@theMarket: Economic Data Buoys Market Gains

Strong growth in the economy in the last quarter of 2023 helped support equity markets this week. The U.S. economy grew 3.3 percent in the fourth quarter, which was much higher than the estimates of 2.2 percent growth. For last year overall, the economy grew 2.5 percent.

 

At the same time the core personal consumption expenditure price index, which excludes food and energy, increased by 2.9 down from 3.2 percent from the prior month, and moved below 3 percent for the first time since March 2021. Investors liked those numbers enough to keep the S&P 500 Index making new highs.

 

Technology continued to lead stocks higher. The Magnificent Seven (Apple, Amazon, Alphabet, Microsoft, Nvidia, Tesla) garnered the lion's share of buying. Tesla, however was the downside exception. This has been the trend for most of last year and continues to be the case so far in 2024. Six of the seven accounted for 80 percent of the SPX gains in January, Nvidia and Microsoft alone represented almost 50 percent of that move.

 

The problem with this action is that with only a few stocks pushing the averages higher, I question the underlying health of the markets overall.

 

Under the market's hood, rotation into one sector and out of others for a day or two says to me that most of the market is going nowhere. The bears argue that this kind of action can't continue much longer. My answer to that is the Mag Seven carried the market for most of last year and continue to do so at least into February.

 

That does not mean I would rush in to buy more of these big-cap tech stocks. They are "holds," right now. Most investors already own these seven stocks in their portfolios anyway. In addition, they are top holdings in hundreds of exchange-traded funds and mutual funds. As such, they represent a huge portion of U.S. investments. The entire market capitalization of the small-cap, Russell 2000 Index, for example, is less than the market value of Apple or Microsoft. These large-cap, liquid stocks are supporting the markets.

 

There have been times in the past, for example, in the latter half of 2022, when these darlings were out of favor. When they are, this usually leads to a sell-off in the overall market. Could this happen again? It certainly can.

 

Take Tesla as an example. For years, this electric vehicle pioneer could do no wrong. But sentiment has changed. The mounting competition of dozens of EV manufacturers entering the market is reducing prices and causing profits to decline. Recently, one Chinese company, BYD, has dethroned Tesla as the leading EV company in the world. Tesla's stock price has plummeted in recent weeks and earnings were disappointing.

 

Most of the Mag Seven companies will be reporting earnings in the coming week or two. Thus far, fourth-quarter earnings have been pretty good. About 25 percent of the S&P 500 Index have reported. Overall, 70 percent are beating estimates by about 7 percent. Given how high these individual stock prices have been bid up, most are priced for perfection. Netflix earnings did surprise to the upset, while Tesla did the opposite. The Bulls are hoping the remaining five surpass expectations.

 

Next week, we will also be treated to another Federal Open Market Committee (FOMC) meeting. Investors expect the Fed to hold the line on interest rates. No rate cuts or hikes are expected. Possibly even more important than the Fed will be the U.S. Treasury's quarterly refunding announcement on Jan. 31. The more long-term Treasury bonds the government plans to sell at upcoming auctions, the more pressure there will be on bond yields to rise. That will have consequences for the equity markets.

 

We are still in that last move up that I had been forecasting. And it is not over yet. How much higher could we go? The S&P 500 could climb 100-200 points higher to 5,000-5,100. My timing for this market's short-term top was off a bit. I was expecting that we would have already hit the top by now. However, it still looks like a pullback in February into March before moving higher sometime in the spring. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.