All Is Calm, All Is Bright

Dec 18, 2023

By Pete Biebel, Senior Vice President, Senior Investment Strategist
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At last week’s U.S. Federal Reserve (Fed) Open Market Committee meeting, the combination of the Committee’s policy statement and its “Dot Plot” spread tidings of comfort and joy. Stock market averages and bond prices, which had already been in impressive uptrends, spiked even more steeply higher. It’s beginning to look a lot like Christmas in both the stock and bond markets. The Dow Jones Industrial Average (DJIA) hit a new all-time high. Both the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) reached new highs for the year and are within a whisker of their record highs of a couple years ago. SPX had its seventh consecutive weekly gain, its longest such stretch in six years. The rally in bonds has pushed the yield on U.S. 10-year Treasury notes from its October peak near 5% down to 3.91%, near four-month lows. For investors, it’s a beautiful sight, they’re happy alright, workin’ in a market wonderland.

The stock market has had a great year in just the past seven weeks. And it doesn’t show signs of stopping. With already low unemployment and declining inflation, the Fed’s indication that it expects to cut its benchmark lending rate several times next year had all the bulls singing “Hallelujah!” The major averages all gained between 2.5% and 3% for the week. Prices of longer-dated Treasury bonds rallied nearly 5% over the five sessions. Even the much-maligned Real Estate sector got back into the black for the year with a gain of a bit more than 5.5% last week. Let nothing you dismay.

Among the market averages, the embodiment of Rudolph the Red Nose Reindeer is the Russell 2000 Index of small-cap stocks (RUT). As that index wallowed through late-summer and early-fall, all of the other averages used to laugh and call it names. But, since late-October, RUT has been guiding the sleigh. Again last week, and in spite of a loss of 0.77% on Friday, RUT led the pack higher with a 5.7% net gain. RUT has pranced up by more than 21% since its October 27th low.

Recent weeks have also brought good tidings to another area of the stock market that had been underperforming through the first 10 months of the year. Portfolios and funds that focus on stocks of companies that have a record of paying and increasing their dividends through the years have been a reliable and a relatively conservative investment approach for decades. However, in 2023, owning a simple index fund would have handily outperformed the dividend strategy. One fund, which holds only stocks of companies that have increased their dividend every year for at least 25 years, has averaged better than a 10% gain per year for the past 10 years. This year, that fund was down 6.5% at its October low. At that point, SPX was up more than 7% for the year while COMP had gained nearly 21%; the conservative approach was on the naughty list. Thankfully, in the seven weeks since then, the fund has gained about 14%.

The improving prospects for an economic soft landing next year had been making spirits bright in recent weeks, fueling the “everything rallies” markets that we’ve enjoyed since late October. Last week’s news from the Fed was the icing on the cake, leaving investors feeling joyful and triumphant. But can the news now get any more bullish? Can the good tidings get any better? Will we be able to repeat the sounding joy? Have investors perhaps grown a little too joyful and triumphant?

‘Tis the season for making a list and checking it twice. Analysts up and down Wall Street have been hard at work generating their prophecies for 2024. So far, most predictions for next year have SPX ending the year somewhere between 4500 and 5000. Even the top end of that range represents less than a 6% gain from Friday’s close. That’s not much reward for taking equity market risk when short-term Treasuries are yielding about 5%. And that’s only if the rosy outlook for inflation, interest rates and earnings comes to pass. Perhaps all the joy and triumph are already priced into the stock market.

SPX ended last week just below 4720. It and all the other indices are well into overbought territory on both a short-term and an intermediate-term basis. SPX has not been so overbought short-term in more than three years. When the index was this extremely overbought in September 2020, it took the index more than two months before it was able to reach a higher high. It would be reasonable to expect a little backsliding this week. If the market is going to post a positive return during the traditional Santa Claus rally period (the last five trading days of the year and the first two of the New Year), then it should work off some of the overbought condition this week. SPX could settle back into the 4600s without doing any technical damage. However, though it seems unlikely, if SPX falls below 4550, that would restore the visions of sugar plums in the eyes of the bears.

This week’s calendar of economic reports is nearly empty through the first half of the week. All the meaty reports come on Thursday and Friday, when offices on Wall Street will be nearly empty.

May your days be merry and bright, and may all your Christmases be white. Happy holidays to you and yours!

Economic Calendar (12/18/23 – 12/22/23)



Monday 12/18/2023 Home Builder Confidence Index, December



Tuesday 12/19/2023 Housing Starts, November, M/M



Building Permits, November, M/M



Wednesday 12/20/2023 Existing Home Sales, November, M/M



Thursday 12/21/2023 Initial Jobless Claims



Continuing Claims



Gross Domestic Product, Q3, Annual Rate



Philadelphia Fed Manufacturing Survey, December



U.S. Leading Economic Indicators, November, M/M


Friday 12/22/2023 Durable Goods Orders, November, M/M



Durable Goods ex-Transportation, November, M/M



Personal Income, November, M/M



Personal Spending, November, M/M



Personal Consumption Expenditures Price Index, November, M/M



Core PCE, November, M/M



New Home Sales, November, M/M



Consumer Sentiment, December




Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market