificial intelligence (AI). These firms have been key drivers of U.S. stock market gains. However, their expected price-to-earnings valuations for the next 12 months are about a third higher than for the S&P 500, and even higher when excluding them. While earnings expectations have supported the mega-cap rally, the question arises: Will pricey valuations halt the rally?
2. Earnings as a Catalyst: Earnings are expected to be a significant focus this year, especially after consensus expectations rose through the previous year, with up to 11% growth expected in the next 12 months. The 2023 Q4 earnings season is anticipated to provide insights into how these expectations will evolve. Profit margins in the U.S. and euro area, while holding up, are expected to normalize over time due to factors such as higher interest rates, ongoing wage gains, and persistent, though above-target, inflation.
3. Inflation as a Potential Catalyst: Inflation is identified as a potential catalyst that could challenge positive market sentiment. The market is currently priced for a near-perfect outcome, with expectations of a soft economic landing, falling inflation, and aggressive rate cuts by central banks. The risk of resurgent inflation becoming visible later in the year is seen as a development that could disrupt the upbeat sentiment.
4. Market Backdrop and Interest Rates: U.S. stocks rose nearly 2% last week, bringing the year's performance to a flat level. The 10-year Treasury yield ticked down to 3.95%. The expectation is that long-term yields are likely to drift higher due to the anticipated resurgent inflation. However, the market appears to be pricing in deeper and quicker rate cuts than the Fed may be able to deliver.
5. Week Ahead and Economic Data: Looking ahead to the upcoming week, investors are focused on U.S. retail sales, UK CPI, and China Q4 GDP. The data will be scrutinized for signs of how higher policy rates are impacting business activity and consumer spending. CPI data in the UK is expected to show falling inflation, but there are expectations of rising inflation again in early 2025, driven by an aging population and tight labor markets.
6. Strategic and Tactical Investment Views: Tactical views include underweighting DM equities due to macro concerns but acknowledging the potential of the AI theme. Strategic views favor private credit as banks retreat and inflation-linked bonds due to expectations of inflation staying closer to 3% on a strategic horizon.
7. Mega Forces Shaping the Investment Landscape: There are five mega forces – demographic divergence, digital disruption and AI, geopolitical fragmentation and economic competition, future of finance, and the transition to a low-carbon economy that need to be monitored. These forces are expected to have significant and lasting impacts on the investment landscape, creating opportunities and risks for investors.
8. Market Performance in Early 2024: The markets in 2024 have been described as subdued and somewhat bumpy, following a strong rally in the last few weeks of 2023. Despite the potential for a natural and healthy reset, the pullback in the S&P 500 has been modest, up only about 0.2% thus far in 2024. The market's behavior suggests a period of consolidation, and the subdued nature may be indicative of caution among investors.
9. Underlying Market Movement: There has been noticeable movement beneath the surface, with some segments of the market that showed signs of life late in 2023, such as small-cap stocks, the broader equal-weight S&P 500, and investment-grade bonds, coming under pressure early in 2024. The shift in these areas may reflect changing investor preferences and adjustments in portfolios.
10. Sector Performance and Defensive Shift (Continuation): Technology and communication services remain leaders from a sector perspective, indicating a continuation of trends from the previous year. However, there is also notable outperformance from defensive sectors like health care and consumer staples. The shift towards defensive areas may signal a cautious approach among investors, possibly in response to perceived uncertainties or risks in the market.
11. Focus on January Performance: The historical adage "as goes January, so goes the year" is discussed, but recent history shows that a negative or bumpy January does not necessarily lead to negative full-year returns. This suggests that while January performance is being observed, it may not be a definitive predictor of the overall year's market direction.
12. Datapoints to Watch: Three key datapoints to watch in the final weeks of January are highlighted:Fourth-quarter U.S. GDP growth (January 25): Investors will look for clues on economic growth and consumption in 2024. Resilient consumer behavior has supported stronger economic growth, but potential pressures on the consumer, including lower excess savings and higher credit card debt, may impact GDP growth in the coming quarters.PCE and Core PCE inflation (January 26): Inflation data has been mixed, and the PCE inflation figures are considered the Fed's preferred measure. Expectations are for some moderation in inflation, aligning with the Federal Reserve's projections. A tiebreaker in the direction of inflation is anticipated.Fed meeting and interest-rate decision (January 31): The Federal Reserve's actions and statements remain critical. While the expectation is for interest rates to remain on hold, investors will listen for clues on potential rate cuts in subsequent meetings. The Fed's stance on inflation and its future policy direction will be closely monitored.
13. Outlook for Economic Growth, Inflation, and the Fed: Economic growth, inflation, and the Federal Reserve are identified as key drivers for financial markets in 2024. The expectation is for an improvement in the backdrop for these factors over the course of the year, with lower inflation, potential Fed rate cuts, and a potentially reaccelerating economy. However, near-term market volatility is anticipated, particularly as the Fed potentially pushes back against March rate cuts.
14. Opportunities in Market Volatility: early-year market volatility could be an opportunity to rebalance, diversify, and add quality investments to portfolios. Themes of broader stock-market leadership and better performance from investment-grade bonds are expected to continue unfolding through 2024.
15. Interest Rate Cuts in 2024: It's challenging to reconcile tight U.S. labor market conditions and optimism about the economic outlook with Federal Reserve (Fed) expectations for three rate cuts in 2024. Mixed economic data and unusual strengths in the economy, along with strong financial underpinnings, have kept interest rate expectations historically low. However, a sharp slowdown in private sector hiring and deteriorating indicators of labor demand may justify lower interest rates.
16. Recalibrating Themes for 2024: Long-term secular trends and themes are emerging in 2024, influencing investment strategies. Five primary themes—Artificial Intelligence, Demographics, Infrastructure, Security, and Polycrisis—are identified as powerful structural forces. Thematic investing is highlighted as a forward-looking approach that considers macroeconomic factors and anticipates changes over a long-term horizon.
17. January Market Activity: The S&P 500 stumbled in the first trading week of 2024, falling by -1.5%, sparking interest in the January Barometer theory. The theory, which suggests that January's market performance reflects the entire year, has historical accuracy, but its reliability has decreased in recent years. Shaky market activity in January may not necessarily indicate weakness for equities, and the theory's nuances, along with macroeconomic and political factors, should be considered.
18. Interest Rate Cut Case - Macro Strategy: Despite challenges in interpreting the Fed's expectations, there is a case for interest rate cuts in 2024. The labor market's deterioration and negative growth indicators suggest a potential economic shift that justifies lower interest rates. The Federal Reserve's views on inflation and economic growth are complex, leading to elevated interest rate volatility.
19. Recalibrated Themes for 2024 - Macro Strategy: The macroeconomic-based, forward-looking approach of thematic investing is emphasized. The CIO identifies Artificial Intelligence, Demographics, Infrastructure, Security, and Polycrisis as key themes for 2024. The potential rewards and challenges associated with these themes are outlined, with a focus on long-term implications for economic growth and earnings.
20. Investment Implications - Portfolio Considerations: Despite optimism that peak rates and inflation are behind, there is a balanced approach towards strategic benchmarks. The portfolio is fully invested across equities, with a preference for large-caps and U.S. assets. In fixed income, a higher quality positioning is maintained, and themes for 2024, including AI, demographics, infrastructure, security, and polycrisis, are identified as influential on economic growth and the cost of capital.
21. Interest Rate Cut Case - Investment Implications: The macro strategy team presents the case for interest rate cuts in 2024. The Fed's communication challenges and uncertainties surrounding inflation and economic growth are discussed. Despite a historically restrictive monetary policy, the potential for lower interest rates is supported by a decline in private sector hiring and other indicators signaling economic headwinds.
22. Recalibrated Themes for 2024 - Investment Implications: The investment implications of recalibrated themes for 2024 are discussed. Thematic investing, driven by macroeconomic factors, focuses on long-term trends. The identified themes—AI, demographics, infrastructure, security, and polycrisis—are expected to shape industries and the global economy, influencing investment strategies and portfolio allocations.
23. January Market Activity - Investment Implications: The performance of the S&P 500 in the early weeks of 2024 prompts consideration of the January Barometer theory. While historically accurate, the theory has become less reliable in recent years. Shaky market activity in January may not necessarily translate to weakness in equities, thus it is recommended against placing excessive emphasis on any single technical indicator.
24. Investment Implications - Macro Strategy: The importance of clear central bank communication in shaping policy expectations is vital. Despite uncertainties, there has been clear progress toward the Fed's inflation objective, and the potential for lower interest rates is acknowledged. The macroeconomic landscape, including growth indicators, wage pressures, and global factors, contributes to the elevated interest rate volatility.
25. Recalibrated Themes for 2024 - Macro Strategy: Thematic investing is highlighted as a forward-looking approach, focusing on emerging trends reflective of economic, social, corporate, and demographic dynamics. The CIO identifies AI, demographics, infrastructure, security, and polycrisis as key themes for 2024, with potential implications for long-term economic growth, earnings, and the cost of capital.
26. January Market Activity - Macro Strategy: The S&P 500's performance in January and the January Barometer theory are examined. While historically reliable, the theory's declining success rates and the influence of macroeconomic and political factors on its outcome are emphasized. Shaky market activity in January is viewed cautiously, with a reminder to consider a balanced and diversified portfolio approach.
27. Angola's Oil Production in 2024:Angola's oil production is likely to remain tepid in 2024, impacted by low levels of spare capacity. The historical underinvestment in aging oil fields is expected to hinder the country's ability to increase production to prior levels.
28. Impact on Global Oil Prices:Angola's exit from OPEC is not expected to significantly impact global oil prices in 2024. However, it highlights a potential concern if more countries follow suit, leading to a fractured OPEC. Such a scenario could add volatility to global oil markets.
29. Spare Capacity and Underinvestment:Angola's spare capacity (production capacity minus actual production) was only 100,000 barrels per day as of December 2023, indicating limited room for immediate production increases. The historical underinvestment in aging oil fields is a key factor influencing this spare capacity constraint.
30. Future Defections from OPEC:If more countries were to exit OPEC, it could have a more substantial impact on global oil markets, potentially leading to increased volatility.
31. OPEC's Role in Global Oil Prices:We need to emphasize OPEC's role as the largest producer of oil in the world and a source of price stability. A fractured OPEC could contribute to increased volatility in already volatile oil markets, suggesting that the organization's cohesion is crucial for market stability.
32. Angola's Historical Production within OPEC:When Angola joined OPEC in 2007, its production levels were higher (1.9 million barrels per day) compared to the 2023 average production of 1.1 million barrels per day. The historical production levels are considered more meaningful in a context of limited global supply growth.
33. Equity Markets in 2024:Equity markets have experienced a pullback at the beginning of 2024. However, it encourages investors to focus on the positive long-term trend of the market. The correction in 2022 is seen as effectively bottoming at the low end of the channel that began in 2009.
34. Long-Term Uptrend for the S&P 500:The chart illustrates the long-term uptrend for the S&P 500, with the correction in 2022 considered to have bottomed at the low end of the channel that started in 2009. Q4 2022 lows as the lows for the cycle, and a recovery is steadily developing through 2023.
35. Market Expectations and Correction:Market corrections are expected, especially after significant rallies in the S&P 500, Nasdaq, and Russell 2000 Small-cap index. The current pullback is considered normal and healthy, as long as the S&P does not break below the key support band between 4000-4200.
36. Intermediate-Term Outlook:After rebounding from oversold levels in Q4 to resistance at the 2022 highs near 4800, pause or pullback is anticipated, especially through earnings season. The Quadrant Balance indicator suggests early signs of peaking at overbought levels, indicating a potential multi-month choppy period. Key support levels are identified in the 4500-4600 range and near the 40-week moving average at 4419.
37. AAII Sentiment Survey:The AAII Sentiment Survey has transitioned from generally bearish in Q4 to relatively elevated sentiment and low bearish sentiment in 2024. Sentiment data is expected to pull back over the coming months as investors reset their bullish expectations, potentially leading to a pause or pullback in the market.
38. Russell 2000 Small-cap Index:The Russell 2000 Small-cap index shows signs of stalling under its resistance band near 2000. The first key support band between 1800-1900, followed by 1700 is identified. Despite bullish sentiment on small-caps, the long-term relative performance trend vs the S&P remains in a downtrend, suggesting caution in overweighting small-caps.
39. US 10-Year Yields:After peaking at 5% in Q4 2023, the US 10-year yield declined to oversold levels near 3.7%. The current move above 4% as a short-term breakout that could support further upside. Levels of 4.3% followed by 4.4-4.5% coincide with the 50-62% retracement levels of the Q4-Q1 decline in yields.
40. Small Caps Performance in 2024:Small caps, particularly the S&P SmallCap 600 and Russell 2000, experienced a strong rally in the closing months of 2023. However, in the first three weeks of January 2024, small caps have given back about one-third of their late-2023 gains and underperformed the S&P 500.
41. Factors Supporting Small Caps:There are several winning attributes of small caps: Attractive valuations, trading near 20-year lows relative to the S&P 500 on a trailing P/E basis. Typically perform well during Fed easing cycles, and the report suggests that the Fed is likely to start cutting rates in the middle of 2024.Balance sheets and funding issues for small caps appear better than feared, with an indication that the debt situation is manageable. Portfolio diversification benefits due to different sector weightings compared to large-cap indexes.
42. Challenges and Considerations for Small Caps:Patience is needed regarding the small-cap portion of portfolios, anticipating more fits and starts. It highlights that small caps tend to underperform during periods of low GDP growth, and if a hard landing materializes, they could trade back down to previous lows.
43. Global Economic Outlook:Treasury yields are climbing higher in the U.S. due to stronger-than-expected economic data, and there is a perception that rate cuts might be in the pipeline. In Canada, rising inflation and housing market activity are discussed. In Europe, the ECB and the Bank of England's concerns about inflation and interest rates are highlighted. The Asia Pacific section covers economic data from China and Japan.
44. Inflation and Housing Market:Inflationary pressures and housing market activities are discussed in the context of Canada and the UK, with a focus on factors influencing inflation rates and housing prices.
45. Investment Recommendations:A moderate overweight position in U.S. small caps is warranted due to steeply discounted valuations relative to large caps. However, there is a wide range of plausible economic outcomes in 2024 and investors are advised to be patient.
46. Equity Market Technical Analysis:The S&P 500 equities are described to be in a "pause mode" at the beginning of the year, seen as a normal digestion phase after a sharp 2-month rally at the end of 2023.Technical factors include the S&P 500 hitting prior highs from January 2022, leaving many areas overbought in the short term. Investor sentiment is initially bullish, with expectations of a March rate cut and six cuts over the next year. However, there is a mention of an overshoot in sentiment, and it has consolidated over the past two weeks. Policymakers at global central banks are pushing back on market expectations for imminent and steep rate cuts to avoid unwinding progress on inflation and potential "stop-and-go" policy.Q4 earnings season has begun, and early indications suggest that the bar may be high for stocks following the late 2023 run-up.
47. Macro-Economic Outlook (U.S.):December CPI came slightly higher than desired, but inflation is on a better path with seven consecutive months of core CPI in a "normal" month-to-month trend. Leading indicators, such as December PPI, suggest inflation is expected to continue moving lower. December retail sales are well ahead of expectations, supporting the narrative of a soft landing for the economy. Traditional leading economic indicators are still flashing caution, requiring attention.
48. Q4 Earnings Season Analysis:Q4 earnings estimates for S&P 500 have drifted 8% lower over the past few months, reflecting a -9.4% quarter-to-quarter earnings contraction. Technology is the only sector expected to show positive sequential earnings growth. Despite the lower bar for earnings to beat estimates, early indications suggest that the bar may be high for stocks following the late 2023 run-up. Investors are advised to pay close attention to company commentary and price action, particularly regarding potential market rotation.
49. Technical Market Analysis and Support/Resistance Levels:Equities are described to be in "pause mode" at the beginning of the year, with a technical pause making sense after hitting prior highs and leaving many areas overbought. A bearish divergence is noted between prices and RSI, suggesting the market may need more time to digest November/December gains. Monitoring support levels around ~4637-4600, aligning with Fibonacci retracement, the 50-day moving average, and July highs. Initial resistance is at recent highs (~4810).
50. Market Strength and Breadth:Market strength since late October has improved the technical backdrop, but the pace of the rally left stocks overbought in the short term. The percentage of stocks above their 50-day and 200-day moving averages reached high levels, boding well for positive returns over the intermediate term. Market breadth has been narrow since the March banking crisis, and there are attempts to improve relative performance for the S&P equal-weighted index and small caps.
51. Sector Analysis - Opportunities and Challenges:Banks and real estate have been among the best performers post-October, showing improvement from depressed levels. However, fundamental challenges remain. Utilities, one of the last year's underperformers, has yet to see relative strength improvement. Technical trends are not favorable yet, but there is potential for outperformance in the future.

Previous update:

1. Easing Monetary Policy by the Federal Reserve: There is a likelihood of the Federal Reserve implementing an easing monetary policy in the back half of the year. The expectation is based on the trend of lower inflation, with the CPI at 3.4% and core CPI at 3.9%, which is still above the Fed's 2% target. The signals provided, including slowing job openings, declining producer price index (PPI), and lower consumer inflation expectations, indicate a downward path for inflation. The market is currently anticipating rate cuts, but the timing might be a source of volatility.
2. Potential Delay in Rate Cuts: The bond market is pricing in a 75% chance of the first rate cut happening in March. The timing of the first rate cut could be a source of volatility, and there might be resistance from policymakers at the first Fed meeting of the year. The debate around the timing will likely continue, with additional inflation readings and jobs reports expected before March.
3. Opportunities in the Stock Market: The rebound in forward earnings, along with new market highs, is seen as confirmation that the uptrend in stocks remains intact. There are opportunities to buy potential pullbacks as markets digest last year's gains, diversify into lagging equity market segments, and extend duration for those overweight in CDs and cash investments.
4. Corporate Earnings Outlook: Despite some mixed bank earnings and lower net interest income projections, economic resilience has helped corporate profits hold up better than expected. There is an expectation that earnings will reaccelerate in the current year, providing support for equities.
5. Positive Signal for Equities: The rebound in earnings and the stock market reaching new highs are viewed positively for future performance. Historically, once stocks exceed prior peaks, they tend to keep rising for another three years until the next bear market arrives.
6. Concerns about Supply Chain Disruptions: The recent attacks in the Red Sea and disruptions across the Suez Canal are identified as a potential headwind. While the impact is expected to be muted relative to the supply chain issues in 2021, there are concerns about higher shipping prices and potential flow-through effects on consumer prices if disruptions persist.
7. Persisting Momentum in Risk Assets: Risk assets surged at the end of 2023, driven by market optimism for Federal Reserve rate cuts. This momentum is expected to continue into 2024 as inflation cools further.
8. Market Jitters and Potential Disappointment: Despite the positive end to 2023, recent stock slides and rising bond yields indicate that market optimism on inflation might be let down. Sticky U.S. wages contribute to a jittery start in 2024, suggesting investor nervousness about the macro outlook.
9. Expectation of Falling Goods Prices and Rollercoaster Inflation in 2024: Anticipating falling goods prices leading to lower inflation in 2024, with potential supply constraints putting inflation on a rollercoaster. Predictions include inflation easing close to 2% as consumer spending normalizes, but a warning about the risk of inflation resurging later in the year.
10. Market Pricing for Near-Perfect Outcome: The final rally in 2023 leaves equity markets priced for a near-perfect outcome, expecting a soft landing with falling inflation and aggressive central bank rate cuts. This pricing implies expectations for further rate cuts if growth risks emerge, potentially leading to volatility in bond markets.
11. Potential Challenges to Expected Rate Cuts: Questions arise about whether the Fed can deliver the expected rate cuts, given factors like persistent wage growth, geopolitical fragmentation, consumer exhaustion of pandemic savings, and reduced government spending. The timing of when risk assets might reflect this outlook in 2024 is uncertain.
12. Volatility in Fixed Income Markets: Expectations of more volatility in fixed income markets are highlighted, partly due to clearer persistence of inflation. Uncertainty around neutral rates, influenced by looser fiscal policy and the low-carbon transition, is expected to contribute to market volatility.
13. Strategic Investment Approach: Emphasizes a granular approach to navigate macro uncertainty, favoring specific sectors like Japan, technology, and industrials in stocks. The tactical allocation includes being neutral on long-term Treasuries and overweight on short-term Treasuries.
14. Market Backdrop and Recent Performance: The market momentum from the end of 2023 could persist, but recent U.S. payrolls data indicating ongoing wage pressures may create uncertainty regarding the inflation outlook.
15. Tracking Five Mega Forces: There are five mega forces expected to influence investing in the present and future - demographic divergence, digital disruption and AI, geopolitical fragmentation and economic competition, future of finance, and the transition to a low-carbon economy. These forces are key drivers of greater macroeconomic and market volatility, presenting both opportunities and risks for investors.
16. Policy-Driven Growth Acceleration: Accumulating evidence suggests aggressive monetary and fiscal stimulus is propelling a breakout to higher nominal GDP growth and interest rates. The role of rapidly advancing AI technology is expected to determine the split between inflation and real growth in this context.
17. Market Resilience Amid Geopolitical Risks: Despite major geopolitical events, global indexes recorded record returns, seemingly indifferent to disorder. The potential risks associated with geopolitical tensions include rising defense spending, widening budget deficits, inflation from supply chain vulnerabilities, and increased global populism/nationalism due to dislocated cross-border migrants.
18. Clean Energy Transition Challenges: The global race to decarbonize is underway, marked by substantial infrastructure spending. However, the shortage of skilled workers in clean energy sectors poses a challenge. Labor shortages and skill mismatches in construction and manufacturing, combined with the labor-intensive nature of these sectors, may hinder the net-zero transition.
19. Portfolio Considerations and Market Rotation: Despite expecting a choppy market environment with elevated headline risk, a rotation in equities is anticipated. The strategy remains balanced, emphasizing adjustments in areas such as Value and Growth, Small- and Mid-cap versus Large-cap, and U.S. versus non-U.S. (including Emerging Markets) for optimal performance in 2024.
20. Secular Shift in Interest Rates and GDP Growth: Policy changes, including fiscal stimulus, have contributed to a secular shift towards higher nominal GDP growth and interest rates. The post-pandemic era marks the end of the secular bull market in bonds, with bond yields rising and nominal GDP growth surpassing previous trends. The shift favors a barbell approach, combining Value and Growth stocks for portfolio diversification.
21. Inflation and Interest Rate Outlook: The longer-run trends in interest rates and nominal GDP growth since 1960 highlight a correlation. The expectation is that interest rates will average in line with nominal GDP growth, leading to a new higher range for both. This shift favors Value stocks compared to the low-nominal-growth era.
22. Geopolitical Risks and Market Impact: Geopolitical events are emphasized as significant factors influencing market dynamics. The current geopolitical landscape, marked by conflicts and warfare, is seen as bullish for defense stocks. A U.S.-centric, diversified portfolio is recommended to navigate a world of multipolar disorders.
23. Labor Challenges in Clean Energy: The global push for clean energy faces challenges due to labor shortages and skill mismatches in construction and manufacturing. The growth in clean energy infrastructure requires addressing the shortage of workers, with the potential for delayed projects, increased costs, and hindered climate goals.
24. Investment Implications and Diversification: The market's complacency towards geopolitical risks is cautioned against, emphasizing the importance of actively managing diversified portfolios. Investments in defense stocks, dividend champions, hard assets, and a home bias towards U.S. assets are recommended. Diversification across asset classes, including Alternatives, is highlighted for risk management.
25. Future Scenarios and Monitoring: The shifting geopolitical landscape, rising defense expenditures, and the end of the peace dividend era raise uncertainties. Monitoring geopolitical risks, global elections, and potential market impacts is crucial for making informed investment decisions.
26. Fed Rate Cuts and Current Inflation: The current inflation, as measured by the November Consumer Price Index (CPI) and the Fed's preferred PCE deflator, stands just over 3% and 2.6%, respectively. This proximity to the central bank's 2% inflation target has led investors to anticipate Fed rate cuts early in 2024. However, the debate revolves around whether inflation is sufficiently low to justify these expected rate cuts in the early part of the year.
27. Economic Slowdown and Disinflation: The expectation is that the economic slowdown will contribute to a more gradual disinflation process extending into the second half of 2024. Key factors include the anticipation of a slower decline in goods costs, the potential reversal of goods price deflation, and a shift toward services prices, particularly rents, to sustain disinflation.
28. Long-Term Inflation Outlook: Looking ahead, the belief is that structural forces, such as an aging population and increased unionization, are relaxing their grip on inflation. This relaxation could result in inflation hovering noticeably above its sub-2% average seen in the decade preceding the pandemic. Reshoring and supply-chain fragmentation away from China, coupled with industrial policy encouraging reshoring, may contribute to eroding globalization's cost-cutting potential.
29. Investment Implications: The recommended investment strategy is cautious, favoring high-quality stocks and an early rotation toward shorter-term, investment-grade securities. This aligns with the anticipation of more gradual disinflation in a slowing economy. The expectation is that, as the economy eventually reduces inflation and the Fed cuts interest rates, there will be a pivot to stronger economic growth, offering broader investment opportunities across various asset classes and sectors.
30. Secondary Effects of Fed Policy on Financing: The Fed's focus on bringing inflation under control is noted to have secondary effects on financing conditions. Higher interest rates are expected to make financing more challenging for individuals and businesses. Concerns are raised about the potential impact on leveraged companies, those needing to refinance maturing debt, and those with floating-rate obligations. The possibility of a credit default cycle is mentioned, contingent on the trajectory of interest rates.
31. Fixed Income and Credit Market: Despite the potential for an economic downturn, high-yield credit spreads, particularly for single-Bs, have tightened significantly over the past 18 months. Single-B credit metrics have remained near historic averages, with only modest deterioration in interest coverage. Concerns are expressed about rising funding costs impacting single-B credit, and credit spreads are considered to be currently too tight to be attractive. The potential for a credit default cycle is mentioned, particularly if stress becomes severe.
32. Energy Sector Outlook for 2024: Cash flows have retreated due to lower commodity prices and higher capital expenditures. The outlook for 2024 suggests that most companies within the sector have the ability to maintain strong balance sheets. However, investor sentiment is weighed down by global economic uncertainty, and periods of downside volatility for Energy equities are expected in the near term.
33. Real Assets - U.S. Home Wealth: The data highlights an all-time high in U.S. home prices, driven by limited supply and high mortgage rates. Despite the high rates, the limited supply has pushed home prices upward, contributing to an increase in home equity wealth. The increase in home equity wealth is noted to strengthen consumer balance sheets, supporting a resilient consumer and contributing to a resilient economy. The potential impact of high interest costs on drawing upon accumulated home equity is acknowledged.
34. Global Bonds and Inflation Concerns: The Q4 2023 saw a surprising rally in various markets, especially in fixed income, leading to one of the best performances in decades. Central to this rally was the expectation that central banks were poised for rate cuts, but concerns arise over potential inflation reacceleration in the new year.
35. Bond Market Performance: The U.S. 10-year Treasury yield experienced a notable drop from around 5.0% on Oct. 19 to approximately 3.9% by the close of 2023. Similar trends were observed globally, with the German 10-year Bund yield hitting nearly 3.0% in October and falling below 2.0% by year-end. This decline in sovereign bond yields contributed to a rally in risk assets, including major global stock indexes.
36. Expectations and Risks: Market expectations were built on the assumption that central banks had reached peak policy rate levels and might pivot to modest rate cuts sooner than anticipated. The central question is whether bond markets ran too far, too fast, as the path forward for central bank policy rates and sovereign bond yields becomes crucial.
37. Bond Strategy and Near-Term Outlook: Despite the robust performance in Q4 2023, expectations for healthy returns in 2024 for bonds persist. Caution is advised in the near term, considering the recent run in bond market performance. A focus on the benchmark U.S. 10-year Treasury yield is highlighted, with potential entry and exit points discussed.
38. Inflation Update and Rate Cut Expectations: The U.S. Consumer Price Index for December 2023 showed a rise in inflationary pressures, exceeding Bloomberg consensus estimates. Despite this, the market reaction was relatively muted, and real wages, adjusted for inflation, showed an increase. Expectations for multiple rate cuts are discussed, with a focus on the calibration of policy rates relative to inflation trends.
39. United States: U.S. equities are higher on the week, with a focus on Q4 earnings season. Earnings growth estimates for Q4 2023 have been revised lower, and inflation was higher than expected in December.
40. Canada: Diversified Canadian banks faced challenges in 2023, but expectations for positive operating leverage are highlighted for 2024. The housing market's affordability is discussed, considering rate cuts later in the year.
41. Europe: Signs of bottoming in euro area economic indicators are noted, with improved investor and consumer confidence. Q4 growth expectations and the recent rally in European equities, particularly cyclicals, are discussed.
42. Asia Pacific: China ETFs saw increased investor interest amid a stock market downturn in 2023. Samsung Electronics expects a decline in operating profit, reflecting sluggish demand. Intensifying competition for bank deposits in Hong Kong is driven by attractive incentives offered by financial institutions.
43. Market Outlook: The strong rally at the end of 2023 (17% rally into year-end) may lead to a temporary stall for the S&P 500 near the all-time high. The technical backdrop remains constructive, with the market in an upward trend and broader participation, supporting active management. Sideways trading in the near term is anticipated, allowing digestion of recent gains, with initial resistance at 4810 and support at 4637.
44. Sector Rotation and Breadth: 2023 saw gains in Tech+ and growth-centric sectors, while 2024 starts with defensive sectors like Health Care outperforming. Broadening breadth is positive for Health Care and the average stock (S&P 500 equal-weight index), presenting opportunities for diversification. Relative earnings improvement in Health Care and the technical improvement in market breadth are key factors.
45. Market Bottom Line: Long-term optimism on equities persists, with any pullback viewed as a buying opportunity. Near-term, a temporary pause is expected as the S&P 500 approaches resistance. Positive technical backdrop with broadened breadth, improving Health Care sector, and resilient U.S. economy supporting the soft-landing narrative.
46. Macro: US: The U.S. economy remains resilient, aligning with the soft landing narrative that has buoyed equities. Signs of softening emerge, with the ISM Services PMI showing a slight decrease and new orders moderating in December. Tight labor market with non-farm payrolls surprising to the upside, but monthly job gains moderating from post-COVID highs.
47. Inflation Focus: Inflation moderation is a key focus, with the Thursday CPI report crucial for Fed policy and valuation. Longer-term expectations point to inflation moderating under 3%, contingent on contained month-over-month growth rates. Market sensitivity to further inflation moderation for current valuation levels justification.
48. Technical: S&P 500: S&P 500 remains in an upward trend, but a temporary stall is anticipated near the all-time high. Oscillators like RSI have come off overbought levels but remain near the upper end of neutral. Sideways trading in the coming weeks is welcomed for digestion of recent gains, with defined resistance and support levels.
49. S&P 500 Equal-Weight: The S&P 500 equal-weight index experiences an intermediate-term breakout with improving relative performance. Diversification remains key, and market breadth improvement is positive for active management. Opportunities in the average stock are seen, given the market's lopsided nature over the past year.
50. Health Care: Health Care emerges as a favorite defensive sector, with YTD returns the strongest among sectors. Sector rotation back into Health Care, and an intermediate term breakout, signals potential opportunities. Watch for an uptick in relative earnings trends to gain confidence in near-term price action.
51. Japan: Japan is poised to make a run towards all-time highs, trading near the highest level in over 30 years. Attractive valuations for Japanese equities on both absolute and relative bases. Japan appears attractive for global diversification, warranting further observation for strengthening trends.

Previous update:

1. Continued Volatility and Macro Uncertainty: The macro backdrop is more uncertain in the current period compared to the stable growth and inflation during the Great Moderation. This suggests that markets may continue to experience volatility in 2024.
2. Importance of Adapting to Macro Regime and Structural Shifts: The lessons from 2023 suggest that adapting to the new volatile macro regime and leveraging insights into structural forces will continue to be crucial in shaping investment strategies in 2024.
3. Market Opportunities Amid Greater Dispersion: The increased dispersion in individual stock returns since 2020 indicates opportunities for investment expertise. Investors may find value in being dynamic and selective, looking beyond broad asset allocation blocks.
4. Influence of Artificial Intelligence (AI) on Stock Performance: The role of AI as a mega force influencing stock performance is highlighted. This trend is expected to continue, emphasizing the relevance of technology-driven investments in 2024.
5. Shift in Portfolio Construction Strategies: The positive correlation between bond and stock returns suggests that traditional portfolio construction strategies relying on bonds to offset equity sell-offs may no longer be effective. Investors may need to consider alternative approaches to manage risk and seek above-benchmark returns.
6. Structural Forces Driving Opportunities and Risks: Aging populations, the low-carbon transition, and geopolitical fragmentation are identified as structural forces impacting the market. These factors are expected to continue influencing investment opportunities and risks in 2024.
7. Long-Term Yield Expectations: The expectation that long-term yields will resume their rise over time, driven by investor demand for more compensation amid persistent inflation and budget deficits, suggests a potential trajectory for interest rates in 2024.
8. Labor Market Dynamics Impacting Inflation: The tight labor market contributing to elevated wage growth and U.S. inflation is highlighted. This suggests that labor market dynamics will continue to play a significant role in shaping economic conditions.
9. Global Geopolitical Risks: Geopolitical events such as wars in Ukraine and Gaza, as well as the intensifying structural competition between the U.S. and China, are identified as factors influencing the market. Global geopolitical risks may continue to impact investor sentiment and market dynamics in 2024.
10. Focus on Granularity and Selectivity in Investments: The recommendation to break up broad asset allocation blocks and adopt a more dynamic and selective approach reinforces the importance of granularity in navigating the current market environment.
11. Labor Market Resilience and Consumer Spending: The employment report indicates that the labor market remains robust, with more jobs added than expected in December, keeping the unemployment rate steady at 3.7%. Despite a slowdown in job gains and a modest rise in the unemployment rate anticipated, the labor market's resilience is expected to support ongoing economic growth. This, in turn, is crucial for sustaining consumer spending and corporate profits.
12. Goldilocks Economic Scenario: The ideal scenario for the market, often referred to as "Goldilocks," involves strong economic growth supporting consumer spending and corporate profits, while inflation remains moderate enough to allow for potential rate cuts by the Federal Reserve. The prediction for 2024 suggests a potential balancing act where economic growth continues, but at a slower pace, possibly due to a moderation in consumer spending.
13. Wage Growth and Inflation Dynamics: While wage growth increased in December, there's an expectation that it will moderate further in the year. This moderation is seen as necessary for inflation to return to a more sustainable rate. The balance between wage growth, consumer spending, and inflation will be critical in determining the economic trajectory.
14. Expected Fed Rate Cuts: The Federal Reserve is anticipated to ease monetary-policy conditions in 2024, primarily through rate cuts, and may make adjustments to its quantitative tightening approach. The timing of these cuts is a point of contention, with the consensus possibly being too optimistic. The prediction is that the Fed will adopt a cautious approach, remaining on the sidelines for a longer period before implementing rate cuts, likely around mid-2024.
15. Market Reaction to Fed Policy Changes: The historical analysis suggests that equities tend to perform well leading up to the initial rate cut. However, there is a caution that the market may need to be patient, as the expected timing of rate cuts may be more delayed than currently priced in. Any deviation from market expectations could result in temporary volatility and weakness, akin to episodes in the past year.
16. Market Performance Signals: Historical trends suggest that a strong rally in December often translates into continued momentum in January. The start of the year, while not definitive, can provide some insights into the market's performance for the year. A particularly strong or weak January may influence the market's trajectory, although history shows that even a weak start does not guarantee a poor finish.
17. Expectations for 2024: The overall outlook for 2024 is seen as a mix of headwinds and tailwinds. Despite the market's high expectations and significant gains leading into the year, there's an optimistic view that both stocks and bonds can build on the gains achieved in 2023.
18. Structural Shift to Higher Long-Term Inflation Regime: The strong positive correlation between stock and bond returns, along with the Fed's pivot and eased financial conditions, indicates a structural shift to a higher long-term inflation regime. Easier monetary policy is expected to drive a shift to beneficiaries of lower interest rates that faced challenges in 2023 during rising rates.
19. Ten Macro Questions for 2024: Numerous uncertainties surround the capital markets in 2024, including concerns about a potential U.S. recession, the Fed's ongoing battle against inflation, expectations for improved market breadth, and questions about U.S.-China relations. The answers to these questions are crucial for shaping market direction and asset performance throughout the year.
20. Momentum into 2024: Despite global and domestic crosscurrents in 2023, the S&P 500 delivered above-average annual returns. Momentum is carried into the New Year, with the index approaching its all-time high. The investment rationale emphasizes balanced and diversified allocations across equities and fixed income.
21. Portfolio Considerations: Anticipating a potentially choppy market environment, the portfolio strategy remains "balanced" while fully invested at the beginning of the year. The focus is on adjustments within Value and Growth, Small- and Mid-cap versus Large-cap shares, and U.S. versus non-U.S. assets, including Emerging Markets. The goal is to navigate a long rotation in equities, expecting a more substantive rally later in the year.
22. Fed's Inflation Policy and Investment Implications: The Fed's shift in inflation policy, allowing for moderate inflation above 2%, has resulted in inflation averaging close to 5% for several years. The positive correlation in stock and bond returns reflects this new higher inflation outlook. Investors are advised to take advantage of near-term declines in inflation to increase allocations to beneficiaries of higher inflation, including real asset classes.
23. Ten Macro Questions for 2024: Addressing key questions for 2024, such as the potential for a U.S. recession, progress in the Fed's fight against inflation, and the breadth of market performance, will shape investment decisions. The impact of geopolitical risks, U.S.-Sino relations, and the structural challenges faced by China are additional factors influencing market dynamics.
24. U.S.-China Relations and Other Macro Dynamics: Expectations for U.S.-China relations in 2024 include a mixture of constructive and contentious elements. The structural challenges faced by China, reminiscent of Japan in the late 1980s, may lead to more aggressive fiscal and monetary policies. The impact of the upcoming U.S. elections, geopolitical risks, and the effects of AI becoming more prominent are factors to monitor in portfolio construction.
25. Momentum Into 2024: The U.S. equities' significant momentum entering 2024, backed by a strong 2023 performance, reflects enthusiasm around AI and the resilience of the U.S. consumer. While some sectors outperformed, the focus is on broader participation in 2024, with potential upside surprises and careful monitoring of variables like geopolitical resolution and economic fundamentals.
26. Portfolio Considerations: The macro dynamics shaping market returns and asset pricing, including upside potential for U.S. equities, are considered in portfolio construction. Despite potential choppiness, a constructive view on stocks and bonds is maintained, emphasizing a balanced approach relative to strategic targets.
27. Stay defensive, but prepare for early cycle recovery: Favor fixed income over equities due to a combination of tighter monetary policy and above-target inflation. Focus on equities with stable earnings and higher-quality bonds. Sectors such as Industrials, Materials, and Health Care are recommended for new cash allocations.
28. Anticipate a pivot to riskier asset classes: Expect a slowdown in the economy and a pullback in equities early in 2024. Plan to reallocate portfolios towards asset classes that perform well during economic reacceleration. Shift tactical allocations to higher beta asset classes like Small Cap and Emerging Market Equities, and High Yield Fixed Income.
29. Lock in attractive long-term bond yields: With bond yields approaching attractive levels, encourage investors to use cash to secure yields in the 4.5% – 5+% range on short-term and long-term high-quality bonds. Propose building a laddered bond position with diverse maturities for income and liquidity. Suggest remaining nimble and reducing duration over time.
30. Position for potential correlation spikes by using alternative investments: Recognize that traditional diversified portfolios faced breakdowns in correlations between equities and fixed income in recent years. Recommend allocations to alternative investments such as hedge funds and private capital to moderate overall portfolio declines during correlation spikes. Highlight preference for Macro and Relative Value strategies.
31. Use pullbacks to add to commodities: Consider rebalancing commodities back to target allocations as they historically serve as an effective inflation hedge. Despite caution in the first half of the year amid an economic slowdown, expect opportunities to accumulate commodities, especially Precious Metals and Energy, in the second half.
32. Favorable sectors tilt toward quality and defense: Suggest a preference for quality and defensive sectors. Favorable ratings on Health Care, Industrials, and Materials. Unfavorable ratings on highly cyclical Consumer Discretionary and beleaguered Real Estate sectors. Health Care seen as a defensive sector due to sound earnings stability and attractive valuations.
33. A tale of two halves: Predict the Fed to pivot away from tightening monetary policy in 2024, likely remaining on pause in the early months. Anticipate U.S. Treasury yields to be highly volatile, with a decline in the first half due to an economic slowdown, followed by a climb in the second half as recovery takes shape. Suggest maintaining exposure in short- and long-term high-quality fixed income.
34. Unattractive backdrop for global bonds: Expect challenges in the Eurozone with a recession and fiscal policy issues. Project a strong U.S. dollar in the first half of 2024. Maintain no strategic or tactical allocation to developed market ex-U.S. bonds. Hold a neutral outlook on emerging-market sovereign debt denominated in dollars, with potential brightening in the second half.
35. Commodity outlook for 2024: Acknowledge 2023 as the first year of negative performance in the current commodity bull super-cycle. Despite caution in the first half due to an economic slowdown, express favorability towards commodities, especially Precious Metals and Energy, in the second half. Recommend dollar-cost averaging into commodity positions and provide year-end targets for various commodities.
36. Looking ahead to 2024: Prefer alternative strategies for diversification and down-market protection. Maintain a favorable stance on Relative Value strategies like Arbitrage and Long/Short Credit due to defensive attributes and potential benefits from fixed income market volatility. Favor Distressed Credit strategies for capitalizing on stress in credit markets. Remain patient for more attractive entry points in Private Equity, Private Credit, and Private Real Estate.
37. Recession expectations defied: Despite concerns of a recession in 2023 due to the Fed's aggressive rate hike cycle, the U.S. economy did not succumb to a recession. The S&P 500 posted strong gains of 24.2%, surpassing expectations and ending well above the 10.3% average annual return since 1980.
38. Dominance of "Big 7" AI-themed stocks: The "Magnificent 7" or "Big 7" stocks, including Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and Meta Platforms, rose significantly by 105% on average. These stocks, driven by artificial intelligence trends, contributed to about 75% of the S&P 500's gains in the first nine months.
39. Broadening of market performance in Q4: Market performance began to broaden beyond the Big 7 in Q4. Sectors like Real Estate, Consumer Discretionary, Financials, and Industrials outperformed the S&P 500, signaling a shift in market dynamics.
40. Fed's pivot and rate cuts: The Fed's pivot from aggressive rate hikes to forecasting multiple rate cuts for 2024 played a key role in boosting the equity market in Q4. The change in stance led to increased participation in large-cap sectors and a strong rally in small-cap and midcap indexes.
41. Economic factors driving optimism: Declining inflation, lower Treasury yields, stronger-than-expected GDP, and soft-landing sentiment contributed to market optimism. Consumer inflation dropped from 7.5% to 3.1%, Treasury yields fell back to 3.88%, and the GDP growth forecast rose from 0.3% to 2.40% by year-end.
42. Surge despite low earnings growth: Despite a 1.6% decline in S&P 500 earnings for the first three quarters of 2023, the market rallied strongly. Anticipation of stronger earnings in 2024 and a healthy soft landing scenario contributed to the year-end surge.
43. Regional bank crisis and stabilization: The crisis triggered by the collapse of regional banks, including Silicon Valley Bank, in March had global attention. However, as the regional banking system stabilized and the Fed adopted a dovish stance, the S&P 500 Regional Banks Index rallied 34.9% from late October to year-end.
44. Maintaining a cautious stance: The reversal of poor 2022 performance characterizes 2023, with the market ending on a positive note. The outlook for 2024 depends on whether the U.S. economy faces a recession or achieves a soft landing. A Market Weight positioning is recommended, tilting portfolios toward higher-quality segments of the equity market.
45. Preference for higher-quality equities: Tilt portfolios toward higher-quality segments of the equity market, including companies with resilient balance sheets, sustainable dividends, and reliable cash flow generation.
46. Weak start with rising yields: Bond markets started the year with declining prices, pushing yields higher by approximately six basis points on major Treasury maturities. The decline in prices follows a strong run-up in December 2023, with Treasury yields falling roughly 40 bps.
47. Investors reassessing monetary policy: Recent bond market performance is driven by investors reassessing the likely path for monetary policy. Following the Fed's December meeting, there was a shift toward an aggressive rate-cutting regime, with interest rate futures pricing in multiple rate cuts in 2024.
48. Fed's data-dependent stance: The minutes of the latest Fed meeting emphasize a data-dependent approach to future policy moves, particularly focusing on inflation. Recent data, including the PCE deflator, supports a dovish pivot by the central bank.
49. Disinflation despite higher-than-expected inflation: Canadian inflation numbers for November surprised to the upside, reaching 3.1% y/y. However, disinflationary pressures persist, and despite the upside CPI surprise, inflation rates for certain categories are declining.
50. Cautious stance on corporate bonds: Canadian credit spreads in both investment-grade and high-yield corporate bonds finished 2023 near their tightest levels. Despite market-implied tailwinds, caution is advised due to potential credit deterioration ahead, influenced by weakening economic momentum and a tougher refinancing environment.
51. Defensive sectors outperform: European equities slipped slightly in early 2024, with defensive sectors, particularly Health Care, outperforming. Health Care is considered a preferred defensive sector due to its relatively inexpensive valuation, resilient characteristics, strong balance sheets, and the prospect of robust earnings growth.
52. Energy sector gains amid geopolitical tensions: Energy shares gained with rising oil prices driven by geopolitical tensions in the Middle East. Disruption in shipping through the Red Sea impacted container ships, affecting industries such as clothing retail and raising freight costs.
53. Weak start for Asian equities: MSCI Asia ex Japan Index fell over 2% in the first three trading days of 2024, influenced by Federal Reserve minutes and fragile sentiment on Chinese equities.
54. Stable recovery in China's services sector: Despite economic recovery headwinds, China's New Year holiday saw a stable recovery in the services sector. Domestic tourism trips increased by 9.4%, indicating resilience, but spending patterns shifted with more interest in cultural experiences than luxury shopping.
55. Maintaining a cautious stance in 2024: Despite the positive end to 2023, maintaining a cautious stance for 2024 due to lingering risks from the Fed's aggressive rate hike campaign. A Market Weight positioning is recommended, with a tilt towards higher-quality segments of the equity market.
56. Focus on higher-quality equities: Emphasize higher-quality segments of the equity market, including companies with resilient balance sheets, sustainable dividends, and reliable cash flow generation.
57. Positive Outlook for 2024: A positive outlook for equity markets is reiterated, with market and sector indices breaking above or challenging resistance at the upper end of 2-year trading ranges. The expectation is for most indices to trend higher in 2024, with a potential pullback in Q1.
58. Weekly Momentum Indicator Signals: The weekly momentum indicator, a valuable tool for identifying multi-month turning points, transitioned from oversold levels at the beginning of Q4 to overbought territory in Q1. While overbought conditions can persist in strong uptrends, it suggests a possible pullback or consolidation in the coming months.
59. Longer-Term Trend remains Positive: Despite potential short-term pullbacks, the longer-term trend remains positive. The Q1 pullbacks into Q2 are seen as opportunities to revisit leading growth and cyclical stocks as they approach more attractive technical support levels.
60. Sector Rotation Expected: As leaders pull back, sector rotation is anticipated. Healthcare, identified as a lagging group, is showing signs of emerging strength in early 2024, and more rotation is expected.
61. Surge and Overbought Conditions: The S&P has surged almost 17% in two months, leading to overbought conditions in daily momentum indicators, which are now turning down. This suggests potential equity weakness in the next 2-3 weeks.
62. Healthy Pullbacks: Pullbacks are viewed as a healthy part of a broader market recovery, necessary to unwind near-term excess optimism, especially with earnings season approaching. Key support levels are identified between 4550-4607, just above the rising 50-day moving average.
63. Rebound and Resistance: The Russell 2000 has rebounded almost 27% from key support, facing resistance in the 2000-2144 range. The ongoing pullback from the upper end of the 2-year trading range is seen as a normal and healthy development. Support is expected in the 1838-1885 band.
64. Rate Movement: Over the past two months, the US 10-year yield has dropped from overbought levels to oversold levels. The expectation is for a bounce back in Q1, pressuring risk assets. Resistance levels are identified at 4.02-4.09, followed by 4.3-4.5%, considered the upper band for counter-trend bounces.
65. Semiconductors as Leading Group: Semiconductors are viewed as a leading group with potential for further upside in 2024. After a strong rebound in Q4, a healthy pullback is occurring.
66. Healthcare Sector Rotation: The Healthcare sector, having sat out the 2023 rebound, is in a broad range for 2+ years. With growth and cyclical stocks pausing, a rotation to defensive areas like healthcare is expected. This rotation may challenge and breakout to new highs in 2024.
67. Volatility in 1H 2024: Expecting more volatility in the first half of 2024 for equities. Recommends adding healthcare exposure after its 2-year pause to diversify equity exposure during a potentially more volatile period.
68. Market Strength and Broader Participation: The S&P 500's 17% rally into year-end, finishing just shy of all-time highs, is noted. The market strength since late October includes broader participation across sectors like Banks, Real Estate, equal-weighted Consumer Discretionary, and Small Caps, showcasing a notable shift from the dominance of Tech stocks in 2023. This rotation is seen as an opportunity for 2024.
69. Technical Strength and Supportive Market Breadth: The market starts 2024 from a position of strength with 91% of stocks above their 50-day moving average and 77% above their 200-day moving average. Equal-weighted Consumer Discretionary vs. Consumer Staples is trending upward, and semiconductors recently broke out to new highs, indicating a supportive technical backdrop. Credit behavior is positive, with CDS spreads at their narrowest level in over 1.5 years.
70. Short-Term Consolidation Expected: Although the S&P 500's rally leaves many stocks extended, some mean-reversion/consolidation is expected in the short term. The market may experience slight counter-trend moves in bond yields, the US dollar, and equities in early 2024.
71. Macro and Fed Expectations: Economic data shows weakness in manufacturing, with the ISM Manufacturing in contractionary territory for 14 consecutive months. Job Openings are decreasing as employment normalizes. Despite weak manufacturing, the labor market is viewed as undersupplied, likely supporting employment and economic activity. Expectations for the Fed include potential rate cuts in 2024. The market is pricing in cuts, and sentiment has shifted from recession fears in 2023 to expectations of a soft landing and rate cuts in 2024.
72. Inflation and Economic Health: As of now, inflation has moved toward the Fed's 2-2.5% target for six consecutive months. Lagged effects of monetary tightening indicate continued inflation moderation. The focus in 2024 is expected to shift toward the economy and the impact of higher interest rates, with an expectation of mild weakness.
73. Market Sentiment and Potential Risks: Sentiment has changed significantly over the past 12 months, moving from recession fears in 2023 to expectations of a soft landing and steep rate cuts in 2024.AAII Bull-Bear Sentiment survey has shifted from very bearish levels in 2022 to very bullish levels currently, posing a potential risk due to the volatility in sentiment driven by economic uncertainty and Fed messaging.
74. Market Rotation and Opportunities: The rotation in the market, away from the narrow dominance of Tech stocks in 2023, is seen as an opportunity for 2024. While Tech can still perform well, the broader market is expected to see more diversification and opportunities in areas that were previously lagging.