Two
weeks
in,
the
year’s
first
act
is
playing
pretty
close
to
the
bull-market
script.
After
a
nine-week
sprint
higher
to
finish
2023,
bull
and
bear
alike
pointed
out
the
tape
was
overheated
and
stretched,
and
it
has
duly
cooled
off
with
a
two-week
pause
that’s
kept
the
S
&
P
500
just
a
half-step
below
its
record
high
of
two
years
ago.
There
has
been
some
payback
for
the
November-December
rip
below
the
surface.
The
small-cap
Russell
2000
has
dropped
close
to
4%
against
a
fractional
gain
in
the
S
&
P
500
year
to
date.
ARK
Invest
,
proxy
for
lower-quality
high-beta
tech,
is
more
than
12%
off
its
late-December
high.
This
was
necessary,
predictable,
and
very
likely
unfinished.
What
we
know
about
the
kind
of
rare
breadth
and
momentum
scores
achieved
by
the
surge
off
the
October
lows
are
this:
The
forward-return
implications
going
out
several
months
or
a
year
are
quite
positive
based
on
history,
yet
the
near
term
often
features
some
backsliding
and
sloppy
profit-taking.
This
chart
from
Ned
Davis
Research
shows
that
the
all-in
rally
to
end
2023
was
a
worldwide
affair,
taking
92%
of
all
national
stock
markets
above
their
50-day
average,
and
during
the
recent
market
pause
“hardly
a
dent
has
appeared
in
the
breadth
numbers
that
entered
the
year
indicating
decisive
improvement
in
global
participation,”
says
NDR
chief
global
strategist
Tim
Hayes.
The
equally
weighted
All
Country
World
Index
has
appreciated
at
a
24%
annualized
pace
since
1998
when
this
gauge
is
above
75%.
As
Tony
Pasquariello,
head
of
hedge
fund
coverage
at
Goldman
Sachs,
put
it
late
last
week,
“The
setup
is
neither
all
good,
nor
all
bad,”
with
the
economy
resilient
but
stocks
far
less
depressed
and
hated
than
they
were
a
year
ago.
He
believes
we’re
operating
in
“some
form
of
bull
market,”
so
it’s
right
to
expect
further
upside
progress,
though
“2024
will
bring
a
lot
of
bump-and-grind
and
much
less
velocity
than
we
saw
circa
2019-2023.”
In
broad
terms,
the
S
&
P
500
could
retreat
to
4600
or
so
–
about
4%
down
from
here
–
and
still
be
in
a
routine
technical
check-back
to
its
latest
launch
point
in
early
December.
New
year’s
rally
pause
The
negative
return
for
S
&
P
500
over
the
year’s
first
five
trading
days
isn’t
meaningless
but
neither
is
it
a
loud
alarm,
history
showing
it
essentially
has
cut
the
odds
of
a
positive
calendar
year
from
around
70%
to
about
50%.
The
week
of
January
monthly
options
expirations,
which
is
next
week,
also
has
a
tendency
to
be
weaker
for
stocks.
Remaining
mindful
of
such
tactical
hazards
and
potential
indigestion,
a
broader
framework
has
stocks
having
made
a
two-year
round
trip
during
which
they
absorbed
500
basis
points
of
Fed
tightening,
a
mild
earnings
retreat
and
constant
foretelling
of
recession
to
emerge
into
2024
with
the
soft
economic
landing
thesis
intact
(if
unproven)
and
disinflation
unfolding
as
hoped.
.SPX
mountain
2022-01-10
S
&
P
500,
2
years
Henry
McVey,
KKR’s
head
of
global
macro,
leans
on
the
fact
that
October
2022
was
a
bear-market
bottom,
and
after
such
a
low
stocks
tend
to
deliver
above-average
returns
over
the
next
few
years.
“We
think
that
too
many
investors
are
still
locked
into
the
paradigm
that
the
S
&
P
500
is
trading
at
lofty
headline
valuations
and
the
U.S.
economy
is
topping
out
and
headed
for
a
hard
landing,”
says
McVey.
“We
do
not
see
things
this
way.”
While
not
penciling
in
gaudy
gains
at
the
index
level
for
this
year
or
U.S.
GDP
growth
to
be
brisk,
McVey
notes
reasonably
valued
equities
away
from
the
anointed
glamour
mega-caps,
and
importantly
points
out
that
none
of
the
top
25
central
banks
are
tightening
compared
to
85%
in
2022.
Meantime,
the
combination
of
merger-and-acquisition,
IPO
and
high-yield
debt
issuance
relative
to
GDP
is
running
at
the
lowest
level
since
2009.
Mergers
and
IPOs
missing
Morgan
Stanley
keeps
a
leading
indicator
of
M
&
A
activity
which
has
recently
raced
higher,
suggesting
dealmaking
–
a
recent
plot
hole
in
the
bull-market
script
–
should
reawaken
before
long.
Is
it
likely
a
bull
market
would
end
before
animal
spirits
get
mergers
and
IPOs
rolling,
with
the
average
Wall
Street
strategist
forecasting
no
S
&
P
500
upside
this
year
and
with
the
index
having
gone
nowhere
for
two
years?
Whether
the
recent
anecdotal
upturn
in
acquisition
activity
(visible
in
biotech,
energy
and
software)
picks
up
and
helps
smaller-cap
companies
resume
their
catch-up
move
versus
the
giant
growth
names
is
far
from
clear
yet.
Much
celebration
greeted
the
late-2023
ramp
in
small-caps
from
multi-decade
relative
depths.
And,
sure,
greater
confidence
in
the
economy
averting
recession
with
rates
coming
down
should
be
a
prop.
Big
money
betting
on
a
broadening
But
the
Russell
2000
in
two
weeks
has
already
surrendered
about
half
its
outperformance
over
the
Nasdaq
100
racked
up
over
the
prior
two
months.
And
I
can’t
help
noting
again
that
if
this
market
begins
favoring
the
majority
of
stocks
over
the
Magnificent
Seven
names,
it
would
represent
the
consensus
getting
exactly
what
it
wants
–
something
markets
don’t
tend
to
serve
up
on
command.
Todd
Sohn
of
Strategas
notes
that
the
Invesco
S
&
P
500
Equal
Weight
ETF
(RSP)
saw
inflows
go
vertical
last
year
to
$13.5
billion,
30%
above
its
prior
12-month
record.
The
fund’s
asset
total
is
now
$49
billion,
so
the
new
money
betting
on
a
broadening
tape
is
a
hefty
chunk
of
the
total.
It
makes
sense
to
expect
less
dominance
from
the
largest
seven
index
leaders
perhaps,
but
markets
don’t
have
to
be
zero-sum.
None
of
the
Mag7
has
a
forward
P/E
higher
than
two
years
ago.
And,
helpfully,
they’re
not
moving
as
one,
with
Apple
and
Tesla
diverging
to
the
downside
lately.
Betting
on
‘peacetime’
Fed
cuts
Right
or
wrong,
the
market
debate
right
now
can
never
get
far
before
turning
into
a
Fed-policy-path
discussion.
Last
week’s
CPI
and
PPI
data
added
to
the
market’s
collective
conviction
that
inflation’s
downside
momentum
is
strong,
opening
the
way
for
“peacetime”
Fed
rate
cuts.
We
know
Fed
Chair
Jerome
Powell
has
acknowledged
there
would
be
easing
well
before
the
2%
PCE
inflation
target
is
met,
to
ensure
policy
doesn’t
grow
too
restrictive
with
a
current
Fed
funds
rate
of
5.25-5.5%.
We
know
the
Fed
views
2.5-3%
Fed
funds
rate
as
“neutral,”
and
that
its
members
median
forecast
pencils
in
three
quarter-point
rate
cuts
this
year
even
though
they
did
not
foresee
the
2%
target
being
reached
until
at
least
2025.
All
of
this
points
to
easing
ahead.
Now,
the
Fed
funds
futures
market
is
pretty
sure
it
will
start
in
March
and
now
prices
in
a
total
of
150
basis
points
of
cuts
by
the
end
of
2024.
(1
basis
point
equals
0.01%)
This
is
the
supposed
mismatch
in
Fed-vs.-market
expectations
that
more
cautious
or
hard-to-please
observers
cite
as
a
major
possible
source
of
market
dislocation.
But
beyond
a
couple
of
months
Fed
funds
futures
pricing
is
pretty
unreliable,
capturing
a
wide
range
of
potential
hedging
and
speculative
scenarios
that
get
priced
along
a
spectrum,
and
the
market
will
tend
to
over-extrapolate
at
times.
For
now,
though,
the
reassuring
trend
of
inflation
ebbing
more
quickly
and
convincingly
than
the
labor
market
and
consumer
are
weakening
remains.
The
Fed’s
stated
willingness
to
try
to
accommodate
a
soft
landing
(such
as
in
1995
with
just
a
couple
of
rate
cuts
as
the
economy
reaccelerated)
is
also
a
psychic
backstop.
A
lot
can
go
wrong,
including
deeper
consumer
fatigue
(discretionary
stocks
have
traded
poorly
for
three
weeks)
or
a
gathering
layoff
wave
that
imperils
the
growth
side
of
the
soft-landing
thesis.
But
just
because
the
S
&
P
now
trades
near
4800
again
and
the
Fed
funds
futures
market
contemplates
six
rate
cuts
this
year,
doesn’t
mean
that
the
former
has
occurred
because
of
the
latter.
