The U.S. stock market’s year-end rally seems to be holding strong. As a copywriter, I’ve been closely monitoring the performance of equity hedge funds and their managers’ efforts to maintain and improve returns before the December 31 deadline for calculating incentive fees. Funds that haven’t finalized their books are currently engaged in a “beta chase” to ensure performance bonuses.
Meanwhile, there’s positive news in the small-cap stocks arena. These stocks are experiencing upside breakouts from multi-month bases, and this favorable trend is expected to continue throughout the season. Further progress in this area will confirm a bullish outlook for these stocks and potentially incite a FOMO (Fear Of Missing Out) buying frenzy.
Another noteworthy indicator of market activity is Bitcoin. While I personally remain skeptical of cryptocurrencies, Bitcoin’s value continues to rise and serve as a real-time proxy for financial system liquidity. This suggests robust market “animal spirit” activity. Interestingly, Bitcoin may still have room for further growth as its prices align with Jurrien Timmer’s fair-value estimate at Fidelity Investments.
All in all, the underlying conditions for a Santa Claus rally appear solid.
The Challenges Awaited in 2024
Looking ahead to the new year, investors and traders are being advised to consider taking profits in response to the strong equity rally that has persisted since October. However, it’s important to note that the latest BoA Global Manager Survey does not indicate signs of a major market top. While risk levels among global institutions are returning to normal, the readings do not suggest an overcrowded long position in equities. This means that equity weights can still rise significantly before reaching a crowded long condition, which would indicate a contrarian bearish stance.
Taking a macro perspective, the U.S. market is currently factoring in expected rate cuts by the U.S. Federal Reserve during the first quarter of 2024. Skeptics and pessimists have challenged the bullish narrative surrounding these rate cuts, arguing that they would only occur in response to slower economic growth or a potential recession. However, numerous representatives from the Federal Reserve have emphasized the possibility of rate cuts if inflation were to decrease.
All signs point to an impending economic “soft landing.” The Atlanta Fed’s GDPNow nowcast predicts a fourth-quarter 2023 GDP growth rate of 2.8%, which suggests that a recession is not on the horizon. Key Risks
The optimistic viewpoint I hold comes with its fair share of risks. In the most recent earnings report from FedEx (FDX, -0.42%), a recession warning was highlighted. It stated that U.S. package volume experienced a 3.5% decline in the November quarter, with a significant 15.1% drop compared to the previous year. This negative two-year trend in volume indicates a worsening situation, even worse than the previous quarter. It seems the hopes for an increase in box demand have been dashed.
Additionally, the stock market’s strength has been supported by robust financial liquidity. A significant announcement to keep an eye on is the Quarterly Refunding Announcement (QRA) scheduled for late January. During this announcement, the U.S. Treasury unveils its planned issuance. Despite the growing federal deficit and substantial financing requirements, the Treasury has been focusing on issuing more bills rather than coupon-bearing paper. This unexpected shortage of coupon supply has bolstered bond prices and consequently supported equity valuations.
Furthermore, the increased issuance of T-Bills has resulted in reduced levels of reverse repos at the Fed. This reduction has effectively boosted liquidity within the banking system. The outcome of the Treasury and stock markets in the short-term will depend on the next QRA.
However, both my inner-investor and inner-trader are currently positioned optimistically. My inner trader expects to start making profits in early 2024, but overall, I am bullish about equities in the short term. Although the U.S. stock market may experience some volatility in the coming year due to hedge-fund flows drying up and profit-taking initiatives, the overall macro outlook remains positive. Investors should anticipate a promising year in 2024 in terms of equity returns.
More: This stock market rally, which has broken records, is facing an uncertain future.
Also read: Ed Yardeni: 12 compelling reasons why stock investors should expect the S&P 500 to reach 5,400 by 2024.