Stocks continued their climb yesterday as the merry persisted. Home prices rose a bit less than expected, but that may not last if mortgage rates continue to slide in 2024.
Into the dark. You may be surprised to learn that I don’t take much literary license when I write to you every day. The reality is that I am blessed with having an interesting enough life to have something to say 260 days out of the year. That said, let me start out with another true story. I quite literally got 2 hours of sleep last night. No, I was not partying at some EDM rave in an abandoned warehouse on the edge of a gentrified part of Brooklyn. No. I was sitting straight up on my couch… with Eloise the Cavapoo (visiting for the holidays) watching YouTube videos on Artificial Intelligence and Python programming. I was up because I had a terrible earache which woke me up at around midnight. Somehow, sitting straight up in the dark with my new best friend gave me some sort of relief. The time was productive because it did give me a chance to think about some of the projects I am working on, like a new version of my rebalancer tool, a new performance tracker, some new AI tools , the list goes on. I also thought about, as I do most nights if my sleep is disturbed, what I wanted to write about this morning. In doing so, I realized that I missed mentioning the winter solstice which occurred last week. I have to qualify that it occurred in New York, because, thankfully, I have regular readers in the Southern Hemisphere where they are on the opposite schedule. The hibernal solstice is that very moment when one of Earth’s hemispheres is at its maximum tilt away from the Sun. What that translates to is the day of the year with the least amount of sunlight.
Now, unless you are a vampire (and I believe I know a few), you would probably think that the darkest day is a negative thing. I, however, am an eternal optimist who views the solstice as a turning point at which all the days going forward will be brighter. Is that not a perfect set up for a discussion on the capital markets? Sure, it is. So, let’s go.
It is clear that interest rates have a better chance of being lower than higher by this time next year. It is also clear that if the US avoids a recession and achieves a so-called “soft landing,” that many companies will avoid financial pain. Remember, from a recent morning note that I informed you that a large gaggle of prominent Wall Street economists are predicting a 50% chance (on median) of recession, down from almost 70%; coin-toss odds are not too bad on Wall Street. That seems to me like brighter… um less-dark days ahead, but it must be qualified.
Lower bond yields can occur in 2 scenarios. First, if inflation contracts quickly, and second, if the economy falls apart (if that coin lands on the wrong side). That would cause the Fed to lower interest rates even faster than they expect to at the moment. That can be good news if you currently own bonds, as their value will go up with falling yields. But it can also be bad news if you own those bonds for their higher yield and plan to hold them to maturity at which point you will have to buy bonds with lower yields. Also, if you like keeping your investment capital in cash, those juicy money market yields are going lower, so you are going to have to come up with a more viable investment strategy than holding cash and hoping for a divine sign to get invested. If you own stocks, the story is a mixed one. If the economy remains strong and the Fed takes its foot off the brakes, your underperforming but solid value stocks will have some upside. Unfortunately, your favorite growth stocks, which have done really, really well recently, may not continue to grow at the same break-neck pace. That is only because they have already factored in the pivot. To be clear, they won’t be at a disadvantage, their growth will simply slow. However, if the economy falls into recession and the Fed cuts faster, there is the possibility that growth stocks may offer some sort of a hedge, along with the traditional interest rate-heavy sectors. But that would put your cyclical stocks at a slight disadvantage.
If you read through all that carefully, I think you would agree that the days going forward will have less darkness, but not all days will be sunny. I am willing to call that upside. There are also some other messages which I want you to come away with. If you like today’s yield environment, you will need to make some changes to lock in higher yields for longer, and your high-yielding cash will need to find somewhere else to live. Finally, and I am sure you don’t want to hear this, make sure that your equity portfolio is diversified. Oh, and I am going to the Dr. today to get the ear checked out… and need at least 5 hours of sleep to be productive .
BEFORE THE BELL
Not much to report on here as analysts are catching up on their sleep and are not likely to make any changes before the new year. Also, investment bankers have already announced all their big deals for the year and are hiding out in their vacation homes… leaving their analysts and associates to work out all the details in 90-hour work weeks . No earnings or even scandals to report. Equity futures are mixed to slightly higher, bond yields are slightly lower, and crude is slightly lower but trading in the 70s again. Tesla is the most highly traded in the premarket (by volume), which is not noteworthy because it tops the volume leaderboard most mornings.
YESTERDAY’S MARKETS
NEXT UP