Opinion: What to expect after the Santa Claus rally
“An economic ‘soft landing’ appears possible.”
The US stock market’s year-end rally appears to be intact.
Recently I have been focusing on equity hedge fund performance and the need for hedge fund managers to preserve and enhance returns ahead of the December 31 incentive fee calculation date. Funds that have not yet closed their books are “beta chasing” to maintain their performance bonuses.
Meanwhile, small-cap stocks have been on the rise for months during the group’s seasonally positive period. Any further developments would confirm the bullish outlook for these stocks, which could trigger a rush of FOMO.
Additionally, Bitcoin BTCUSD,
It is a real-time proxy for financial system liquidity and is still rising, indicating strong market “animal spirit” activity. I am skeptical about cryptocurrencies, but Bitcoin may have more room to bounce back. Fidelity Investments’ Jurrien Timmer has a fair value estimate for Bitcoin, and the Bitcoin price is moving into that range.
In short, the foundation of the Santa Claus rally appears to be solid.
Challenges for 2024
As we head into the new year, investors and traders are hearing calls to take profits in response to the strong rebound in stocks since October’s lows. However, keep in mind that the latest BoA Global Managers Survey shows no sign of major market tops. While global institutional risk levels are normalizing, readings are not in crowded buy conditions and stock weights could rise much further before reaching crowded buy conditions, which could be a reverse downtrend.
The big picture from a macro perspective is as follows: US markets are discounting an expected US Federal Reserve (FRB) interest rate cut in the first quarter of 2024. Recessionists and bearers alike have opposed the Fed’s push to cut interest rates on the grounds that cuts would only be made in response to slowing economic growth. Possible economic downturn. But many Fed speakers emphasized the message that the Fed could cut interest rates if inflation falls.
An economic “soft landing” appears possible. The Atlanta Fed’s current GDP growth rate for the fourth quarter of 2023 is 2.8%, which is nowhere near recession territory.
main risk
My bright prospects do not come without some risks. For example, FedEx’s FDX,
The most recent earnings report included a recession warning. “U.S. package volumes fell 3.5% in the November quarter, down 15.1% year-over-year. That said, the two-year volume trend is very negative and worse than last quarter. Too much to improve box demand… ”
Additionally, stock markets were supported by strong financial liquidity. One key announcement to keep an eye on is the Quarterly Rebate Announcement (QRA) in late January, when the U.S. Treasury announced plans to issue it. Despite soaring federal deficits and strong financing requirements, the Treasury has been issuing far more paper currency than the paper it contains coupons for. Lower-than-expected coupon supply supported bond prices, which in turn supported stock valuations.
Moreover, increased T-Bill issuance has reduced the level of reverse repos at the Fed, which has the effect of increasing liquidity in the banking system. The near-term fate of the Treasury and stock markets will be decided in the next QRA.
Nonetheless, my insider investors and insider traders are now in a bullish position. My insider trader expects it to start taking profits in early 2024, but overall I’m bullish on the stock in the near term. US stock markets may be somewhat volatile in the new year due to drying up of hedge fund flows and demand for profit taking. However, the macro outlook is constructive and investors should enjoy a decent year for stock returns in 2024.
Cam Hui writes Humble Student of the Markets, the investment blog where this article first appeared. He is a former equity portfolio manager and sell-side analyst.
more: This record-breaking stock market rally is living on borrowed time.
Also read: Ed Yardeni: 12 reasons stock investors will expect the S&P 500 to hit 5,400 in 2024
