US Stocks: Is the Bull's Run Hitting A Wall Soon?
Thomas Johannes Look
Capital Management (up 37,12% full year 2023, up 72,73% in 2024, as of 14 December), Corporate Advisory & Digital Publishing
A Year-End Rally And Then?
Salve, cari subscripti!
Thank you for reading this week's edition of Closelook@US Stock Markets, dated November 17, 2024 👋. The next edition will be published on November 24, 2024.
A Closelook At This Edition
1) This Week's Action: The Fading Trump Rally
Last week was the opposite of the week before. The weekly performance of all US stock markets was miserable.
Weekly Performance Summary
The R2K index was the worst-performing index, losing four percent. The Nasdaq lost about three percent. Losses for the SP 500 and the DJIA were more modest.
Selling pressure increased when Chair Powell indicated that the Fed was in no hurry to lower rates. Options expiration on Friday added to the increased volatility.
The bullish channel of the SP 500 is still intact. The same is true for the Nasdaq 100 index.
While the Nasdaq 100 did make a new high during the Trump election week, the Nasdaq 100 Tech index did not.
The same applies to the various semiconductor indices. These non-confirmations are bearish signs.
The R2K touched the ATHs seen in 2021 and gave back part of the gains. It may try again during the seasonally strongest 3-month calendar year period - November, December, and January.
The Dow Jones Industrial Average also made a new high, which the Dow Jones Transportation Index did not confirm.
If not confirmed quickly, this would be quite a bearish divergence, which may signal a more than short-term top.
Equity volatility stayed at normal levels. I expect the VIX to mostly trade between 10 and 20 until the end of the year.
Bond yields increased in the week but stayed inside the 4.25 - 4.50 % yield range. The TLT ETF closed around 90 USD.
Bond volatility moved up. I expect bond volatility to stay elevated for the time being.
I also expect bond vigilantes to stage another attempt to move the bond yield firmly above 4.50 % in the weeks ahead. Last week’s statement stays valid.
US presidents come and go, but this election may matter more than other ones. Why? Because there will be structural credit and deficit troubles ahead in the US, and how they are addressed will significantly impact whether we will have mediocre stock market returns in the next 10 years (the Goldman Sachs view) or (close to) double-digit annual returns (Ed Yardeni’s roaring 20s concept).
I anticipated a top in the TLT based on better-than-expected economic indicators rather than the beginning of another debt crisis like the one that occurred from August to October 2023.
I firmly believe that when the bond markets start to worry deeply about the federal deficit and debt and bond vigilantes push them south, moving prices of the TLT ETF to the bottom or even below its multi-month trading range, the stock market bull will end abruptly.
Like in 2016, gold fell on the Trump victory news. The uptrend in pace since early 2024 was broken.
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Silver exhibited similar price action and also moved lower. The trend in place since early 2024 has not yet been violated.
(2) US Economy: Another Fed Pivot
Federal Reserve Chair Jerome Powell is not known for his dancing skills, but he has once again demonstrated his ability to adjust monetary policy with precision.
In his prepared remarks for a speech to business leaders in Dallas on Friday, Powell stated that "the economy is not sending any signals that we need to be in a hurry to lower rates."
This stance aligns with the Fed's recent actions, which began on September 18 when they reduced the federal funds rate (FFR) by 50 basis points, a move that some considered too aggressive at the time.
The Fed continued this trend on November 7, cutting the FFR by another 25 basis points. However, Powell is now cautioning against expectations of immediate further rate cuts.
Last Thursday, during his press conference, he indicated that the FFR was still somewhat restrictive and needed to be adjusted to the neutral rate. While many Fed officials may agree with this assessment, they seem less urgent about making these adjustments.
This could mean there might not be another rate cut at the upcoming Federal Open Market Committee (FOMC) meeting on December 17-18.
The latest analysis from Ed Yardeni's "Nirvana Model" suggests that the unemployment and inflation rates indicate that the current FFR is already at or near the neutral rate.
In the meantime, there are expectations of a potential "Santa Claus rally" in the S&P 500, which could push the index to 6100 by the end of the year.
Ed Yardeni's "Nirvana Scenario"
Ed Yardeni's "Nirvana Scenario" or "Nirvana Model" is a conceptual framework that describes an ideal economic state where several favorable conditions converge. Here are the key elements of this scenario:
Low Inflation
The model predicts a slowdown in inflation, a critical component for economic stability. This slowdown is expected to occur without the economy entering a recession, a scenario often seen as a trade-off in monetary policy.
Economic Growth
The Nirvana Scenario involves continued economic growth. This growth is sustained without high inflation pressures, creating a balanced economic environment.
Moderate Interest Rates
The model implies that interest rates, particularly risk-free rates like those on 10-year Treasury notes, remain at levels that support economic growth without fueling inflation. This balance is crucial for maintaining investor confidence and stable financial markets.
Low Unemployment
A vital feature of the Nirvana Scenario is low unemployment rates. This condition is bullish for the stock market, as it indicates a strong labor market and overall economic health, provided it is not accompanied by rising inflation.
Investor Optimism
Yardeni's Nirvana Scenario suggests a period of investor optimism, where the combination of low inflation, economic growth, and stable interest rates creates a favorable environment for investments, particularly in the stock market.
In summary, the Nirvana Model represents an ideal economic state where inflation is under control, the economy is growing, unemployment is low, and interest rates are moderate, all contributing to a stable and favorable investment climate.
Fed Model
The Fed Model, also known as the Fed's Stock Valuation Model, is a valuation tool that compares the forward earnings yield of the stock market (typically the S&P 500 Index) to the yield on 10-year U.S. Treasury bonds. Here are its key points:
Key Differences
While both concepts are associated with Dr. Ed Yardeni, they serve different purposes and operate within various contexts.
(3) US Stock Market Seasonality: Riding the Bull in November, December, and January
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Great analysis, thanks for sharing!