STOCKS GONE WILD: This Hasn’t Happened Since 2004!

Santa Claus gave bigger and bulkier gifts than usual last year while bestowing outsized gains to practically any index fund investors and adding extra window dressing to fund managers’ full-year financials. It felt euphoric while it was happening, but investors now have to weigh the implications of a less-than-ideal risk/reward balance.

Granted, the last couple months of the year are supposed to be bullish with seasonal trends typically indicating gains for the S&P 500 in November and December. This time around, however, the so-called “Santa Claus rally” started extra early and didn’t stop until the year was in the history books.

Sure, stocks fell during the first few trading sessions of 2024, but don’t let recency bias distract you from the unbelievable performance of the stock market lately. Going into the end of 2023, the S&P 500 went up nine weeks in a row.

If that doesn’t sound like an unusual occurrence, consider that this was the S&P 500’s longest weekly winning streak since 2004. A pullback in early 2024 based on investors engaging in some justified profit-taking would only be natural after a rally of this magnitude and duration.

There’s another way to look at it, though. From a big-picture perspective, the S&P 500 had two “lost” years from late 2021 to late 2023. The index ended up right back where it started during that period.

Still, the late 2023 performance of large-cap stocks can’t be ignored. The market is sending a clear message of optimism although prudent investors might question whether this message is the right one.

Beyond the unreliable force of November and December seasonal patterns, it’s not difficult to figure out what prompted the Santa Claus rally. The market decided that the Federal Reserve will lower interest rates half a dozen or more times in 2024.

This conclusion wasn’t derived from anything Federal Reserve Chairman Jerome Powell specifically said, nor did it come from the Fed’s dot plot, which indicated three interest rate cuts in 2024.

Plus, there’s another assumption baked into large-cap stock prices: that the so-called “Magnificent Seven” companies, such as NVIDIA, Microsoft, and Alphabet/Google, will continue to grow their earnings at a record pace based on the generative A.I. trend.

At this point, there’s no denying that only a handful of technology stocks held up the large-cap stock market indices last year. Believe it or not, the Magnificent Seven’s combined market cap is four times the size of the entire Russell 2000 small-cap index.

It’s not unlike the tech bubble of 1999 and the first half of 2000 when Internet stocks had sky-high valuations and mainstream media pundits predicted that they would just keep going up. In hindsight, it’s obvious that this trend wasn’t sustainable.

Today, we don’t have the benefit of hindsight when it comes to the pervasive and seemingly failsafe generative A.I. trend. Remember that a trend feels like it will never end until it inevitably does.

Moreover, today’s economy and markets are quite different than they were in 2004 during the prior 9-week S&P 500 winning streak. The U.S. didn’t just embark on a cycle of raising interest rates in 2004, and there were no cracks in the foundation from a year and a half of elevated borrowing costs.

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    In contrast, there are cracks in the economic foundation today. You saw what happened to regional banks last year, and commercial real estate is in crisis mode. America’s offices are the emptiest they’ve been since 1979 with nearly 20% of office space in major U.S. cities remaining unleased as of late 2023.

    Nevertheless, Treasury Secretary Janet Yellen already declared that a “soft landing” has been achieved, and analysts are predicting a bullish year for large-cap stocks. Bear in mind that these are the same analysts who predicted a down year for the S&P 500 in 2023, but the actual outcome was the complete opposite.

    In addition, economists expect large-cap U.S. companies to post robust profit growth in 2024. Somehow, S&P 500 companies’ earnings are expected to increase 11.1% overall this year even though they only increased 3.1% in 2023.

    The supposed logic behind this is that forward earnings growth needs to be enough to support lofty valuations in large-cap stocks. Valuations are definitely lofty, with the S&P 500 trading at 19.8 times forward 12-month earnings estimates versus the long-term average of 15.6 times.

    That’s not how it works, though – they can’t just assume robust future earnings growth because that’s needed to justify current S&P 500 valuations. Earnings are based on corporate sales versus expenditures and not what’s required to fit the market’s narrative.

    As Sameer Samana of the Wells Fargo Investment Institute summed it up, “The market trading where it is at current levels demands earnings to show strong growth next year.” When investors start making demands to companies, it’s a tale that likely won’t have a happy ending.

    Feel free to celebrate a rare stock market event that hasn’t occurred in nearly 20 years. Gifts were bestowed and celebrations were had, but the year-end holiday fun must now give way to a harsh dose of reality.

    Prosperous Regards,
    Kenneth Ameduri
    Chief Editor,

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