Stocks peak about every 36 years, most recently in 1929, 1965, and 2000. This 36 year cycle can be traced all the way back to the earliest eras in recorded human history, back to Pythagoras and Plato and the Axial Age around 600BC. After each peak comes a period of decline (punctuated by bear market rallies) that typically lasts 16 years or so. Then, with the excesses of the prior bull period wrung out and investors most depressed, the next 20-year run to the next market top can begin.
Howdy, Bull-Riders:
As we come to the end of the year, company news flow shrinks sharply. They enter a blackout period when they can't buy back stock and don't want to comment on how their December quarter is going, unless it is much better or much worse than what they've said previously. With the companies mum, brokerage firm conferences stop.
At the same time, Wall Street gets ready for the annual tsunami of pension fund cash from corporations – yes, that's still a thing – by buying stocks before their customers can. All eyes turn to bigger news, primarily economic. Since last Thursday we've gotten November payrolls, the November Consumer Price Index, and a Fed meeting – all good news for stocks. Let's dig in...
November Payrolls
Payrolls added 199,000 versus the +180,000 forecast and +150,000 in October as striking auto workers and Hollywood actors came back to the workforce. September and October were revised down again – for the 11th straight month - but this time by only about 36,000. The Bureau of Labor Statistics models may finally have caught up with reality.
The unemployment rate dropped from 3.9% in October to 3.7% while the worker participation rate increased slightly from 62.7% to 62.8%. Annual wage inflation, which the Fed watches closely, held steady at 4% in November.
The message to the Fed and the markets was the economy is not falling apart but also not wildly overheating. Soft landing, anyone?
November Inflation
The headline year-over-year Consumer Price Index declined to 3.1% and the core (ex-food and energy) came in at 4.0%, both as expected. The entire rise of the Core CPI was due to cars and housing.
h/t @fundstrat
If Shelter was 0%, both the headline and core month-over-month CPI would be way negative . But Shelter shouldn't be zero, it actually should be negative to match real rent deflation in November. In other words, we already have deflation in November but it is masked by the badly lagging Shelter cost data. Chairman Powell knows this and that the services figures are distorted by car-related services. Powell explicitly acknowledged that non-housing service disinflation progress has become significant.
The November CPI shows why the Fed could cut rates, but the shelter component is still giving them an alibi to keep rates high. As I've been saying, “high (but not higher) for longer.”
The Fed
Chairman Powell, December 1: “It would be premature to … speculate on when policy might ease.”
Chairman Powell, December 13: Rate cuts are something that “begins to come into view” and “clearly is a topic of discussion.”
Is this an election-year rate cut projection? I don't think Powell cares about elections, the level of the stock market, or anything but inflation as measured by the core Personal Consumption Expenditures Index and the value of the dollar relative to other currencies.
So on Wednesday, as I expected, the FOMC held rates steady at a 22-year high, extending the pause, and retained a weak tightening bias in the statement. They now expect inflation to fall to 2.4% next year - down from 2.5% forecast in September - and drop further to 2.2% by 2025.
The Dot Plot shows a median projection of three rate cuts in 2024. One FOMC member expects six rate cuts in 2024, four see four cuts, six project three cuts, five see two cuts, one thinks one cut, and two expect no cuts. That is the most confused “year ahead” FOMC we've seen in years.
h/t @NickTimiraos
After the dovish FOMC meeting, Fed Funds Futures are now pricing SIX rate cuts in 2024. That's a total reduction of 150 basis points to a range of 3.75% to 4.00% that is expected to begin in March. I think that's nuts, but so much for the Dot Plot suggesting three cuts and the futures market caring at all.
As I see it, real interest rates – the amount by which they exceed inflation - are the highest in this cycle while Quantitative Tightening continues. What else could Powell want? He loves sounding dovish when he isn't – it keeps Senator Warren and her ilk off his back. As he said about the last mile of getting inflation down: “We kind of assume it will get harder from here, but so far it hasn't.”
Powell made it clear the Fed wouldn’t wait until inflation gets all the way down to 2% to start cutting.
"It would be too late," he said. "You would want to be reducing restriction on the economy before you get to 2%…so you don’t overshoot."
Personal Consumption Expenditures Index
The Fed’s favored inflation measure — the core Personal Consumption Expenditures index — was 3.5% for October, down from 3.7% in September and 4.3% in June. The November PCE announcement comes December 22. Based on the November CPI and PPI, headline PCE inflation likely declined last month. Core PCE inflation is projected to have been a very mild 0.06% in November. This could lower the 12-month core PCE index to 3.1%. The 6-month annualized rate would fall to 1.9%, below the Fed's target.
h/t @NickTimiraos
The news of lower inflation and a strong economy is being met with more optimism from the market now. We have not seen this before in this cycle – fear of the Fed after every bit of good news has been replaced by hope for a stronger economy. The latest University of Michigan consumer sentiment survey showed consumers expect inflation to sit at 3.1% in a year, a big decrease from last month's expectation of 4.5%. That's the lowest since March 2021 and only slightly above the 2.3% to 3.0% range seen in the two years before the pandemic. Expectations for long-run inflation fell to 2.8%, down from November's 3.2%, which was the highest reading since 2011.
h/t @OphirGottlieb
Market Outlook
The stock market has been up for seven straight weeks. After the Fed meeting on Wednesday, Powell's press conference unleashed historic devastation on the net-short hedge funds. There were margin calls galore into the close. The venerable Dow Jones Industrial Average closed at a new all-time high as it surpassed 37,000 for the first time ever. The S&P 500 added 2.9% since last Thursday and is up 22.9% year-to-date. Not bad!
The Nasdaq Composite also gained 2.9% and is up a stunning 41.0% for the year. Thank you, AI! The SPDR S&P Biotech Exchange-Traded Fund (XBI) climbed 6.2% to tell the world the biotech bear is over (see chart below). It is only up 3.0% year-to-date, but it's on a roll. The small-cap Russell 2000 soared 7.1% to close over 2,000 and is up 13.6% in 2023. 2024 should be much better.
The fractal dimension signaled a new uptrend a few weeks ago and nailed it. We probably have six to eight more up weeks before the inevitable next consolidation.
Economy
Yesterday morning, the Atlanta Fed's GDPNow model increased its forecast for December quarter real GDP to +2.6% due to big increases in personal consumption expenditures growth, domestic investment growth, and government spending growth.
Coming Events
All times below are ET, and most presentations and slides are archived on the companies' websites so you can listen to them.
Thursday, December 21
September quarter GDP - 8:30am – Third estimate
Winter Solstice - 10:27pm
Friday, December 22
Personal Consumption Expenditures Index - 8:30am
Gold dipped below $2,000 but quickly recovered, and then jumped after the Fed meeting. Kuppy wrote:
“Headlines You Don't Want to See at Breakouts”
“Gold is trying to work off one of the nastiest wicks and technical damage I’ve seen in a while as traders went stop hunting on last Sunday night. KEDM started getting bullish on the pet rock on October 1 when GC was in the low 1800s.
“While the fundamentals still stand with CBs (i.e. China) hoovering it up, caution must be heeded after this week (even if we aren’t chart monkeys!)...and especially as it received the kiss of death on Barron's this week...”
The gold fractal dimension is just about to fall through 55, signaling a multi-month uptrend that will attract the Commodity Trading Advisers and other momentum players. New highs a-comin'.
Bonus Content
I just posted the new issue of Biotech Moonshots on Substack. The 2 ¾-year biotech bear market ended with a bang on October 27. Next, the strength in the XBI will spread down to the smaller companies. Now is the time to get onboard!
Golden Age Portfolio Update
This was a very good week for the portfolio as it gained another 3.4%. We're now up 60.7% with much more to come. Let's dig in...