You’ll have witnessed some fireworks on New Yr’s Eve, however these weren’t the one fireworks exploding. The final two months of 2023 completed with a bang!
Extra particularly, over this quick interval, the S&P 500 index skyrocketed +13.7%, NASDAQ +16.8%, and the Dow Jones Industrial Common +14.0%.
The positive aspects have been much more spectacular for the cheaper, extra rate of interest delicate small-cap shares (IJR +21.8%), which I’ve highlighted for months (see also AI Revolution).
For the total yr, the bull market was on an excellent greater stampede: S&P 500 +24%, NASDAQ +43%, and Dow +14%.
Though 2023 closed with a festive explosion, 2022 ended with a bearish growl. Successfully, 2023 was a reverse mirror picture of 2022. In 2022, the inventory market fell -19% (S&P) on account of a spike in inflation.
Directionally, rates of interest adopted inflation larger because the Fed labored via nearly all of its 0% to five.5% Federal Funds price mountain climbing cycle.
To sum it up merely, the final two years have been like driving a rollercoaster. For the yr simply ended, a lot of the yr felt like a celebration, however 2022 felt extra like a funeral.
If you add the 2 years collectively, it was extra of a lackluster end result. For 2022-2023 mixed, outcomes registered at a meager +0.1% for the S&P, +3.7% for the Dow, and -4.0% for the NASDAQ (see chart under).
For these saying the great occasions of 2023 can’t proceed, traders ought to perceive that historical past paints a special image.
As you possibly can see from the inventory market cycles chart (under) that spans again to 1962, the typical bull market lasts 51 months (i.e., 4 years, 3 months), whereas the typical bear market persists a little bit longer than 11 months. This information suggests the present one-year-old child bull market has loads of room to develop extra.
Supply: Visible Capitalist
Why So Bullish?
What has traders so jazzed up in latest months? For starters, inflation has been on a gradual decline for a lot of months. With China’s stagnating economic system, it has helped our inflationary trigger by exporting deflationary items to our nation.
As you possibly can see from the Personal Consumption Deflator chart under, this broad inflation measure has declined to the Federal Reserve’s 2% goal degree.
Jerome Powell, the Federal Reserve Chairman has been being attentive to these statistics, as evidenced by the central financial institution’s forecast on the Fed’s latest coverage assembly final month on December 13th for 3 rate of interest cuts in 2024.
This so-called “Powell Pivot” is a reversal in tone by the Fed, which had been on a relentless rampage of rate of interest hikes, during the last two years.
Supply: Calafia Seashore Pundit
This rate of interest cycle headwind has was a tailwind as traders now start to low cost the likelihood of future price cuts in 2024.
The reduction of decrease rates of interest could be felt instantly, whether or not you think about declining mortgage and automobile mortgage charges for customers, or credit score line and company mortgage charges for companies.
This development could be seen within the benchmark 10-Yr Treasury Word yield, which has declined from a peak of 5.0% a number of months in the past to three.9% at this time (see chart under).
Supply: Buying and selling Economics
Declining inflation and rates of interest clarify a variety of investor optimism, however there are extra causes to be sanguine.
The economic system stays robust, unemployment stays low, AI (Synthetic Intelligence) functions are bettering employee productiveness, trillions of potential inventory market {dollars} stay on the sidelines in cash market accounts, and company earnings have resumed rising close to all-time report ranges (see chart under).
Supply: Yardeni.com
What may go incorrect? There are at all times loads of unexpected points that would gradual or reverse our financial prepare. Geopolitical occasions in Russia or the Center East are at all times troublesome to foretell, and now we have a presidential election in 2024, which may at all times negatively impression sentiment.
This new bull market had an amazing begin in 2023, however in historic phrases, it is just a child. Time will inform if 2024 will make this child cry, however regardless of the market faces, declining inflation and rates of interest ought to act as a pacifier.
This text is an excerpt from a beforehand launched Sidoxia Capital Administration complimentary publication (January 2, 2024).
Disclosure: Sidoxia Capital Administration (SCM) and a few of its purchasers maintain positions in particular person shares, and sure alternate traded funds (ETFs), however on the time of publishing had no direct place in some other safety referenced on this article. No info accessed via the Investing Caffeine (IC) web site constitutes funding, monetary, authorized, tax or different recommendation neither is to be relied on in investing or different determination. Please learn disclosure language on IC Contact page.
Editor’s Word: The abstract bullets for this text have been chosen by In search of Alpha editors.