Weekly market insights

1. Potential Rate Cut Timing: The Fed is likely considering a rate cut in the near future, but the exact timing remains uncertain. The data suggests a possible rate reduction in June at the earliest, as the Fed wants to observe further signs of declining inflation before making any moves.
2. Economic Resilience: The robust job gains and a stable unemployment rate indicate the economy's resilience. The healthy state of the labor market is considered a crucial factor preventing a traditional recession. While there might be a growth scare in 2024, it is expected to be relatively mild.
3. Market Volatility: The market is expected to face some turbulence as it adjusts to shifting expectations regarding Fed policy. While the overall market direction is positive, historical patterns suggest there could be noticeable pullbacks in the stock market before and after the initial Fed rate cut.
4. Banking Sector Concerns: There are worries about the financial health of smaller banks, reminiscent of issues from the previous year. However, the data suggests that this might not escalate into a broader banking crisis. Credit conditions and stress in the commercial real estate market could pose challenges for some smaller banks, and this will be monitored closely.
5. Stock Momentum and Rate Cut Timing: The data indicates the potential for ongoing stock momentum due to cooling inflation and the Federal Reserve's readiness to cut rates. The overall view on U.S. stocks is upgraded to overweight, with a specific emphasis on technology stocks. The anticipation stems from the expectation of the Fed initiating rate cuts, leading to an overweight stance on broad U.S. stocks for the next six to 12 months.
6. Economic Resilience and Broadening Market Rally: The information highlights strong U.S. Q4 GDP growth, falling inflation, and a positive macro outlook as factors supporting the market rally. The expectation is that the rally will expand as inflation continues to decrease, the Fed starts rate cuts, and the market maintains a positive macro outlook. The consensus is for a soft economic landing, with markets focusing on specific themes, potentially allowing the rally to extend beyond technology stocks.
7. Inflation Rollercoaster and Corporate Earnings: The data acknowledges an expected rollercoaster in inflation, with short-term expectations around 2% and a potential rise to 3% by 2025. Corporate earnings and profit margins have held up against increased interest rates and costs so far. However, there's an anticipation of margin pressure in the medium term due to factors like high rates, wage pressures, and inflation above the target. The likelihood of the Fed not cutting rates as much as in the past is mentioned, considering various factors such as wage growth and geopolitical fragmentation.
8. Global Market Landscape: Insights into the euro area and Japanese markets are provided, indicating the absence of expectations for resurgent inflation in the euro area. The European Central Bank maintains a tight policy, while the Bank of Japan keeps a loose policy to anchor overall inflation at 2%. The bottom line is an overweight stance on overall U.S. stocks, with a cautious approach due to the expected inflation rollercoaster.
9. Market Backdrop and Mega Forces: Recent market movements include modest gains in the S&P 500 and a steady 10-year Treasury yield. The market's optimism for a soft landing is supported by robust U.S. growth and falling core inflation. The introduction of five mega forces influencing the investment landscape includes demographic divergence, digital disruption, geopolitical fragmentation, the future of finance, and the transition to a low-carbon economy. These forces are expected to bring significant opportunities and risks for investors.
10. AI's Impact on Semiconductors: Emphasizing the importance of Artificial Intelligence (AI) in driving the technology sector, particularly in semiconductors. The surge in AI-related stocks has been driven by a "fear of missing out" (FOMO), leading to historic valuations. While the near-term run in AI stocks may be overdone, the long-term potential of AI is acknowledged. Markets tend to anticipate the effects of new technologies, creating volatile investment cycles.
11. Semiconductor Performance and AI Revenues: Despite a projected downturn in semiconductor revenues in 2023, semiconductor stocks experienced significant growth, with the Philadelphia Semiconductor Index (SOX) returning 67%. The fundamentals of the semiconductor industry bottomed in Q2 2023, and a fundamental upturn is underway. The question arises about whether valuation multiples have already been factored in. The sentiment for semiconductor growth is most bullish for 2025, while caution is advised for the first half of 2024.
12. Technology Investing Strategy: Highlighting that technology investing is not solely about semiconductors. While acknowledging their cyclical nature, semiconductors are considered to provide better return potential than most subsectors in the Technology, Media & Telecom (TMT) industries. Investing in semiconductors can offer opportunities for generating alpha and improving returns in a diversified equity portfolio.
13. Election Year Dynamics: Despite the prevailing negativity and fatigue among investors, key considerations are suggested: the resilience of the U.S. economy, the historical dominance of profits over politics, the potential for volatility in election years, and the importance of staying invested. The focus should be on constructing portfolios that prioritize quality, diversification, and income-producing assets.
14. Long-Term Perspective: Encouraging a long-term view, advising against market timing and major portfolio shifts based on short-term uncertainties. Emphasis is placed on quality assets, diversification beyond traditional portfolios, and the stability of income streams through bonds and dividend-paying equities. Focusing on macro structural themes is advised, rather than getting swayed by short-term election-related volatility.
15. International Equity Underperformance: Acknowledging the underperformance of international equity markets compared to the U.S. in recent years. Highlighting challenges in developed markets, including recession risks in Europe, fiscal tightening, and potential geopolitical risks. Japan's policy rate increase is anticipated, which could impact certain sectors. China's structural challenges and U.S. export controls on semiconductors pose risks to emerging markets.
16. Strategic Allocation to International Equities: A strategic allocation to international equities can offer advantages such as higher dividend yields, valuation discounts, and portfolio diversification. However, tactical caution is advised for 2024 due to the anticipated challenges. The role of Fed rate cuts in supporting emerging markets is discussed, with external strengths likely to dampen their impact.
17. Semiconductors as Foundational: Semiconductors are foundational to innovation in the technology sector. Despite cyclicality, they are seen as providing strong returns for long-term investors. The potential re-rating of semiconductors is linked to the shift toward a data-driven economy.
18. U.S. Bias and Long-Term View: The investment implications stress a bias toward U.S. equities due to stronger balance sheets and innovation capacity. Investors are advised to maintain a long-term view, emphasizing the importance of quality, diversification, and staying invested in the face of market volatility.
19. Caution in International Equities: Tactical caution is reiterated for international equities in 2024, considering the specific challenges in developed and emerging markets. While recognizing the advantages of international exposure, investors are advised to approach with caution due to the prevailing uncertainties and risks.
20. Interest Rate Trend: Unveiling the historical trend of interest rates, which witnessed a four-decade decline but recently shifted upward. The Federal Reserve's move to combat inflation led to increased rates, impacting bond market volatility. There is heightened volatility, reaching levels comparable to 2008 and the late 1990s. The uncertainty revolves around the Fed's commitment to addressing inflation and global supply chain disruptions.
21. Alternative Strategy - Relative Value – Long/Short Credit: Advocating for the Relative Value – Long/Short Credit strategy in the alternative investment landscape. This strategy involves investing in a diverse range of fixed-income securities, aiming to capitalize on mis-pricings across debt securities and derivatives. The strategy's defensive attributes and historical outperformance during periods of high volatility are highlighted. The flexibility to deploy long and short positions offers potential risk reduction in turbulent markets. The strategy's low correlation with traditional markets emphasizes its diversification benefits.
22. Sector Downgrade and Upgrade: Highlighting recent sector changes, with the Financials sector downgraded from neutral to unfavorable, while the Energy sector was upgraded from neutral to favorable. The rationale includes the Energy sector's underperformance since August 2023, driven by a decline in oil prices. However, expectations of limited global oil supply growth, attractive valuations, and a commitment to capital discipline contribute to the upgrade. Conversely, the Financials sector faces headwinds from an economic slowdown, poor earnings growth, unattractive valuations, and increased regulatory scrutiny.
23. High Yield Debt Valuations: Examining high yield debt valuations, indicating that they are expensive by various metrics. Credit spreads for the Bloomberg U.S. Corporate High Yield Index are near historical lows, standing at 336 basis points compared to a 20-year average of 493 basis points. Despite a slowly weakening economic environment, the high yield asset class is performing well. However, caution is advised due to historical events leading to substantial changes in credit risk valuations. The fixed income space's relatively expensive valuations warrant ongoing reassessment.
24. Crude Oil Dynamics: Unveiling the record U.S. crude oil production in 2023, reaching 13.3 million barrels per day, and the anomaly of low crude oil inventories despite increased production. The rise in U.S. oil exports, especially to emerging markets like China, is highlighted as a key factor. Despite record production, U.S. oil inventories remain below their 5-year average. The expectation is that emerging market oil demand will continue to rise throughout 2024, impacting global oil prices.
25. Market Cycle Improvement: Recent breakouts above 2-year trading ranges by the S&P 500, Dow Industrial Average, industrial sector, and semiconductor group signal an improving market cycle.
26. Tactical Pause Expected: Despite the positive cycle backdrop, a tactical pullback or pause is likely in Q1 into Q2. Overbought weekly indicators, particularly the quadrant balance indicator, suggest a potential slowdown. Short-term trading indicators indicate peaking momentum, especially in technology stocks, following earnings reports and a reset by the Federal Reserve on overly optimistic interest rate cut expectations.
27. Equity Volatility and Range: While maintaining a bullish outlook for equities in 2024, investors should anticipate increased volatility. Equity markets are expected to trade in a choppy range above support levels between 4510-4637 moving into Q2.
28. Momentum and Pullback: Daily momentum for the S&P 500 is overbought, signaling a near-term pullback. Initial support is in the 4844-4800 range near early 2022 highs, followed by 4682-4735 near the rising 50-day moving average. Pullbacks are viewed as a healthy part of a longer-term emerging uptrend, unlikely to indicate a major market decline.
29. Weekly Momentum and Range: Similar to the S&P 500, the Russell 2000's Q4-Q1 rebound has pushed weekly momentum indicators into overbought territory, suggesting a pause or pullback by mid-late Q1 into Q2. The expectation is for the index to trade in a choppy range above 1829 support but below 2047-2144 resistance.
30. Yield Expectations: After reaching 5% in Q4, the US 10-year yield declined to 3.7% by year-end due to overly optimistic expectations for Federal Reserve interest rate cuts in 2024. Anticipated to remain in a broad range above 3.7% but below 4.3% well into Q2 based on the technical backdrop.
31. Uptrend and Tactical Pullback: The semiconductor index remains in an uptrend, but a tactical pullback is likely in Q1 into Q2. Overbought weekly momentum indicators suggest a potential peak, especially near the 161.8% extension level of the 2022-2023 trading range. First support is at 3160, followed by 2848. Positive long-term outlook despite the expected short-term pullback.
32. Market Trends: The S&P 500 is likely to continue its upward momentum in the short term, supported by positive economic data, lower inflation, and moderating interest rates. The current trend suggests higher prices as the prevailing market sentiment.
33. Fed Policy: The Federal Reserve is expected to consider rate cuts in the coming months, with market expectations reflecting potential cuts in March and May. The Fed's cautious approach indicates a desire for greater confidence in inflation moving toward the targeted 2%.
34. Inflation and Rates: The falling inflation and lower interest rates are contributing to higher valuation multiples in the market. However, the timing and degree of rate cuts could impact the market trend, and strong economic data may influence the Fed to move slower in implementing rate cuts.
35. Economic Outlook: Signs of an economic soft-landing and the potential for fiscal stimulus ahead of the election may contribute to continued market growth. The fading dominant opinion of a mild recession developing suggests a shift in economic expectations.
36. Longer-Term Risks: The data points to potential longer-term risks in 2025, reminiscent of the late 1960s, where inflation spiked, stocks declined, and aggressive Fed tightening triggered a recession. Monitoring inflation and the Fed's commitment to keeping it lower becomes crucial in avoiding prolonged high inflation.
37. AI and Productivity: The data suggests that AI could be a potential productivity-enhancer, supporting more rapid economic growth and earnings growth. This could lead to higher stock market prices in the longer term.
38. FOMC Meeting Reaction: The initial reaction to the recent FOMC meeting indicates slightly lower expectations for a March rate cut. The market remains focused on upcoming economic data, particularly the January ISM Manufacturing and Services surveys, and the January jobs report, which could influence Fed expectations and market sentiment.
39. Q4 Earnings Season: While 72% of companies have beaten downwardly revised estimates, the overall earnings surprise is negative, reflecting q/q earnings decline. Mega-cap Tech dominance is a key theme, with positive surprises in earnings growth, but weak initial reactions may indicate a high bar for results.
40. Market Support Levels: S&P short-term support levels to monitor include ~4800, 4790, 4710, and 4600. These levels represent horizontal support, moving averages, and retracement levels, which could impact market movements.
41. Rotation in the Market: There is a potential rotation in the market, with equal-weighted S&P 500 showing relative strength coming down to support. Monitoring the development of a base or uptrend in relative strength will be essential to assess broader market participation, especially considering the performance of mega-cap Tech stocks.
42. U.S. Stock Markets: Large-cap benchmarks reached new highs, but small-caps struggled. The S&P 500 and Dow Jones hit intraday highs, but small-cap indexes recorded losses. Narrow advance with the equal-weight S&P 500 falling and the small-cap Russell 2000 declining. Fourth-quarter earnings reports and economic data influenced market movements.
43. U.S. Federal Reserve and Interest Rates: Fed Chair Jerome Powell indicated a reduced likelihood of a rate cut in March. Futures markets lowered the probability of a rate cut to 20.5% after strong job data. Labor Department reported 353,000 nonfarm jobs added in January, influencing the rate cut outlook.
44. Manufacturing Sector in the U.S.: Positive revisions to January gauges indicate healing in the manufacturing sector. Benchmark 10-year U.S. Treasury note yield rose after the jobs report but ended the week lower. Lower-than-expected borrowing needs figures and positive flows benefited the municipal market.
45. European Markets: Pan-European STOXX Europe 600 ended roughly flat. Major stock indexes in France, Germany, and the UK showed mixed performance. Eurozone avoided a recession in Q4 2023; inflation slowed.
46. Bank of England (BoE) and UK Housing Market: BoE held interest rates steady but signaled openness to policy easing. Net mortgage approvals for house purchases rose in December, indicating potential stabilization.
47. Japanese Markets: Nikkei 225 and TOPIX Index rose, supported by strong corporate earnings. 10-year Japanese government bond (JGB) yield fell, influenced by a robust JGB auction.
48. Bank of Japan (BoJ) and Manufacturing Conditions in Japan: BoJ expressed confidence in achieving price stability, signaling normalization. Manufacturing conditions weakened in January, with declines in output and new orders.
49. Chinese Markets: Shanghai Composite and CSI 300 faced significant losses, driven by economic concerns and property sector issues. Mixed economic data in January showed improvement in manufacturing but continued challenges in the property market. China Evergrande ordered to be liquidated, raising concerns about the financial system and housing industry confidence.
50. Other Key Markets: Colombia: 2024 Financing Plan revealed disappointing numbers, including a wider budget deficit. Hungary: National Bank of Hungary reduced policy rates, citing widespread and persistent disinflation.

Previous update:

1. Soft Landing Scenario: The data strongly supports the idea of a soft landing for the U.S. economy. Key indicators such as the S&P PMI data (both services and manufacturing) and fourth-quarter GDP growth exceeding expectations indicate that the economy is not softening as it enters the new year. The positive surprise in economic growth and signs of moderation in inflation contribute to the confidence in a soft landing.
2. Financial Market Performance: The "Goldilocks" outcome of better-than-expected growth and easing inflation is expected to support financial markets broadly. The S&P 500 has already reached new all-time highs, and there is likely to be some downward pressure on interest rates. Historically, markets tend to perform well during a soft landing, especially as the Federal Reserve pivots to rate cuts.
3. Interest Rate Trends: The data suggests that the Federal Reserve may consider rate cuts in response to the positive economic indicators and the moderation in inflation. The expectation is for three to four rate cuts in 2024, with the first cut possibly starting closer to June. The Fed's approach is seen as a balanced one, moving rates lower gradually to monitor the impact on the economy while ensuring inflationary pressures continue to ease.
4. Market Returns: Historically, when the Fed initiates a rate-cutting cycle and the economy is not in a recession, markets tend to perform well. The average 12-month return after the first Fed rate cut in periods of no recession has been around 7.6%. The positive economic data in the U.S. suggests a soft landing, which could bode well for market returns as the Fed pivots to rate cuts.
5. Market Leadership Shift: The returns in the previous year were driven by a narrow set of stocks and sectors. Returns ahead may be driven by a broader set of market leadership. Market volatility is seen as an opportunity to position for broader leadership in both equities and investment-grade bonds as the Fed embarks on its rate-cutting cycle.
6. Federal Reserve Meeting Expectations: The focus is on the upcoming Federal Reserve meeting on January 31. While the market has priced in about six Fed rate cuts in 2024, the Fed's likely approach may involve acknowledging progress on both growth and inflation but pushing back somewhat on the aggressive rate cuts priced into the market. The expectation is for three to four rate cuts in 2024.
7. Geopolitical Fragmentation Impact: The ongoing geopolitical fragmentation, particularly in Asia and the Middle East, is expected to contribute to elevated inflation pressures in the long term. Recent events, such as Yemen's Houthi militants attacking Red Sea shipping, highlight potential disruptions to supply chains and increased production costs. This geopolitical fragmentation is identified as a structural market risk that may persist, affecting global trade and supply chain dynamics.
8. Market Performance and Rate Expectations: Despite geopolitical tensions, U.S. stocks reached record highs, and the S&P 500 closed at its highest level. The U.S. 10-year yield rose above 4.10% as markets priced in fewer Federal Reserve interest rate cuts, but there is still an expectation for about six quarter-point cuts. The quick shift in rate expectations underscores the importance of managing macro risk, and the market pricing of rate cuts is considered by some as overdone.
9. European Central Bank and Bank of Japan Policy: The European Central Bank will likely hold rates steady at its upcoming policy meeting. In contrast, the Bank of Japan faces pressure to tighten its ultra-loose policy. The decisions of these central banks are anticipated to have implications for global monetary policy and market dynamics.
10. Rewiring of Globalization: Geopolitical fragmentation is seen as a key factor contributing to persistent inflation pressures and policy rates staying above pre-pandemic levels. The rewiring of globalization along geopolitical lines is expected to continue, with "connector" countries like Mexico and Vietnam potentially benefiting from competition between geopolitical blocs. However, significant investment in critical infrastructure is deemed necessary for these benefits to materialize fully.
11. Impact on Different Sectors: Companies that prove resilient to shifting supply chains and those benefiting from robust industrial policies, such as the U.S. Inflation Reduction Act and CHIPS and Science Act, may gain a competitive edge. The economic and market impact of geopolitical fragmentation will depend on whether changes to the global order are managed or disorderly. The risks include potential disorderly changes leading to greater geopolitical volatility, affecting global supply chains and increasing the risk of violent conflicts.
12. Expectations for 2024: The outlook for 2024 includes expectations of deeper fragmentation, heightened competition, and less cooperation between major nations. The rewiring of globalization is anticipated to benefit certain countries like Mexico and Vietnam. Additionally, increased investment is expected in advanced technology, clean energy, defense, and other sectors deemed critical to a country's economic and geopolitical goals.
13. Mega Forces Impacting Investing: Geopolitical fragmentation is identified as one of five mega forces, alongside demographic divergence, digital disruption and AI, the future of finance, and the transition to a low-carbon economy. These mega forces are considered significant drivers of macroeconomic and market volatility, influencing long-term growth, inflation outlook, and profitability across economies and sectors. Investors are advised to track and navigate these mega forces for potential opportunities and risks.
14. Credit Markets: Despite the fastest interest rate hike in 40 years, credit markets have remained calm, with narrow spreads and increased appetite for riskier credit. Economic growth surprises to the upside, and the outlook for corporate earnings has improved, contributing to corporate creditworthiness. Corporate borrowing at historically low rates and extended debt maturity profiles have helped control interest costs despite rising rates. Most credit risk, including potential Commercial Real Estate (CRE) defaults, is concentrated in privately owned firms rather than publicly traded corporations. The system appears less rate-exposed, and the risk of increased stress in credit markets may rise if a sustained expansion phase without higher inflation and interest rates is unclear.
15. Equity Markets: The U.S. equity market experienced a turbulent move higher but closed 2023 on a positive note. The first year of the new cyclical upturn faced challenges due to skepticism, concerns over Fed rate hikes, and geopolitical conflicts. The market is expected to march forward, but a more sustainable move may require specific conditions to fall into place. Factors influencing equity market sentiment include monetary policy clarity, the potential for a soft landing in the economy, a durable earnings recovery, positive inflow into equities, and broader stability. The market is beginning the new year with a focus on rate cuts, and valuations have become more elevated.
16. Oil Prices: Despite ongoing geopolitical tensions, world oil prices have remained relatively stable, with a decline observed since the start of the Israel-Hamas conflict. The anomaly in oil prices is attributed to deflation in China, stagflation in Europe, and the emergence of the U.S. as an energy superpower. The U.S.' energy transformation, with a significant increase in oil production since 2005, has mitigated geopolitical risks in the Middle East. The U.S.' energy security contributes to global economic stability, lower inflation expectations, and positive outlooks for global earnings and capital markets.
17. Investment Implications: Portfolio considerations include maintaining a balanced approach with a focus on quality assets. While optimistic about peak rates and inflation being behind, a diversified investment approach is deemed prudent. The potential for increased stress in credit markets is highlighted, and a focus on quality assets is recommended. The outlook for Equities remains positive, but caution is advised until it becomes clear that a new expansion phase can be sustained without risks of higher inflation and interest rates.
18. Cash on the Sidelines: Over the past 18 months, around $1.3 trillion has flowed into money market funds, driven by attractive yields offered by these funds. The influx of funds is partly from U.S. bank saving accounts with an average yield of 0.58%.As money market yields remain high and inflation cools, investors face the decision of whether to maintain cash holdings or explore opportunities in riskier assets. The total balance in money market funds is now nearly $6 trillion. If inflation continues to ease and interest rates remain steady in the near term, there might be a shift from money market funds to higher-yielding and potentially higher-growth assets, as investors seek alternatives to cash.
19. Equity Markets: The S&P 500 Index returned 26% in the previous year, reaching the levels of late 2021.Despite the recent rally, the cumulative return for 2022 and 2023 was 3.37%, emphasizing the challenges equities face during periods of Fed rate hikes and inflation fighting. The market's recent optimism is built on expectations of aggressive rate cuts, a strong economy, low inflation, and easy financial conditions. The market's reliance on optimistic expectations might lead to a test of important support levels if these expectations are not met. A pullback in the S&P 500 Index towards key support levels is considered likely.
20. Fixed Income: The bond duration exposure has been shifted to neutral in early January. A neutral duration position is chosen to remain flexible as interest rates may move lower or higher. Anticipation of a tale of two halves in 2024 for interest rates: moving lower in the first half and higher towards the year-end. Investors are advised to consider a neutral duration position to navigate potential changes in interest rates. The story of interest rates in 2024 is expected to involve fluctuations, and flexibility in fixed income strategies is recommended.
21. Real Assets - Copper and Industrial Metals: Expectations for higher copper prices in 2024 due to an improving U.S. economic outlook, but China's economy plays a crucial role. China's economic indicators, such as the Leading Economic Index, show signs of slowing, impacting copper prices. Neutral stance on copper and industrial metals, with a close watch on China's economic performance. Economic indicators from China will be closely monitored, and if signs of weakness persist, there may be a downgrade in the outlook for Industrial Metals.
22. Venture Capital: The venture capital (VC) asset class is experiencing a decline in investor sentiment, with a significant drop in fund closings and raised capital in 2023. Dry powder in VC reached $600 billion as of October 2023, indicating a more competitive fundraising environment and a trend toward greater investment discipline. There is also a growing interest in artificial intelligence (AI) as a secular trend in VC investments. The VC landscape is becoming more competitive, and investors should expect increased scrutiny, valuation discipline, and a focus on proven track records. Trends such as AI could present compelling investment opportunities in the VC space.
23. Shipping Costs and Freight Rates: Global shipping costs are likely to continue rising, primarily driven by the attacks near the Suez Canal and the drought-related issues in the Panama Canal. The Drewry World Container Index indicates a significant increase in spot shipping costs.
24. Impact on Corporate Sectors: The shipping disruptions will have varied effects on corporate sectors. Global shipping companies may benefit from higher freight rates, while logistics and air freight companies could also see positive impacts. On the flip side, companies facing higher transport costs and delivery delays may experience challenges.
25. Supply Chain Disruptions: Companies operating on a "just-in-time" basis, like auto manufacturing, may face temporary shortages due to shipping delays. This could lead to production halts and potential stockouts, affecting sales.
26. Inflationary Pressures: The rise in shipping costs could contribute to inflation, especially in Europe, which is most affected by the Red Sea attacks. However, the direct impact on inflation may be mitigated if some companies are reluctant to pass on higher costs to consumers.
27. New Risks: While the recent disruptions haven't had a significant impact on financial markets, there is a potential for increased inflation and challenges to global supply chains. The resilience of equity markets may be tested if disruptions persist.
28. Geopolitical Risks: The situation near the Suez Canal involving Houthi attacks and potential escalation in the Middle East conflict, particularly with increased Iranian involvement, poses a risk to regional energy supplies. This could lead to a surge in oil prices, contributing to inflation globally.
29. Market Sentiment: Despite the disruptions, markets currently seem to believe that the Houthi attacks will recede with the involvement of warships from the U.S. and UK. However, ongoing disruptions in key waterways could impact inflation and global supply chains, challenging the recent narratives of a soft landing and declining inflation.
30. Market Trend and All-Time Highs: The S&P 500 has broken out to new all-time highs, which historically has resulted in above-average 12-month returns. The technical signal is bullish, and the upward momentum since late October is expected to continue.
31. Underlying Factors for Market Rally: The current market rally is underpinned by factors such as easier Fed expectations, lower interest rates, and supportive economic data. The prediction is that equities can climb higher over the next 12 months as the Fed is expected to cut rates, bond yields trend lower, and potential economic weakness remains mild.
32. Pragmatic Approach Recommended: Despite the positive outlook, caution is advised, and a pragmatic approach is recommended. The expectation is that there might be some digestion of market strength after reaching new highs. Volatility in factors supporting the market's climb, such as Fed messaging and economic data, is acknowledged.
33. Earnings Season Analysis: The Q4 earnings season has seen sub-standard results overall, with only 64% of companies beating bottom-line estimates. Technology, however, has shown positive sequential earnings growth. Price reactions to earnings announcements have been mixed. The market's run since late October has set a high bar for results, and corporate guidance has not changed dramatically.
34. Interest Rates and Inflation Influence: Easier Fed messaging and supportive economic data have led to lower interest rates, positively impacting equity market valuations. The expectation is that this trend will continue, contributing to positive market returns over the next 12 months.
35. Market Uncertainties: While economic variables are on a better path, the prediction is that there could be bumps along the way. Geopolitical tensions, such as those in the Red Sea affecting shipping costs, are cited as potential disruptors to the current trajectory of economic data and market sentiment.
36. Technical Indicators: Positive intermediate-term technical indicators, such as equal-weighted Consumer Discretionary vs. Staples and the breakout of semiconductors to new highs, are noted as favorable signals for the market.
37. Tech Dominance: Technology mega-caps dominated performance in 2023, and they maintain their strength in 2024. However, the expensive valuation of these companies emphasizes the importance of meeting or exceeding expectations in earnings reports to sustain outperformance.
38. Market Rotation: The equal-weighted S&P 500, small caps, and sectors that were left behind in the previous year are showing signs of price improvement. The durability of this market rotation is under scrutiny, with a focus on whether these sectors can build and maintain relative strength.
39. U.S. Economic Outlook: Manufacturing activity shows signs of improvement, particularly with a rebound in the S&P Global flash manufacturing index entering expansion territory. Business spending is picking up, and overall business conditions are strong as evidenced by orders for nondefense capital goods and the GDP growth estimate of 3.3% for the fourth quarter.
40. Interest Rates and Bonds: The upside surprise in weekly jobless claims balanced strong economic readings, keeping the benchmark 10-year U.S. Treasury note yield relatively unchanged for the week. Positive risk sentiment supported the performance of the high-yield bond market.
41. Europe: European stocks rose, with the STOXX Europe 600 Index ending higher on encouraging corporate results and additional stimulus measures announced by China. The European Central Bank (ECB) kept interest rates unchanged but hinted at a more dovish outlook, acknowledging the disinflation process and noting that risks to economic growth remained tilted to the downside.
42. Japan: Japan's stock markets declined, but the Bank of Japan (BoJ) maintained its ultra-accommodative stance, including its forward guidance. Governor Kazuo Ueda indicated progress toward sustained inflation, raising expectations for a potential shift in monetary policy. The spring wage negotiations are underway, with a focus on inflation-beating wage hikes.
43. China: Chinese equities advanced after the People's Bank of China (PBOC) announced measures to support the economy, including a cut in the reserve ratio requirement and lower interest rates for specific loans. Chinese regulators removed draft rules on online video games, alleviating concerns in the gaming sector.
44. Other Key Markets: In Mexico, inflation for the first half of January exceeded expectations, driven by higher costs of agricultural products. In Turkey, the central bank raised its key policy rate to address inflation pressures, while noting improvements in external financing conditions and exchange rate stability.
45. Global Economic Trends: The data suggest a generally positive outlook for the global economy, with strong business conditions, improving manufacturing, and central banks adapting their policies based on economic indicators. Inflation remains a focal point, with central banks taking measures to address inflation pressures while considering broader economic factors.

Previous update:

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.