December 5th, 2023
Mediocre 493 to Match Magnificent 7?
It’s no secret that the stock market’s gains year-to-date have been unevenly distributed. So much so, that the 7 companies responsible for most of the market’s performance have earned the title “the Magnificent 7”. These stocks – Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla – are collectively around 30% of the S&P 500 index weight and nearly 50% of the Nasdaq 100 Index weight. They are also responsible for nearly all the year-to-date gains in those indices.
Until November’s rally, the rest of the S&P 500 could be referred to as the ‘Mediocre 493’. Having done next to nothing all year it’s encouraging to see that much of the rest of the market has started to see some positive movement. And, there is more fuel left in the tank if investors embrace the Fed’s “soft landing” narrative.
More than 40% of S&P 500 companies are trading well below their respective 200-day moving averages – deeply discounted, with substantial upside potential for further breadth expansion. So what could trigger investors to spread the love beyond the Magnificent 7 and into their neglected counterparts? Earnings haven’t convinced investors, as they have been strong across the board all year long, and broadly improved in the third quarter. Unfortunately, we will likely need a shift in messaging from the Fed to convince investors to get on board with the Mediocre 493.
Fed members have completely dismissed the idea of rate cuts while some Fed members have even expressed a desire to hike rates further. The market’s expectation, reflected in Fed Funds Futures, is that the Fed will in fact cut rates as soon as March but with high likelihood come Q3 or 2024. While analysts at ING predict the Fed will deliver six rate cuts in ’24 as a result of economic slow-down, amounting to 150 basis points in cuts. UBS sees even more aggressive cuts, saying slow economic growth could drive the Fed to cut rates by 275 basis points by the end of 2024. This disconnect is nothing new, the market didn’t believe that the Fed would go as high as it did for most of the rate hike cycle – and yet, here we are. With data showing more and more convincing evidence that inflation is decelerating – and in some subcomponents, declining – it’s hard to argue with the market’s refusal to buy what the Fed is selling (no rate cuts soon). The Fed hasn’t stated it wouldn’t cut rates; it simply said it needs to see convincing evidence that inflation is on the path back to 2% before cuts are discussed. Having said that, even a slight shift in messaging to convey that discussion of cuts is on the table would be a cause for massive celebration in equity markets. At this point, until we hear it from the horse’s mouth, all we can do is speculate.
When the Fed will change its narrative is anyone’s guess but with economic data suggesting that we can continue to hold off a recession for at least a few more quarters, it seems that we have bought enough time for the Fed to officially end its aggressive rate hike cycle. With that being the case, well diversified investors holding the neglected segments of the market, the Mediocre 493, should be handsomely rewarded for their patience.
With this being my final Market & Economic Update for the year I want to send you my sincere gratitude for your readership and support. AllOneWealth stands for more than money. We believe investing is a vehicle for advancing society – voting with your shareholder dollars – when we recognize the powerful connection between company strategy, social purpose, and economic value.
Sending you and your family a wonderful holiday season and a happy New Year.
Interested in learning more? Schedule a call with me HERE.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Economic Update
PCEInflation Data, Manufacturing Data, Fed Member Changes Tune, Durable Goods, & China Property Crisis
Market Update
Global Equities: US equities closed out their best month of the year in November and added to those gains on Friday to begin December on solid footing. Rotation out of tech and into the neglected segments of the market was the theme. The Dow Jones Industrial Average finishing the month up 8.77%, the S&P 500 finished up 8.65% and the Nasdaq leading the pack up 10.32% gain. Developed international stocks were up 8.81% while Emerging Markets gained 7.09%.
Economic Update
PCE Inflation: The Personal Consumption Expenditures Index came in flat for the month of October at an annual rate of 3.0%. The Core measure, ex-food and energy, was 0.2% for the month and 3.5% year-over-year. The Fed has noted that looking at 3 or 6 month annualized inflation is a better metric, and those numbers are getting very close to the Fed’s 2% target at around 2.5% for Core PCE. The data is just the latest in a string of easing inflation readings and is making the Fed’s “higher for longer” narrative a tough sell as investors believe the Fed will begin cuts by May at the latest and possibly as early as March.
Charts of the Month
S&P 500
Our first chart is a look at the S&P 500 showing an image of strength as markets look to push even higher in December – give the market its desired ‘Santa Claus Rally’.
Russell 2000
Our next chart is a look at the Russell 2000 as a perfect representation of how the majority of companies have done next to nothing this year. As the Fed’s narrative changes we’d expect to see this charge change dramatically in 2024.
S&P 500 – McClellan Oscillator
Our final chart is of ther S&P 500 and ‘market breadth’, the term for more evenly distributed stock market gains. You can see the poor breadth reflected in the McClellan Oscillator, which measures momentum in the ratio of advancing to declining stocks. Breadth improved in June and July to carry the market to its peak, before deteriorating as the market rolled over and entered a significant downtrend. With November’s breakout, we can see that the McClellan Oscillator is once again firmly positive, and the gains have been more evenly distributed within the S&P 500.
