Markets and Madness of Crowds

By Jeff Kelly on December 15, 2023

“To believe in yourself, to believe in one another, that’s fundamental to being alive”.

-Ted Lasso

I believe what Ted Lasso says, belief in yourself and one another IS fundamental to being alive. I’ve been very fortunate this week to spend some time with my new granddaughter, Louise. There’s nothing like spending some time with a beautiful baby to make one want to believe in humanity. It makes me want things to be normal, safe, sane, and rational. We are a long way from most of those descriptions. Sometime in the future we’ll need to believe in one another again. Sometime in the future we’ll banish the extremes to their rightful place on the scrap heap of history. For now, however, they remain as the impediment to a better, safer, and saner world.

The markets are seeing no impediments to higher prices. A curious statement and press conference from the Fed Chairman set off an unprecedented spate of buying in both stocks and bonds. I say curious because the statement was very different from what he said a mere 3 weeks ago. From an economic and data point of view little has changed. But, according to the Fed Chairman inflation is fixed, all is well, and we can cut rates in 2024. History says the Fed moves to rate cuts because the economy has slowed. Rate cuts are made to stimulate the economy. At some point it’s likely equities will appreciate the need for rate cuts does not immediately translate to better earnings or sales. But that’s out in the future.

It is currently difficult to find any fault with the market performance other than it may be too far too fast. We have seen many positive signs over the past 3 weeks. We’ve seen breadth get much better. We’ve seen lagging groups such as small caps and financials make major moves higher. Small caps went from a 52-week low to a 52-week high in 6 weeks. That’s never been done before in market history. When things happen, that never happened before it’s time to take notice.

Corporate bonds also made their biggest two day move since the pandemic. Lots of good news out there about the market’s performance. It’s a good time to remember this quote:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” 

-Charles Mackay

With all the terrific market performance, why do we need to cut rates? Perhaps the chart of the delinquency rates at Discover Card can give us some clues.

All credit card companies are experiencing similar delinquency rates. They are at levels not seen since we exited the great financial crisis. It’s great to enjoy the market performance but we need to keep our wits about us as we enter 2024. More on that next week. For now, enjoy the rally, it may go even further after a short rest. Have a terrific weekend.

CHARTS FROM THE WEEK PAST

20-day highs have surged.

This surge exceeds the rally at midyear.

IWM, small cap ETF, from 52 week low to 52 week high in 6 weeks.

Never in history has this occurred.

Asking rents post the biggest decline in over 3 years.

Great for inflation.

19% of S&P 500 members made a new 52-week high yesterday … largest share since May 2021.

Financial conditions are much easier despite no rate cuts yet.

Can they cut rates with conditions this easy without creating inflation?

The most call buying in history yesterday.

U.S. PMI fell to 48.2 vs. 49.4 in Nov; Services up to 51.3 vs. 50.8 prior; Composite up to 51 vs. 50.7 prior … quicker upturn for Composite driven by sharpest increase in new orders since July; cost pressures gained momentum as input prices increased.

Market has moved in big chunks this year, now at over bought extremes.

Interesting how badly CEO Business confidence predicts the S&P 500 performance.

They do not look ahead but simply mimic the index performance.

Rail traffic intermodal units up 8.2% on the week.

US finished goods PPI at very low levels.

Big premiums currently to buy vs. rent.

There is an average of 100 days and a 5% S&P 500 gain between the last rate hike and 1^st rate cut.

The time will be longer in this cycle.

Below is the number of days from 1^st rate cut to market low.

It’s normally 213 days and -21.3% in S&P 500 performance. Certainly not what the current market expects.

JP Morgan sees a higher VIX (volatility) in 2024.

Foreign investment in China falls for the 1^st time ever.

A big deal in my opinion.

Spending card data is still lower.

China falling into deflationary territory.

Inflation as measured by CPI down in both Europe and the U.S.

U.S. Equity Investment sentiment getting extended.

Goldman sees global manufacturing likely bottoming.

In Phoenix, investors in 2022 purchased as many as 50% of the houses in some zip codes.

Even higher in some Atlanta zip codes.

An Alphabet (Google) company, Deep Minds, just discovered 380,000 new materials-now is researching them. What a world.

A Google DeepMind AI Just Discovered 380,000 New Materials. This Robot Is Cooking Them Up.

Churchill needed a note from his Doctor to be able to drink when he visited America during prohibition.

WEEKEND HOMEWORK

1932 was a big year of change in America.

Will 2024 be similar?

An enthralling slice of history with contemporary resonance, this unique account examines the most transformative year in American history — when a battered nation would emerge from the Great Depression and reinvent itself under the skilled leadership of President Franklin Delano Roosevelt.

In one vitally significant year in American history, the country would experience turmoil, instability, natural disaster, bubbling political radicalism, and a rise of dangerous forces ushering in a new era of global conflict – and emerge both afresh and revitalized.

At the start of 1932, the nation’s worst economic crisis has left one-in-four workers without a job, countless families facing eviction, banks shutting down as desperate depositors withdraw their savings, and growing social and political unrest from urban centers to the traditionally conservative rural heart of the country.

We all have lots of things to do and get done this weekend. Take care of it all and take care of yourself too. Get outside! Have a great weekend.