Bull Season, Interrupted

Santa didn't rally this year... What's all the trouble about?... Airline analogies aplenty... Signals about jobs, oil, and more... Should you chase the year-end 2023 rip in stocks?... Don't miss this emergency briefing...

Pardon the interruption...

It has only been two trading days, but the double-digit, two-month rally to close 2023 has not yet carried over into the new year...

Following today's action, three of the four major U.S. indexes have now closed lower for at least three straight trading days bridging the New Year's holiday. The small-cap Russell 2000 led the way down today, turning nearly 3% lower, and the S&P 500 was off almost 1%.

You can officially kiss the prospect of a "Santa Claus rally" goodbye, too.

U.S. stocks have finished higher about 80% of the time since 1950 in the low-volume period between Christmas and the first few days of the new year... but mark down this holiday season as a time in history when it didn't happen.

What's all the trouble about?! Isn't the Federal Reserve still going to cut rates AND nail a "soft landing" for the economy?!

Maybe. Maybe not.

This Fed-speak is too good – if you like airplanes...

One Federal Reserve official was out in public today spreading the word that soon-ish rate cuts might not be as much of a shoo-in as many would like to believe.

In fact, Richmond Fed President Thomas Barkin said at a presentation today that rate hikes might not be done... He used various airline analogies to make the point and discuss the uncertainties the central bank apparently is weighing as it prays for a "soft landing."

As CNBC summarized it today...

[Barkin] compared the Fed's job to a pilot bringing an airplane in for a landing, and noted four risks ahead: The economy could "run out of fuel" and growth could reverse; "unexpected turbulence" such as geopolitical events or the banking shock that hit in March 2023; the possibility of "approaching the wrong airport," where inflation holds above the Fed's 2% target; and a "delayed landing," where demand holds unexpectedly high, boosting inflation.

"The airport is on the horizon. But landing a plane isn't easy, especially when the outlook is foggy, and headwinds and tailwinds can affect your course," Barkin said. "It's easy to oversteer and do too much or understeer and do too little."

Of these, my favorite might be "approaching the wrong airport."

In any case, the salient point is that maybe investors will start to think more seriously about the various factors that could disrupt Fed-related expectations and the prevailing market narrative that rates will drop in early 2024.

They run the gamut from changing growth expectations to the influence of war, the path of inflation, and consumer spending.

A mixed bag of inflation data and war risks...

Just today, new jobs and manufacturing numbers came out that support the idea of future rate cuts.

First, the number of open positions per U.S. worker continues to decline, with the ratio now standing at 1.4. Meanwhile, the Institute for Supply Management reported the 14th straight month of contraction in U.S. manufacturing.

Fed meeting minutes from last month also went public today to close scrutiny. They showed a central bank that indeed is talking about rate cuts, much like the market implied after the Fed's meeting last month and comments from Fed Chair Jerome Powell. As Reuters reported today...

Federal Reserve officials appears increasingly convinced last month that inflation was coming under control, with diminished "upside risks" and growing concern about the damage "overly restrictive" monetary policy might do to the economy...

But then there's the unpredictable future, including the threat of inflation to reignite, possibly as a result of increasing tensions in the Middle East that we covered yesterday. That could support the idea of higher rates in the future.

As we explained, Houthi militants from Yemen have disrupted one of the world's major shipping routes in the Red Sea and Gulf of Aden. Roughly 15% of global trade normally travels these waters, so the threat there has spiked global shipping costs.

And oil prices – down about 20% since their most recent high in late September – could be getting a boost...

Today, the OPEC oil cartel published a statement pledging "unity and cohesion" with its members to keep up "efforts to maintain oil market stability going forward." Several nations have already pledged to cut 2.2 million barrels per day through the first quarter of this year to support prices.

That's right, Saudi Arabia, Russia, et al., are still talking about cutting supply and boosting prices – which we saw today, with the U.S. and international oil benchmarks up more than 3% in the past 24 hours. Meanwhile, all the factors in the Middle East driving up shipping prices are also at work...

A prolonged rebound in oil prices or disruption to shipping from the Middle East could cause high(er) inflation globally, particularly in Europe. And it could benefit energy companies and stocks, much like when inflation was on the rise in 2021 and 2022.

For the second straight day, the energy sector of the S&P 500 was up... rising 1.6% today.

That's a lot of variables and risks for investors to weigh...

Amid this potential, the uncertainty also makes room for volatility. That's particularly true when "everyone" has been thinking the same thing – that higher-than-usual inflation is toast and the next major turning point for the economy is Fed rate cuts. Maybe the longer-term path for rates is down, but it could be a rocky road down the mountain.

As Ten Stock Trader editor Greg Diamond, who was a Wall Street trader before joining Stansberry Research in 2018, wrote today to his subscribers...

The consensus of the majority in the investing world is that the Federal Reserve has defeated inflation and that it'll start cutting interest rates.

However, when everyone (or the majority) is on the same side of a position, the opposite usually happens.

I'm not in the camp that believes the Fed will cut interest rates. But I won't speculate on what the central bank will actually do... I only look at the market to determine the probabilities of what the market will do.

Wise words.

Weigh the odds. The next major U.S. jobs report, with a new unemployment rate, comes out on Friday. Any surprises could keep markets moving. An uptick in unemployment could renew talk about a possible recession ahead, or one that has already begun.

And remember, when the Fed actually starts to cut rates, that's usually because there are problems with the economy... History shows this long-sought "pivot" does not translate to higher stock returns, especially when many stocks are considered expensive like today.

Yet in the meantime, the history of stock performance during a "Fed pause" – which we've been in – is strongly bullish. Put it all together and you can see why investors might become unclear about a broad direction for the economy and markets.

As for what this means for someone managing their own portfolio...

Shall we take this bumpy start to 2024 as a signal that much more trouble is ahead this year? Or is this simply a "breather" – and par for the course after a 15% rip higher in the benchmark S&P 500 Index from late October through late December – and an annual gain of 24% in 2023?

If you ask the team behind our Portfolio Solutions products – which published new issues just yesterday – the answer is a mix of both.

As our Director of Research Matt Weinschenk and analyst Matthew Poltorak wrote last night in an update in The Quant Portfolio...

Today, the S&P 500 Index is within spitting distance of its all-time high of 4,796.56, set in January 2022. Another 30 points, and we'll be in rarified air.

The problem is that the market has run up very quickly... By technical measures, it's overbought and due for a cooldown.

At the same time, there's a saying in the markets that the most likely thing after a new high is... another new high. After all, when the market has momentum, investors get excited and, mathematically speaking, just one more tick up will set a new record.

While I always believe investors should be "cautiously optimistic," this is especially true at new highs. Yes, more gains can come. But again, by technical measures, we're due for a pullback... so you should invest carefully.

Stansberry Alliance members can read the full data-based analysis in the latest issue of The Quant Portfolio.

But broadly across our Portfolio Solutions products, Matt and his team explored how they recommend subscribers do just that in 2024... and raised an important question...

Should you 'chase' the year-end 2023 rally?...

Matt and his team explored what has typically happened in a calendar year and the 12 months following other 20%-plus gains in the U.S. benchmark index.

In fairness to paying subscribers, I can't give away all the details. But I will share that considering recent price action, current (historically high) broad market valuations, and rosy corporate earnings expectations for the year ahead, Matt concluded that U.S. stocks are "more likely to calm down in 2024 than continue the upward trajectory we saw in 2023."

As Matt wrote...

The market can rise for two reasons: earnings growth or investors giving it a higher valuation.

The market is priced on expectations. So you want to figure out just what the market predicts and if the businesses that make up the stock market can do better than those estimates.

Wall Street strategists project 2024 earnings growth of 6.7%. If you check all the earnings estimates of each firm in the S&P 500 and add them up (a bottom-up approach), analysts expect 11.5% earnings growth.

Those are both high-growth targets. If you consider that the economy grows at something like 5% a year (including inflation), then the businesses in the S&P 500 will really need to perform well to beat the estimates between 6.7% and 11.5%.

If you don't think earnings will outpace expectations but do expect high returns, you're placing a bet on stock market multiples expanding.

And that might not be a bet where the odds are in your favor. It doesn't mean stocks can't go higher when all is said and done in 2024... but perhaps not by as much as they did in 2023, nor with the same leaders and outperformers. Portfolio Solutions subscribers and Alliance members can find all the details here.

Don't miss this emergency briefing...

This morning, a Stansberry Research analyst responsible for more than a dozen 1,000%-plus winning recommendations shared an urgent briefing, available to all readers, about the type of investment he believes could deliver the most lucrative returns in 2024.

And he made a convincing pitch... He explained how three major profit catalysts are converging for one specific asset class – that could lead to a generational wealth-building opportunity. But the door for the biggest gains is closing fast.

Thus the rush to get this message out right after the new year... If you're looking for a path to making money in what could be a chaotic 2024 in the markets, and something beyond conventional advice, be sure to check out this free emergency briefing here.

And one important note for Stansberry Alliance members: You are more than welcome to watch the free broadcast, but you can also find all the details about this new research in your inbox.

In this week's episode of the Stansberry Investor Hour, Dan Ferris and I look ahead to what might shock the markets in 2024... and why it's wise to prepare for these possibilities now. We also look back at what we said this time last year about 2023.

Click here to listen to this episode right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and X, the platform formerly known as Twitter.

New 52-week highs (as of 1/2/24): American Express (AXP), Cencora (COR), Huntington Ingalls Industries (HII), JPMorgan Chase (JPM), Sprouts Farmers Market (SFM), SPDR Portfolio S&P 500 Value Fund (SPYV), and Waste Management (WM).

In today's mailbag, thoughts about yesterday's edition covering war escalations in the Middle East... and more feedback on the "$100 challenge"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"There is no doubt in my mind this isn't going to end well... It sure sets up some very interesting scenarios... We [the U.S.] already have 2 carrier groups in the region. With Israel launching a drone to kill Hamas's big leader in Beirut, which really pissed off even more who hate them... I sure don't see any de-escalating coming from anyone... We all might as well get ready for s*** to hit the fan." – Subscriber James S.

"Interesting comments on what's going on in the Red Sea with shipping and the Houthi rebels. If the U.S. Administration would quit 'Playing Nice' and simply take out the Houthi's command and control center and exercise their presence, problem gone..." – Subscriber Dan W.

"Several years ago I was getting some exercise by biking several miles. Part of the way was along a sidewalk on an 8-lane highway, as I cycled along suddenly I stopped abruptly. At my feet was a folded $100 bill. I'll bet it was from the $100 bill challenge! Hope that someone got rich." – Subscriber John R.

All the best,

Corey McLaughlin
Baltimore, Maryland
January 3, 2024