The is the next-to-last weekly update from EMC this year, or the last depending on how this coming week progresses. I am sending good market vibes your way, wishing you are your loved ones a happy holiday season and an “upward trajectory” in 2024! And as always, thanks for reading my gibberish.
The two drivers of market sentiment last week were ongoing weak economic data in the Eurozone and the UK, and better-than-expected PCE data (inflation) in the US. I will discuss these below, along with projections from Street analysts as to ending level for the S&P 500 in 2024.
US PCE
US PCE data for November was released by the BEA on Friday morning before the market opened (see “Personal Income and Outlays, November 2023”), signalling that inflation was slowing more quickly than expected. Recall that PCE is the inflation gauge preferred by the Federal Reserve. November headline and core PCE (MoM) was -0.1% and 0.1%, respectively, both 0.1% lower than had been expected. YoY data (% change) for headline and core PCE for November was 2.6% and 3.2%, respectively, both also beating expectations and representing declines from October readings of 2.9% (headline) and 3.4% (core). Unlike in Europe, the US economy remains on relatively stable footing, providing more of a reason for equities and bonds to continue their upward trajectory. This is fine so long as the underlying rationale for the positive returns is not solely based on a near-term Fed pivot. Although many suggest otherwise, economic data simply does not support the Fed pivoting before the ECB or BoE. In the back of your mind as you start to contemplate what may happen as we move into the new year, keep in mind that 2024 is a US election year with all of the additional “noise” that this will most certainly introduce as the year progresses.
Eurozone and UK economic indicators
Although inflation continues to decline in the Eurozone, consumer and business confidence also seems to be heading south quickly, especially in the common currency bloc’s largest and most important country, Germany. The data rolling in suggests that the European economy is slowing to a crawl, a matter that the ECB will likely need to address through a rate cut in late 1Q24 / early 2Q24.
In the UK, better-than-expected retail sales in November provided a boost, which was short-lived because the revised 3Q23 GDP figure was also released showing an economy that contracted by 0.1% in the third quarter (compared to the second). I fear the fourth quarter is going to be even worse in the UK. Although retail sales were better than expected in November, there is risk that the boost was temporary because of robust sales during the Good Friday to Cyber Monday weekend. Nike (NKE) said as much in its earnings release on Thursday in that sales were very strong during the Black Friday to Cyber Monday period, but have been erratic since then, causing them to provide cautious guidance. I suspect a similar trend might have occurred in the UK, resulting in solid late-November sales but an economy that overall is shrinking. Should this prove to be the case, it would mean that the UK is in a technical recession, which sure feels to be case now.
How did investors respond as far as the European bourses? The same as usual, in that this bad economic news is treated as less important than the benefits of lower interest rates, suggesting a higher likelihood of a faster pivot by both the Bank of England and the ECB as they try to jumpstart their economies. Sound familiar? It should because this has been an ongoing theme now for months. The FTSE 100 and the STOXX 100 rallied around the bad economic news / potentially quicker pivot by advancing 1.6% and 0.2%, respectively. It might sound like perverse logic, but it is what it is.
Analyst’s 2024 year-end projections for the S&P
I had intended to write a separate article on this, but I have run out of time. The table below shows several Street firms, including the six major US banks, with their 2024 year-end projections for the S&P 500 on the left side of the table. The right side of the table shows the same firms’ 2023 projections made in Dec 2022, alongside how they have done based on the closing level of the S&P 500 on Dec 21. The firms are ordered by their 2024 expected ending level for the S&P 500 from lowest (BCA Research, 3,300) to highest (Yardeni Research, 5,400).
I’m not sure I take that much away from this table aside from the fact that we can all guess, and we will all likely be wrong. Even if a firm is right one year, it probably won’t repeat this the following year. These are the two things I can say about the table:
Perhaps not shockingly, most analysts are expecting another bumper year for the S&P 500 in 2024. (So much so that I would not be surprised to see some revise their year-end 2024 estimates up further in the next week or two, given the ongoing increase in the benchmark US index.)
The firms that were closest to the year-end level for 2023 last December were JP Morgan, Wells Fargo, Deutsche Bank (the closest) and Oppenheimer. Interestingly, these same four firms are projecting a broad range of outcomes in 2024, from down 11.5% (JP Morgan) to up 9.5% (Oppenheimer).
MARKETS LAST WEEK
Global equities: Equities in the US, Europe and Japan all rallied last week. The UK market (FTSE 100) in particular “cheered” worse-than-expected economic data on the basis that the Bank of England will move faster and provide more rate cuts in 2024. US equities had a bad day on Wednesday – the first in many weeks – but rallied on Thursday to claw back the losses and then some, ending the week higher again. Chinese equities continued to decline, dragging down the MSCI emerging markets index even as the US Dollar weakened and UST yields fell.
US equities: It was again the Russell 2000 that led the charge in the US, although all markets were higher on the week. It’s hard not to focus on the NASDAQ Composite, which is up an amazing 43.2% YtD following a decline of over 33% in 2022. That’s a real comeback, and is exactly why you must stay invested in equities.
US Treasuries: US Treasury yields were lower at the short end of the curve, but flat to slightly higher at intermediate and longer maturities. As a result, the negative 2y-10y curve inversion narrowed, ending the week at negative 41bps. Although PCE data for November was better than expected, this news seemed to be already factored in.
Corporate credit: Yields and spreads (aside from BBB credit spreads) were all lower on the week. Ho-hum…..
Other assets: Gold and oil prices were higher, and the US Dollar was weaker. I am not sure I fully understand why the US Dollar is weakening given that (in my opinion) there is little risk that the Fed will start a dovish tilt sooner than the ECB or the BoE. And the Bank of Japan is standing still, suggesting it has nil interest in normalising its monetary policy, at least not yet. FX markets aren’t my area of expertise, but I agree with Amundi (see “Why Europe’s Biggest Asset Manager is Shorting the Pound” on #Bloomberg) that Sterling certainly seems over-priced. Oil was better bid last week on concerns that the Israeli-Hamas conflict could broaden with the Houthis trying to disrupt commercial shipping traffic in the Red Sea. The price of gold, along with other commodities, is increasing as the US Dollar weakens.
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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