Intraweek Financial Markets Newsletter: NASDAQ 100 Reaches BRAND NEW ATH (All-Time High

Welcome to a midweek edition of OVOM Research weekly markets newsletter. Quite frankly after the prior CPI inflation came in above consensus, I thought the 2023 story is essentially written and it’s time to look ahead to 2024. I thought as the NASDAQ 100 reached an all-time high today, I’d share some quick thoughts since I haven’t in a couple weeks.

Part 1: US Equity Market Overview

Below is my usual 2023 YTD, weekly, monthly, etc. performance tables of major US equity market indices, as well as a breakdown of the S&P 500 by market segment and the “Magnificent Seven”. This week I also included the 2023 YTD performance of 10 ETFs I think will are important to watch heading into 2024. To be clear, that definitely isn’t to say I’m bullish on them, but I think they’re all pretty relevant areas of the market to watch for global financial market participants. As it relates to the US equity market, you’ll note this past week saw major US equity indices all saw positive gains, but we did see market breath widen and mega-caps actually almost all finished down for the week.

Note: Below performance is through Saturday December 10th, 2023

US Equity Market: 2023 Bottom Line

Another week, same exact story as the previous few weeks and even months. The S&P 500 has been led by FANG+ mega-cap segments (XLK, XLC, & XLY). While market leadership is broadening, the 2023 YTD gains are almost exclusively from the high growth, large-cap indices. Lastly, it appears that there is continuing to be strong inverse correlation between where large-caps in the S&P 500 go intraday based on where the 10YR US Treasury yield is going. We expect to see that dynamic change as bad news should start getting treated increasingly like bad news – compared to the “bad news is good news” storyline we’ve seen a lot of this year. In other words, the more economic activity continues to decline, the more likely we think the inverse relationship between the S&P 500 and 10YR yields to subside.

For 2023, I think it’s safe to say the theme of the “Magnificent Seven” and the AI/semiconductor bull run will go down as the number one highlight of the 2023 US equity market summary.

Intraweek Update: December 20th, 2023

While all US equity market indices have been outperforming and certainly what I’d consider benefactors of the ‘Santa Claus rally’ across risk assets, high growth, large-cap, and mega-cap tech really have been the story all year and it’s only appropriate 2023 ends with the NASDAQ 100 reaching a brand new all-time high.

Part 1.1: US Bond Market Proxy Indices Do Not Appear to Agree with the Level of Complacency in the US Equity Market

VIX (S&P 500 expected 30-day volatility) is most popularly compared to MOVE, which is a US bond market volatility proxy. As the first two charts below show, VIX has never been this disconnected from MOVE since its introduction in 2002.

Furthermore, while there may be better gauges of financial conditions than the Chicago Fed’s index, which is a pretty broad measure of financial conditions whereas other indices are more focused on yields and fixed income market dynamics, we nonetheless see a disconnect between the Chicago Fed’s financial conditions index and VIX. Similar to the disconnect from MOVE, this implies US equity market participants are currently complacent relative to history (as the chart below demonstrates).

I made this final chart of the section awhile ago, but it still serves a purpose in my view. It’s a good reminder to US equity market participants of what might happen in a worst case scenario. What we know from history is once downside protection becomes desirable, it gets super expensive extremely quick. With the amount of capital at stake in the US equity market, it truly is surprising there’s this little interest in downside protection to this point. I guess we’ll ultimately see if it winds up being regretted by market participants this cycle.

Note: VIX is on a monthly scale below. Therefore, the peak values reached during recessions and/or times of heightened market risk are lower in the chart below than on a daily/weekly scale. For reference, VIX got up very close to 80 at the peak of the 2008 GFC.

Part 2: Historically Reliable Leading Economic Indicators Continue to Point AWAY From “No Landing”

I have some better charts and data I’ll share in my last weekend newsletter of the year, but I wanted to focus on two main points here: the inverted yield curve and The Conference Board 's 10 Leading Economic Indicators (LEIs) index. When it comes to the Conference Board, as the charts below show every time the LEIs index was at the current level, a “hard landing” US recession arrived in less than 12-months. The 2008 GFC is the longest lagging recession that would come close to the current cycle from the Conference Board’s perspective, which is just to say the more we see those leading economic indicators deteriorate, the harder the landing has been historically.

There’s obviously much more to say about the yield curve, but as many know the 10YR-2YR inverted yield curve is 10/10 in predicting recessions and while we’ve seen more bear steepening lately, it’s still inverted. Additionally, the Cleveland Fed – in addition to the NY Fed, SF Fed, & other regional’s – have been using the 10YR-3M yield curve in this cycle. The Cleveland Fed’s recession probability spiked in April 2024 at nearly 80% and is still very elevated relative to history where it usually only needed 40% to forecast a recession 12-months out. Worth noting the Cleveland Fed’s recession probability model is built predominantly on a 10YR-3M yield curve inversion model.

Part 3: If A Deflationary Recession Occurs in 2024, We Would Notice it Beginning in the US Labor Market

I wanted to start with the below chart because I think it’s important to understand what labor market indicators to look for and when. For example, weekly initial claims typically rise prior to recession, whereas the popularized US unemployment rate begins materially rising when the US economy is already in recession. To be clear, weekly initial claims are still below recession estimates, even with the labor market shortage of this cycle. Based on that and the combination of other data, we believe the US labor market is resilient for now, but that’s likely to end the further we see disinflationary forces from the most aggressive hiking campaign in US Fed history settle into the real-time US economic data.

Below we see a combination of critical, leading economic data for the US economy and how the US unemployment late is related. When small business employment begins to deteriorate, history suggests the broader labor market is not far behind. The same thing with delinquencies, as the US unemployment rate and delinquencies both rise into a recession. Finally going back to the 10YR-2YR inverted yield curve, we know yield curves steepen into recession and the unemployment rate rises into recession. Even though we’ve observed bear steepening and that makes me skeptical the yield curve is steepening in a recessionary way, but nonetheless history shows the positive correlation noted below.

One final chart specific to the US unemployment rate. You’ll notice the US unemployment rate is clearly structurally cyclical – like the US economy – and below it shows a rolling 6-month moving average. Ex-mid-1990s, which is a well-known “soft landing” exception of the US Fed hiking, there are no other times when it looks like the US unemployment rate begins ‘taking off’ like below, then suddenly declines without rising into a US recession. We don’t believe the macro landscape is at all similar to the mid-1990’s for too many reasons to list here, however point being we don’t think it’ll wind up working differently to any other prior cycles that followed the current path into recession.

I’ve shared this chart many times by now but I really think this metric might coincidentally hold. I measured when the 10YR-2YR yield curve began to steepen and the US unemployment rate began to rise. Comparing when that occurred in the current cycle to the prior six, the average historic recession timeline would put this cycle’s recession ETA at the very end of May / early June 2024. We shall see.

Thank you so much as always to anyone who took the time to read and participate in my weekly markets’ newsletter. Hope you enjoyed my market update and if you have any questions, feedback, concerns, etc., please don’t hesitate to email me at:

oliver.loutsenko@ovomresearch.com

Best of luck to all market participants this upcoming week!

Disclaimer: The information and publications are not meant to be, and do not constitute, financial, investment, trading, or similar advice. The material supplied is not intended to be used in making decisions to buy or sell securities, or financial products of any kind. We highly encourage you to do your own research before investing.

Disclaimer: Returns from ETFs do not match the index they’re meant to track on a 1:1 scale. ETFs contain shares of securities comprising a given market metric an ETF is tracking and the composition of the ETF is often not identical to the index its tracking. For example, SPY (SPDR S&P 500 ETF) tracks the S&P 500. A committee ultimately agrees on the companies from the S&P 500 included in the ETF, using guidelines including liquidity, profitability, & balance.