“An economic ‘soft landing’ appears to be in the cards.”
The U.S. inventory market’s year-end rally seems intact.
Lately I’ve been targeted on fairness hedge-fund efficiency and the need of hedge-fund managers to protect and improve returns forward of their Dec. 31 incentive payment calculation dates. Funds that haven’t but closed their books are on a “beta chase” to be able to protect efficiency bonuses.
Meanwhile, small-cap shares are staging upside breakouts from multi-month bases throughout a seasonally constructive interval for the group. Further progress will verify the bullish prognosis for these shares, which might spark a FOMO stampede.
In addition, bitcoin
BTCUSD,
is a real-time proxy for monetary system liquidity and it’s nonetheless rising, indicating sturdy market “animal spirit” exercise. Even although I’m a cryptocurrency skeptic, bitcoin could have extra room to rally. Jurrien Timmer at Fidelity Investments has a fair-value estimate for bitcoin, and bitcoin costs are transferring into that vary.
In quick, the underpinnings of the Santa Claus rally look stable.
The challenges of 2024
Looking to the brand new 12 months, traders and merchants are listening to calls to take earnings in response to the sturdy fairness rally from the October low. Yet remember that the newest BoA Global Manager Survey doesn’t present the fingerprints of a significant market prime. While the chance ranges of worldwide establishments are normalizing, readings usually are not a crowded lengthy and fairness weights can rise a lot additional earlier than they attain a crowded lengthy situation, which might be contrarian bearish.
Here is the large image from a macro perspective. The U.S. market is discounting U.S. Federal Reserve fee cuts anticipated within the first quarter of 2024. Both “recessionistas” and bears have pushed again in opposition to the bullish Fed rate-cut narrative on the premise that cuts will solely happen in response to slower financial progress and a doable recession. But quite a few Fed audio system have underlined the message the Fed can minimize charges if inflation have been to fall.
An financial “soft landing” seems to be within the playing cards. The Atlanta Fed’s GDPNow nowcast of fourth-quarter 2023 GDP progress is 2.8%, which is nowhere close to recession territory.
Key dangers
My sunny outlook doesn’t come with out some dangers. For occasion, FedEx’s
FDX,
most up-to-date earnings report contained a recession warning: “U.S. package volume was down 3.5% in the November quarter, on a down 15.1% year-ago comp. In other words, the two-year volume trend is deeply negative, and worse than last quarter. So much for improving box demand…”
In addition, the inventory market has been supported by sturdy monetary liquidity. One key announcement to observe is the Quarterly Refunding Announcement (QRA) in late January, by which the U.S. Treasury proclaims its deliberate issuance. Despite the ballooning federal deficit and robust financing necessities, the Treasury has been issuing way more payments than coupon-bearing paper. The less-than-expected coupon provide supported bond costs, which in flip supported fairness valuations.
Moreover, extra T-Bill issuance has lowered the degrees of reverse repos on the Fed, which has the impact of boosting liquidity to the banking system. The short-term destiny of the Treasury and inventory markets will dangle within the stability on the subsequent QRA.
Still, each my inner-investor and inner- dealer at the moment are bullishly positioned. My inside dealer anticipates that he’ll begin to take earnings in early 2024, but general I’m short-term bullish on equities. The U.S. inventory market might even see some choppiness within the new 12 months as hedge-fund flows dry up, and from requires revenue taking. But the macro outlook is constructive and traders ought to get pleasure from a good 12 months in 2024 for fairness returns.
Cam Hui writes the funding weblog Humble Student of the Markets, the place this text first appeared. He is a former fairness portfolio supervisor and sell-side analyst.
More: This record-setting inventory market rally resides on borrowed time
Also learn: Ed Yardeni: 12 causes inventory traders will see the S&P 500 hit 5,400 in 2024
Source web site: www.marketwatch.com
