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Momentum factors have performed much better in 2024, as 2023 leadership trends have mostly persisted. Momentum has generally performed well across all sectors, even within underperforming sectors. Our factor performance reports suggest that Growth sector leadership could be challenged if earnings and guidance falter.
Q4 real GDP growth revised up. Strong momentum supports continued expansion into 2024. Jobless claims remain low, reflecting robust labor demand. Consumer sentiment rises to highest level since July 2021, a positive for consumer spending growth ahead. But regional manufacturing activity worsens.
Yen recovery would test Japanese market's outperformance. Watching influence of rate differentials on yen. Also watching sentiment, Japan Composite and Japan Rally Watch.
Most indicators of financial conditions have eased over the past year. Fed rate cuts should further loosen conditions. This has been supportive of stock prices and economic growth, but makes further disinflation more difficult. It raises the possibility of fewer or later rate cuts than currently expected, and a risk of market repricing.
Recent developments show major DM central banks moving toward rate cuts. Japan remains the exception. Further normalization is expected. Contemplating further reductions in Japanese exposure.
The current strong growth/low inflation environment is bullish for stocks, especially large-caps and Growth. Overheating would favor large-caps and Value. A downshift to low growth/low inflation would favor small-caps and Value, but recession would favor Growth.
Economic growth broadens in Q4 2023 and early 2024. Recession Probability Model drops sharply. Mortgage applications remain low, amid still high mortgage rates.
Environmental Services, perhaps best known for garbage collection, is the best performing theme not influenced by Bitcoin, since the end of January.
We discuss the most notable changes in monetary policy over the past week. Global net tightening has fallen to a two year low and will likely enter equity sweet spot in mid- 2024. Emerging markets easing faster than developed economies.
Valuation metrics have indicated worsening valuation as the secular bull has continued but not near previous extremes. U.S. earnings yield is below bond yield but spread is positive using global medians. Relative valuations are less threatening than in 2000. Ratios trending higher with secular uptrend but still below 2021 highs and levels consistent with extreme optimism.
Consumer confidence remains range-bound, on worries about inflation and the economic outlook. Existing home prices mixed at the start of the year. Durable goods orders pick up, but y/y change points to subdued factory output growth. Richmond Fed regional activity continues to contract.
We continue to see a case for European small-caps but our conviction is being tested by a bearish relative strength trend. While we see improving consumer confidence as positive for smaller U.K. Consumer Discretionary stocks, fundamental and technical indicators are less constructive. An improvement in intermediate breadth would support a more bullish view on smaller U.K. Consumer Discretionary stocks.
There are plenty of reasons for the Fed to cut rates three times starting in June. But the market has repriced for that. There is too much complacency with data so close to the Fed's targets for 2024. Data dependency means data surprises have outsized impacts on asset prices.
New home sales edge down in February. Prices decline. CFNAI rebounds, but its three-month average remains consistent with subdued growth. Texas manufacturing conditions worsen.
The secular trend, which turned upward in 2009, still seems intact, but two indicators argue the trend is getting a little mature. The cyclical trend, which turned upward in 2022, also seems intact despite some divergences and extreme leadership concentration. The trend has been persistent and with decent breadth. The short-term trend is extended and subject to correction but is unlikely to be a major correction.
Weekly talking points and key visuals from NDR strategists' insights.
As part of the "Fed is now decidedly dovish" rally on March 20, the FT Nasdaq Cybersecurity ETF (CIBR) had a breadth thrust where the ratio of advancing/declining (A/D) CIBR members exceeded 25.
Markets are vulnerable to a correction, as liquidity is drained from the banking system. Continued QT and tax payments could leave the market short of cash. Four non-macro factors also warn of a possible correction.
Manufacturing PMI reaches highest level in 22 months. Inflation pressures pick up. Philly Fed factory activity expands for the second consecutive month. Expectations soar. LEI posts its first gain in two years. No longer signals recession ahead. Existing home sales jump. Jobless claims remain low.
The latest economic data from China remains constructive, led by industrial activity. This confirms our view that China poses limited downside risk to the global economy this year. However, growth likely won't overshoot due to property woes, which may not provide much impetus to China's equities or commodities.
After underperforming for most of the last year, both Energy and Materials have begun to trend higher vs. the S&P 500. The NDR Commodity Model and Crude Futures Technical Model each turned bullish in February. Energy and Materials have seen rising intra-month sector model composite scores in March and will likely both be upgraded to marketweight by the model.
Optimism excessive with fading seasonal and cyclical tailwinds. Watch breadth, leadership, concentration and the Stock/Bond Composite for signs that a downturn is underway. As long as rate cuts remain a high probability, the cyclical bull should persist. A correction would relieve the optimism and set the stage for the bull market to resume.
Fed still expects three rate cuts this year. But policy in terms of real rates to remain restrictive through 2025. Economy and labor market moving into better balance. Inflation still too high. Fed to proceed carefully. Decision on QT pace likely in May.
Q4 2023 earnings season keeps the 2024 earnings acceleration theme on track. Earnings growth is expected to be weakest in small-cap Value. 2H estimates and interest rates are two risks to EPS acceleration.
We have noticed more investor interest in CPI-sensitive themes, mainly commodity and construction-related, over the past month and since the October 2023 market low. While a reflation scenario was not in our 2024 outlook, we can shift theme overweights to be in position for rising CPI and inflation expectations if warranted.
ABI trend points to an improvement in nonresidential construction spending in late 2024. Mortgage applications edge down.
Measures of market volatility across and within asset classes are lower than they were a year ago. VIX seasonality and four-year cycle confirm the S&P 500 cycle composite for elevated volatility leading into November. Low volatility can be persistent however evidence of an overly complacent market continues to mount.
Both housing starts and permits increase in February. Near-term trends support continued economic expansion.
Wage gains in Japan fueling policy change expectations. BoJ to keep YCC for now. No major changes to the dot plot, as economy comes back into better balance. Policymakers pay more attention to anecdotal evidence than economists do.
HMI rises above 50 for the first time since July 2023. Points to stronger homebuilding activity this spring.
The Leading Indicator Model for stocks is currently bullish. Many technical indicators remain in uptrends with a few concerns. The cycle composite is showing a positive 2024 with corrections in May and September-October.
Manufacturing and mining output rebound. Gains broadens across industry groups, a positive sign for future growth. But factory activity in the Empire region slumps more than expected in March. Consumer sentiment softens slightly. Import prices rise, in line with expectations.
This week saw the third hotter-than-expected CPI report in as many months. A physical over digital theme could play out in both "higher-for-longer" and "rate-cuts fuel inflation" scenarios.
Household debt as a percentage of GDP remains in a post-pandemic downtrend. Corporate debt as a percentage of GDP is back below pre-pandemic levels. Federal deficits and debt continue to grow with interest payments rising.
Retail sales rebound from January slump, but three-month average dips. Suggests slower consumer spending in Q1. PPI inflation picks up, led be energy. Underlying pressures also firm up, implying an upside risk to consumer prices. Jobless claims show the labor market remains tight. Business inventories flat.
Seven sectors are within 5% of record highs, the most since January 2022. Breadth has been strong, led by cyclical sectors. Mega-cap trends can override breadth trends in the most concentrated sectors.
Gold records have not produced excessive optimism. Gold outlook supported by declining bond yields, weakening U.S. dollar and bullish gold models. Gold's cyclical bull gain still less than the median for a secular bull.
Profitable banks plummeted to a record low on DIF replenishment, goodwill impairment, litigation, reorganizations, loan loss provisions, and lower noninterest income. Worst efficiency ratio since the GFC. Credit card delinquencies and charge-offs slowed. CRE workouts just starting.
Volume demand and supply has been a helpful tool in a market driven by ETFs, algos, and pods. We introduce volume demand and supply indicators for Growth versus Value and small-caps versus large-caps. Demand and supply spreads favor Growth and large-caps currently.
Despite a near-term pullback on weak Palo Alto Networks guidance, Cybersecurity offers great potential with an expected long-term CAGR over 11%. The need for increased security around U.S. Presidential and other country elections creates a near-term catalyst for Cybersecurity. If near-term catalysts and long-term growth opportunities prove to be correct, this could be a buying opportunity for Cybersecurity. However, we recommend waiting for the relative strength uptrend to resume.
The fiscal/monetary policy mix matters more for the economy and markets than either policy branch alone. When both are easing, it could be a powerful boost to the economy. When growth is already above potential, as it is now, it could also be inflationary. The Fed should not be in a hurry to cut rates.
Female participation in the prime age labor force has soared all over the world, outpacing that of males. In the U.S., there's has been a notable surge in participation among Millennial women, who spend more and differently than their male counterparts. The rise in Millennial female participation should have positive implications for the economy and equities in the long-term.
The median P/E of the top 10 stocks is 14.3 points higher than the other 490 in the S&P 500. The top 10's P/E is 2.6 standard deviations above its long-term mean, but the other 490's P/E is 1.8 standard deviations above. Interest rates may determine how relevant valuations are in 2024.
CPI inflation came in slightly higher than expected in February, led by shelter, energy, and transportation services. Underlying price pressures remained sticky, with core and super-core inflation barely easing. Although markets still expect a Fed rate cut in June, the risk is of later or fewer cuts than currently priced in, if inflation pressures persist.
The strong performance of GRANOLAS has helped increase European market concentration above the highs of the dotcom bubble. However, high market concentration does not necessarily mean that European equities are heading into a bear market. And while the largest European stocks are highly rated, we are far from the valuation extremes seen at the peak of the dotcom bubble.
After years of minimal attention, NDR is returning to covering commodities. We see value in commodities along traditional finance lines like diversification and hedging. But we also see unique opportunities created by energy transition, capital discipline by mineral producers, and shifting trade alliances.
In our journey to lower yields due to a Fed easing cycle, there are short-term risks to the outlook. We identify five of them. Two are technical. But the other three are fundamental, including policy and inflation.
Three of four stock market indicators are rated bullish by the model. All three interest rate indicators are bullish. Rising crude prices could be a negative for equities.
Solid payroll gains and slower wage growth in February. The unemployment rate, however, jumps to a two-year high. This shows easing labor market tightness. But the big gap between surveys adds uncertainty about the economic outlook. This report should keep the Fed on track for a rate cut in Q2, most likely in June.
Bitcoin is now retesting its 2021 high near $67k, as we expected. However, AUM in spot Bitcoin ETFs exceeded $50B faster than we expected and we have reached our price target faster than expected.
While it's still highly likely that the Fed will cut this year, a long pause is not off the table given that economic and inflation data has been surprising to the upside. Long pauses have no definitive destiny on equities, with the current cycle following the more bullish cases. If the Fed cuts and quickly moves back to tightening, that could have negative implications for equities.
Despite an increase in layoff announcements, initial jobless claims remain low. Revisions confirm the pickup in nonfarm productivity last year. Trade deficit widens at the start of 2024, although trade with China continues to shrink. Continued deflation in wholesale used vehicle prices points to falling CPI for used cars and trucks.
Record highs reached by rising numbers of markets and sectors, accounting for majority of ACWI market cap. Optimism has gotten more extreme as new highs have increased, making a correction more likely. Japan's highs providing cyclical and secular confirmation, but yen strength would be a threat.
Focus on mega-cap tech's attribution to returns misses that most stocks are in uptrends. Complacency toward Tech Titans' EPS and NDR sentiment composites imply elevated risks of a pullback. NDR's models suggest the intermediate-term outlook is bullish.
Reducing Japan to 5% from 10%, remaining at underweight. Shifting to overweight U.S., Europe. Increasing U.S. to an overweight 58% from a marketweight 55%. Increasing Europe to an overweight 30% from a marketweight 28%. Policy normalization in Japan and rate cuts everywhere else prompt change.
New tools for Asia-Pacific market analysis include a Realized Volatility Report. Asia Pacific and China display excessive complacency. Four additional sentiment reports contribute to an aggregate score, offering a broad perspective on the region.
Private sector job growth accelerates in February, led by services and construction. JOLTS data shows labor market remains out of balance. Mortgage applications jump.
Breadth improved in February with 23 of 48 themes outperforming versus only seven in January. We saw stunning moves of 40% or more for several companies within Bitcoin, Genomics, AI and E-commerce themes. We continue to favor Tech/AI and Demographic themes while avoiding Global Shock/Environmental themes. We upgraded Millennial Spending and downgraded Uranium themes in February.
Price/earnings ratios are rising with the market rally. Price/sales rising above pre-pandemic levels. Short-term sentiment is showing more optimism.
The S&P 500 jumped 5.2% in February, with all sectors registering gains during the month. Leadership remained decidedly cyclical over defensive. The sector model continues to favor cyclical sectors. Within the cyclical group, the model favors Growth sectors over Value sectors.
The global economy continued to accelerate in February, according to the latest PMIs. Leading indicators and broadening trends among sectors and economies support the solid recovery and the current bull market in equities. The path toward disinflation has gotten tougher, which may keep central banks tighter for longer.
Services PMI shows continued but slower growth. Cost pressures ease. Light vehicle sales bounce back, but trend remains subdued. Factory orders decline more than expected.
The All-Country World ex.-U.S. Total Return Index gained over 250 basis points in February. The International Equity Core model is overweight Canada, China, Japan, and Germany, while underweighting the U.K., Australia, France, and Switzerland. The Explore model favors Brazil, Mexico, Spain, Turkey, and the Philippines.
The Catastrophic Stop model entered March fully invested. The International Equity Core model is overweight Canada, China, Japan, and Germany, while underweighting the U.K., Australia, France, and Switzerland. The Explore model favors Brazil, Mexico, Spain, Turkey, and the Philippines.
During February, global stocks outperformed U.S. bonds by more than 500 basis points. The Global Allocation model's equity weighting remains above benchmark allocation. The model has an above benchmark weighting for the U.S., while holding underweight allocations for Japan, Emerging Markets, Pacific ex. Japan, Canada, Europe ex. U.K., and the U.K.
During February, global stocks outperformed global bonds by more than 500 ba sis points. The model's equity allocation remains above benchmark weighting, with U.S. Large-Caps and U.S. Growth each receiving more than 20% allocation. The largest fixed income allocations were Emerging Market bonds and U.S. High Yield, both with more than 5% weights.
The Fixed Income Risk Management model improved during the month and entered March with a fully invested allocation to fixed income sectors. The Fixed Income Allocation model continued to favor risk-on leadership but did not rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Bloomberg Barclays U.S. Aggre gate Bond Total Return Index was down -1.4% in February and breadth weakened. The Fixed Income Allocation model continued to favor risk-on leadership but did not rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Catastrophic Stop model improved during the month and entered March with a fully invested equity allocation recommendation. Consumer Discretionary, Industrials, and Health Care joined Financials and Technology at overweight. Utilities improved to marketweight. Energy and Communication Services deteriorated and joined Materials, Real Estate, and Consumer Staples at underweight.
Breadth improved with all 11 S&P 500 sectors posting positive price gains in February. Consumer Discretionary, Industrials, and Health Care joined Financials and Technology at overweight. Utilities improved to marketweight. Energy and Communication Services deteriorated and joined Materials, Real Estate, and Consumer Staples at underweight.
A first new all-time high has not always been auspicious for European equity returns, but a series of all-time highs has been more bullish. We also focus on German equities and find a positive absolute case, but a more ambiguous relative case. A break-out in the German relative strength line and improving business confidence would suggest better prospects on a relative basis.
Bond market has mostly unwound the upside surprise in CPI. Market doesn't seem too concerned about inflation. But the bond market isn't always right, with a warning signal from the NDR Commodity Model. The real rate curve has uninverted implying no recession on the horizon.
The NDR Commodity Model improved to its most bullish reading since August 2023. The external (macroeconomic) model composite improved to its best reading since September 2021. Strong model readings and improving breadth tilt the weight of the evidence in favor of the bulls. However, sentiment returning to excessive optimism could keep a strong rally in check.
The Fab Five Composite remains in its bullish zone, supported by the tape, monetary, and combo components. Sentiment is the lone bearish component of the Fab Five currently. After four-month winning streaks through February, the S&P 500 has risen in the last 10 months of the year 16 out of 16 times.
The ISM and S&P Global Manufacturing PMIs gave conflicting readings. The average still suggests factory activity is stabilizing. Consumer sentiment reverses its mid-February rise, but still hovers near its highest level since 2021. Construction spending declines at the start of the year.
Over the last two years, lithium prices crashed as EV sales growth disappointed, and the Global X Lithium & Battery Tech ETF (LIT) is down more than 50% from its peak in 2021. LIT bottomed on February 5 as 10-day average volume spiked over 800,000 for the second time this year and long-term breadth dropped below 3% - signs remaining bulls may be capitulating. Short-term and intermediate-term breadth expanded with LIT's 16% rally off its low and short-interest sits near an 8-year high. We're not bulls yet, but additional technical improvements may prod us into action.
Sticky super-core inflation raises doubts about the persistence of disinflation. A relatively wide CPI-PCE gap creates uncertainty about the true underlying inflation trend and creates a risk of Fed policy error. The Fed will proceed cautiously, although we still expect rate cuts to begin in Q2.
Sticky shelter and super-core inflation call into question the sustainability of the disinflation trend. Jobless claims increase, but trend remains subdued. Regional manufacturing indexes show signs of stabilization. Pending home sales decline points to continued weakness in housing market activity.
The 10-year Treasury yield has fallen in the three months prior to the first Fed rate cut in every case. Bond proxy sectors have benefitted most from falling yields when the stock/bond yield correlation has been positive. If yields decline and stocks rally, the yield pullback may do little to jumpstart the lagging bond proxy sectors.
Criticized assets jumped 38% last year, the most since the GFC, excluding the pandemic. But the level is still below average. Most criticized assets are non-IG loans held by nonbank entities. Leveraged loans continue to perform well and could continue outperforming IG and HY in the near-term.
A strong start to the year for stocks has tended to foreshadow an incumbent victory, especially for Democrats. Many factors determine an incumbent's reelection bid, including perceived policy effectiveness and international events. A continued equity rally on disinflation, rate cuts, and economic growth would boost Biden's chances, ceteris paribus.
Near-term, we believe consumer spending could be set to accelerate relative to business spending, an ideal environment for consumer sector outperformance. Longer-term, we remain optimistic on Millennial consumer spending as the peak of the generation ages into the higher income and spending 35-44 age group. We recommend gaining exposure to Millennial consumer spending by overweighting the iShares US Consumer Focused ETF (IEDI), and target 17% relative upside.
Home prices in the developed world appear to have been little impacted by aggressive monetary policy tightening. But this is mostly due to the U.S., as most other economies didn't fare as well. We explain the differences and why the environment is likely to improve.
The economy ended 2023 on a strong note, with an upward revision to real private final sales. Rising mortgage rates continue to weigh on mortgage applications and home sales.
We like 20% correction charts for identifying both extreme sentiment and strong uptrends. We looked at indexes, countries, and companies going more than three years without a 20% correction. Health Care, Spain, and IBM stand out for extended bull runs.
Consumer confidence retreats in February, but the level is still consistent with continued economic growth. Durable goods orders decline, led by civilian aircraft. Richmond Fed activity mixed, but outlook turns more optimistic. Existing home prices continue to rise.
The percentage of European companies beating earnings expectations has been in line with the historical median. But the average share price response has been significantly positive, implying investors hadn't been expecting much. We introduce a new 360 report summarizing our key European stock market indicators and show why we are constructive on European equities.
We will likely get a rematch that most voters don't want to see. Fiscal policy preferences are vastly different, and regulatory policies couldn't be further apart. But there are surprising similarities in terms of trade policy and immigration. A Fed Chair vacancy could bring more market uncertainty.
New home sales increase in January, as lack of existing home inventory supports demand. Texas manufacturing activity stabilizes.
The top-level equity allocation rose to 86% due to a bullish signal from the economic sentiment indicator. The technical indicators are strengthening. U.S. Large Caps, U.S. Growth, U.S. Value, and International Developed hold the largest allocations.
Amazon replaces Walgreens in the DJIA, boosting Consumer Discretionary's weight. The DJIA is the most overweight Financials and Health Care and underweight Technology and Communication Services versus the S&P 500. The DJIA now includes four of the nine stocks in the NDR Tech Titans Index, but their weight in the DJIA is still 12% lower than in the S&P 500.
New release of Financial and Alternative Asset Performance using Regime Analysis report now available. Enhancements include more asset universes to choose from, histograms and time-series charts of returns, and a custom allocation feature. Explore thousands of historical return possibilities.
We find only 21% of non-leveraged long-only ETFs hold NVDA and only 9.5% have a weighting in NVDA that is greater than that of SPY.
With no recession on the horizon, the prospects for a short or limited easing cycle have increased. Stocks have posted strong gains during non-recessionary easing cycles. Stocks have gained after the first non-recessionary rate cut.
Flash U.S. Composite PMI dips, led by softer growth in services. Manufacturing activity, however, strengthens. CFNAI declines, but trend and indicator breadth improve, reflecting underlying economic strength. Existing home sales rebound. Initial jobless claims continue to decline.
ACWI Scorecard describes relative strength in U.S. and emerging markets, excluding China and others in APAC. Scorecard most negative on APAC markets, both emerging and developed. Emerging Asia upturn an encouraging sign with EM breadth improving.
Japan fell into technical recession. However, GDP declines happen often due to low potential growth. As a result, Japanese equities haven't always responded negatively to recession. The GDP decline matters because it may delay the BoJ's normalization in policy, which could impact the yen and equities.
A rematch is unprecedented in modern presidential history, but markets may have a better sense of policies than if someone new enters the White House. The stock market has bottomed around May of election years, but the timing has varied widely based on when the winner is obvious. Leadership has been more defensive in the run-up to presidential elections and has transitioned more cyclical post election, especially after the incumbent party loses.
The ARK Innovation ETF (ARKK) is seen as a risk-on bellwether for the thematic space, and it has been in a 22-month relative strength trading range. We have noticed several thematic ETFs are also in a similar trading-range pattern. We look at five such themes and posit what may be the key to cause a relative strength breakout.
Despite short- to intermediate-term excessive investor optimism and high longer-term valuations, cyclical sentiment still may have rewards. Margin debt and ETF flows have been "cautiously" bullish. Macro sentiment remains generally inconsistent with a major peak in stocks.
The most puzzling has been the difference between the national economic data and the individual state data. Other divergences include credit and commodities. Investors and policymakers should proceed carefully until the divergences resolve themselves.
Despite continued decline, LEI shows some momentum and indicator breadth improvement. Our Economic Timing Model points to continued economic expansion.
Risk and macro indicators point to further outperformance for Cyclical versus Defensive sectors. The case for Cyclical Growth versus Cyclical Value remains, although valuations are no longer compelling, and Information Technology has become overbought. Within Defensive Sectors we prefer the Health Care sector, while we continue to see a case for the Beverages industry within the Consumer Staples sector.
Risk-On/Risk-Off Ratio uptrend confirming market advance. Breadth of index components also confirming. RO/RO and breadth diverged before bear markets of 2020 and 2022.
A jump in services PPI boosts overall producer price growth. But annual inflation remains subdued. Partly due to severe weather, housing starts plunge, led by multifamily. Consumer sentiment continues to improve, which bodes well for spending growth.
Since their January 11 launch, spot Bitcoin ETFs have seen over $3 billion in net flows and now have $37 billion in AUM, aided by a 12% rise in the price of Bitcoin.
Recent job cut announcements have made headlines, but the trend remains below historical norms. Cuts are still concentrated in the tech sector due to restructuring and cost-cutting, with data suggesting that the job losses are being absorbed. Other measures of the job market remain robust.
Fear lacking from VIX, with stocks better able to withstand rising yields. ACWI inversely correlated with the stock and bond volatility, both trending lower. While VIX has gone much longer than normal without a spike, a bearish signal now would be inconsistent with bullish weight of the evidence and most other Bear Watch indicators.
Broad-based decline in January retail sales, but y/y momentum is still firm. Jobless claims remain low, providing support to the outlook for consumer spending. Builder confidence continues to improve, which bodes well for housing starts in the near-term. Industrial production declines, partly due to severe weather. Regional reports point to stabilization in factory activity in February. Import prices jump in January, led by consumer goods.
The Nasdaq Cycle Composite peaks in early March and is more bearish than the S&P 500 version. The March inflection point nears with sentiment at extreme optimism, elevated valuations for the tech mega-caps, and an extreme overbought condition from cyclical Growth sectors. We may hold off adding to our Growth sector allocation amid the start of seasonal headwinds.
A broad array of global data has been giving us increasingly more signs that global recession risk is ebbing. A more benign macro backdrop supports the continuation of the cyclical bull market in global equities. Although the glass is looking increasingly fuller, we are still cognizant of the downside risks.
CPI report won't give FOMC "greater confidence" that inflation is moving toward its 2% target. We continue to favor Q2 for the first cut, with June now just as likely as May. BEM generated a sell signal after CPI report. Market could see further damage. Market short-term oversold but not overly pessimistic. Flows remain strong.
Tuesday's CPI report reduces the number of rate cuts likely in the next 12 months, but stocks have risen faster in the first year of slow easing cycles. Excessive optimism and bullish technicals support the case for consolidation within an uptrend. The biggest risk is if inflation and economic growth are too hot for the Fed to cut rates in the coming months.
We continue to believe nuclear power remains integral to the energy transition theme. However, given broad weakness among URA's constituents and URA's close below our stop price of $29, we close this trade out with a gain near our original target.
Continuing bond yield rise could dampen earnings expectations. Watching beat rates and forward earnings estimate growth versus trailing growth. Also watching breadth of positive revisions, which points to a worsening earnings trend in this year's second half.
Year-to-date inflows to credit ETFs are already 61.5% of last year's total inflows. Narrow credit spreads and strong breadth add confirmation to investors' bullish views. Short interest and realized volatility for JNK have returned to levels last seen during the Fed's response to pandemic dislocations.
Consumer prices increase more than expected in January. Super-core inflation accelerates. This report argues against the Fed rushing to rate cuts. We expect the first cut either in May or June. Small business optimism declines.
On an absolute basis, bonds look reasonably attractive. But relative to equities, stocks are favored on a fundamental basis. Need to see bond yields exceed earnings yields by nearly 200 bp before stocks become unattractive.
Stocks' long-term trend over the past 100 years has been up, outperforming other major asset classes. Where one enters the market can make a huge difference. The power of compounding is impressive, especially over the past 47 years.
NVDA is up an impressive 40.9% year-to-date, but SMCI is up an astonishing 145.4% on a blowout fiscal Q2 earnings report that saw net income jump 68% year-over-year.
Falling unit labor cost pressures are positive for margins and profit growth and support the current uptrend in equities. Productivity growth has been offsetting elevated wage pressures. Gains have been relatively broad-based across industries. The long-term outlook is also positive, driven by increased high-tech and R&D investment.
Corporate credit spreads are historically tight. Default risk has diminished, as the economy grows above-trend. Changing index quality composition explains a small piece of the tighter spreads for HY but not IG. A shrinking liquidity premium and favorable tax treatments help explain the rest.
China has reversed from oversold condition and extreme pessimism. But bullish trend confirmation has been lacking. Valuations have improved but forward earnings growth estimates have been declining.
After a brief stint in bearish territory last month, the NDR Commodity Model Composite moved back to neutral with its highest reading since October. The macroeconomic composite improved to its best reading in more than two years. Elevated commodity sentiment and subdued copper demand from China, keeping a lid on copper prices, make a rally for the S&P GSCI an upstream battle.
CEOs feel optimistic, on net, for the first time since Q2 2022. Bodes well for capex and profit growth. Initial jobless claims decline, as labor demand remains robust. Wholesale inventories rebound, led by durables.
The S&P 500 has risen at more in year one of slow easing cycles than in fast easing cycles, on average. Growth has outperformed Value after first cuts, especially during slow cycles. Small-caps have underperformed large-caps before the first cut, but have outperformed after, especially during slow cycles.
Only 7 of 50 themes outperformed in January despite a 1.6% return for the S&P 500. Small-caps are impacting themes. While S&P 500 Technology was up 3.9% in January, S&P 600 Technology declined 4.2%. Tech theme outperformance led by Titans continues to be the narrative for 2024, though extreme optimism is making us very uncomfortable.
Led by shrinking trade with China, the trade deficit fell to a three-year low in 2023. Wholesale used vehicle prices stabilize in January. Mortgage applications mixed.
NDR Economic Cycle Infographic updated for Q4 2023, highlighting 12 economic sub-cycles. Real GDP grew at an above-trend pace, with activity in several sub-cycles picking up from the prior quarter. Labor market strength, high-tech capex, and easing inflation support aggregate demand. But CRE sector continues to struggle.
Adjusting for the upward trajectory of P/Es over time implies the S&P 500 is about 5% overvalued. The cash-adjusted P/E and net payout yield show stocks less overvalued than the traditional P/E and dividend yield. The real earnings yield shows stocks are modestly overvalued compared to record overvaluation in 2022.
The All-Country World ex.-U.S. Total Return Index declined almost 100 basis points in January. The International Equity Core model is overweight Canada, Japan, and Germany, while underweighting the U.K., France, and Switzerland. The Explore model favors Brazil, Peru, Spain, Poland, and the Philippines.
The Catastrophic Stop model entered February fully invested. The International Equity Core model is overweight Canada, Japan, and Germany, while underweighting the U.K., France, and Switzerland. The Explore model favors Brazil, Peru, Spain, Poland, and the Philippines.
During January, global stocks outperformed global bonds by more than 198 basis points. The model's equity allocation remains above benchmark weighting, with U.S. Large-Caps and U.S. Growth each receiving more than 20% allocation. The largest fixed income allocations were Emerging Market bonds and U.S. High Yield, both with more than 5% weights.
During January, global stocks outperformed U.S. bonds by more than 88 ba sis points. The Global Allocation model's equity weighting remains above benchmark allocation. The model has an above benchmark weighting for the U.S., while holding underweight al locations for Japan, Emerging Markets, Pacific ex. Japan, Canada, Europe ex. U.K., and the U.K.
The S&P 500 gained 1.6% in January amid a backdrop of mostly positive economic reports. Leadership skewed Growth over Value to begin the year. Tech mega-caps broke out during the month and earnings revisions remain supportive for the stocks.
The Fixed Income Risk Management model weakened during the month but entered February with a fully invested allocation to fixed income sectors. The Fixed Income Allocation model continued to favor risk-on leadership and did rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
Global economic growth accelerated in January, according to the latest PMIs, with leading indicators constructive. Manufacturing pulled out of contraction territory for the first time in 17 months, while services growth accelerated. Supply chain pressures picked up due in part to disruptions in the Suez and Panama Canals. But prices have so far been little affected.
The Bloomberg Barclays U.S. Aggre gate Bond Total Return Index was down modestly in January and breadth weakened. The Fixed Income Allocation model continued to favor risk-on leadership and did rebalance. The model remained overweight Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, and U.S. Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Treasury Inflation-Protected Securities, and International Investment Grade.
The Catastrophic Stop model weakened during the month but entered February with a fully invested equity allocation recommendation. Financials and Communication Services improved in the sector model and joined Information Technology and Energy at overweight. Consumer Discretionary and Health Care deteriorated and joined Materials, Industrials, Real Estate, Consumer Staples, and Utilities at underweight.
Breadth deteriorated with 6 of 11 S&P 500 sectors posting positive price gains in January. Financials and Communication Services improved in the sector model and joined Information Technology and Energy at overweight. Consumer Discretionary and Health Care deteriorated and joined Materials, Industrials, Real Estate, Consumer Staples, and Utilities at underweight.
Historically, there has been a weak positive correlation between European equity performance in January and the rest of the year. We analyse what this January's return means for the rest of the year. Ultimately, our technical indicators remain favourable and will give a read on potential upside and downside risks as 2024 progresses.
The NDR CCI rose to its highest level since August 2022, indicating above-trend growth in the economy and payrolls but also stickier inflation. The SLOOS showed banks tightened standards at a slower pace, while demand fell at a slower rate. Low financial stress consistent with credit outperformance.
Both ISM and S&P Global Services PMIs rise in January, supporting stronger economic growth. Inflation indicators mixed. Employment trends suggest continued payrolls growth in the months ahead.
The global uptrend has gained momentum with broad participation. But China has remained divergent, offsetting the strength of India and emerging markets in general. EM Index range-bound with China included but in a strong uptrend when China excluded.
Payrolls jump in January, unemployment rate stays low, and wage growth accelerates, led by services. With this kind of labor market strength, the Fed can afford to be patient on cutting rates. Consumer sentiment continues to rise. Weather dents vehicle sales.
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