This morning, we received a few notable reports on the economy, the first of which will be noted by the Federal Reserve. At 8:30 A.M. (EST), the Labor Department reported that initial jobless claims for the week ending December 23rd totaled 218,000, which was up 12,000 from the prior week’s revised tally. Meanwhile, continuing claims came in at 1.875 million, which continues to run below the two-year high mark of just above 1.9 million. Both readings were indications that labor conditions remain tight, ahead of several important reports on the jobs market next week, including the December employment and unemployment data on January 5th.
We also learned this morning that the U.S. trade gap was $90.3 billion in November, the biggest deficit since July. The trade gap data was not expected to have much of an impact on the direction of trading. A half-hour into today’s session, we will receive pending home sales data. The equity futures are presaging a mixed opening to the trading day stateside, but much like yesterday with none of the major averages likely to be too far removed from the neutral line.
The penultimate trading day of 2023 will begin with the major equity averages looking to finish off a very successful 12-month campaign for stocks on a high note. The S&P 500 Index begins today’s session just 0.3% below its all-time high. The recent buying, though continuing to be led by the technology sector, has been more encompassing after a good portion of the gains recorded by the indexes for much of the year was powered by the so-called “Magnificent Seven” mega-cap stocks.
Igniting the rally in the previously out-of-favor sectors is the recent drop in Treasury market yields. The rate on the 10-year Treasury note fell further yesterday after the final Treasury market auction of 2023. There also is an expectation on Wall Street that the Federal Reserve is done raising interest rates and will likely pivot on the monetary policy front in 2024 and start cutting rates if inflation continues to stay on its current downward trajectory. The thought of lower interest rates next year has given a recent boost to the interest-rate sensitive small-cap sectors. Likewise, the drop in Treasury yields has led to a pickup in buying in the higher-yielding equities, like utilities. In a falling rate environment, higher-yielding equities become more appealing options for income-oriented investors.
Given the dearth of economic and earnings news this week, we don’t see anything that will put any notable downward pressure on equities and short-circuit the highly profitable year-end “Santa Claus” rally on Wall Street. There may be some tax-loss harvesting over the next two sessions (a process by which investors use equity losses to offset capital gains elsewhere and help lower their tax bills), but not enough to slow the emboldened market bulls.
Looking ahead to 2024, the continued near-term success of the market will likely depend on labor market conditions and inflation continuing to point to a picture that shows a “soft landing” for the U.S. economy. Our sense is that the market could continue to rally on hope that the Fed will lower rates later in 2024, as long as the talk of rate cuts is not prompted by a sharp downturn in the performance of the economy. We also think that the rapidly approaching fourth-quarter earnings season, which unofficially kicks off with the latest results from JPMorgan Chase (JPM) on January 12th, will play a role in the near-term direction of trading. The consensus on Wall Street is that the pace of earnings growth for the S&P 500 companies is expected to slow to the low-single-digit range after the group delivered profit growth of more than 8% in the third quarter.
Overall, with the S&P 500 Index trading at an elevated valuation following the two-month bull run to end 2023, and the expectation that earnings growth moderated over the last three months, we think the best way to participate in the ongoing stock market rally is to stick with the stocks of the high-quality companies that have demonstrated an ability to deliver steady earnings and cash flow growth. A large majority of these issues are either ranked 1 (Highest) or 2 (Above Average) for Safety™ by Value Line. – William G. Ferguson
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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