If the stock market’s indecisive churn in recent weeks is nothing more than some prolonged post-Thanksgiving digestion, it’s about time for the tape to prove it to ward off concerns that it’s something more serious. While the S & P 500 ‘s trend remains rather unassailable, merely pausing a hair below record highs and holding above the 6000 level for two weeks, the broader market so far in December has softened up and narrowed again. The equal-weight S & P is off 3% this month, more stocks fell than rose each of the past ten trading sessions, the median component is down4%, and cyclical bellwether groups industrials and banks have shed closer to 5%. The Nasdaq 100 has countered this pressure with a 4% advance in December, as the growth stock starter pack of Apple , Amazon , Alphabet and Tesla are up between 4% and 26%. We’ve been through the arguments about whether narrow leadership against weak underlying breadth is a good thing, a dangerous thing, or just a thing. Markets that rotate around, allowing extended groups to settle down without sinking the benchmark, are generally healthy, if frustrating for stock pickers promising to outperform for a fee. .SPX YTD mountain S & P 500, YTD In recent weeks I’ve noted the two-track tape featuring orderly core indexes alongside a rushing current of speculative risk-seeking in select “Trump trades,” resurrected volatile tech, crypto-levered plays and heavily shorted story stocks. Last Monday saw a severe downside reversal in the overheated momentum cohort, with Applovin , Palantir and Microstrategy thumped as laggard boring stocks caught a bid. Yet this action didn’t spur immediate instability across the market, even as some froth was helpfully skimmed away. In other words, nothing here to generate significant concern, especially given it all fits with a general tendency of even strong fourth-quarter rallies to hit a soft patch in the first half of December. And perhaps it’s providing an occasion for a pretty cozy and optimistic consensus to consider potential surprises. Foggy economic, rate outlook A serious economic stumble would surely catch the majority offsides, more so than would’ve been the case a year ago, when economists assigned about a 40% chance of a 2024 recession. The current absence of recession predictions doesn’t, in itself, suggest that a downturn is now more likely as a kind of contrarian “gotcha” justice, any more than President-elect Trump’s visit last week to the NYSE makes it more probable that some sort of ironic bell-ringing top is in. Mid- to late-cycle expansions don’t need to draw fuel from a deep reservoir of fear and foreboding, the way early-cycle recoveries do. Even so, right now, investors might be susceptible to a scare along the way. Or perhaps just a more nuanced approach. Citi strategist Scott Chronert late last week offered this assessment: “It appears that the larger post-election beta move has settled down and client discussions are moving down a path of identifying winners and losers of policy proposals. Given the uncertainty of which campaign proposals could come to fruition, and the scale of said policies relative to initial outlines, the setup seems supportive of this higher dispersion environment in the months ahead.” That post-election chase into cyclical and low-quality small-cap stocks, building upon already-entrenched outperformance by these sectors over the prior months, seemed to be pricing in an imminent economic acceleration, even an early-cycle surge. Yet the economic-surprise indexes rolled over starting three weeks ago, just as inflation readings have stalled above the Federal Reserve’s target. This is shifting the perceived interplay of the economy the Fed and the markets. The bond market’s expectation of another quarter-point rate cut next week was solidified by the CPI and PPI inflation readings, which were a bit warm but in ways that aren’t seen filtering into the Fed’s benchmark PCE inflation gauge. But after that, the path grows foggy, a pause could be more likely, and the ultimate destination of rates might not be too far below where we are. This shouldn’t on its face be a worrying scenario. It would rather closely resemble the stunted 1995 rate-cut cycle of just a few moves over several months, then a long hold as the economy, a productivity boom and equity markets levitated. Valuation concern Encouraging precedent, to the degree it applies, though it must be noted we are at a somewhat elevated starting point looking into 2025 in terms of valuation, trailing returns and investor expectations for policy help. We’re set to end 2024 with all handicappers forecasting higher indexes , with the short base purged through weeks of squeezes and with investors anchored more to their preferred version of the Trump policy mix than any known agenda. BMO Chief Investment Strategist Brian Belski noted the way the bull case for 2025 seems an overwhelming base case for most: “For the first time in a few years, we received little pushback on another bullish forecast based on our interactions from our ‘year ahead’ marketing schedule. Admittedly, our contrarian streak makes us leery of such overwhelming agreement, particularly since many of the same clients pushed back hard at our bullish forecasts earlier this cycle. Nonetheless, given the strength of gains over the past two years there still is a vocal minority questioning the sustainability of market gains.” This vocal minority might well be wondering how much fruit is left to pick after two straight years of 20%-plus S & P 500 gains. History says such a two-year performance in itself is neither a scary portent nor a ticket to further riches. The year following back-to-back 20% up years on balance deliver the longer-run average performance both in frequency and magnitude of gains the following year – with wide variation from high to low. There’s a decent chance this will also be the second straight year of 25% upside in the index, a rarity that’s occurred three times before. The ensuing year showed the following returns, according to Ben Carlson of Ritholtz Wealth Management: down 35%, up 7% and up 21%. Which nets out to no signal from a meager sample size. But perhaps a big up year in 2025 would be almost as much a surprise as a losing year, even if another 20% rise would likely bring market conditions closer to some bubbly extremes. We have an S & P 500 pushing 23-times forward earnings, topped by a $3.75-trillion company called Apple that’s now trading above 33-times projected profits. Apple owns December Note that a December push higher for Apple shares is pretty standard stuff when the market is in an uptrend. As the chart shows, the stock every year of the past five aside from the bear-market break of 2022 has sped higher toward year’s end, for an average 8% gain from Nov. 30 to its December high. Apple in general tends to go on a run as a rally matures, rather than lead the market off a correction. Blending quality financials, defensive properties and now a story that fits with investors’ craving for the next AI beneficiaries in digital services, Apple is an easy name to grab for to top up equity exposure. Note, though, the chart also shows these flourishes have often set the stage for early-year pullbacks. The market can carry higher with full valuations and upbeat expectations so long as plausible forecasts of double-digit earnings growth next year are hit – and the policy carrot is held in front of Wall Street rather than the stick threatening trade flows and labor supply. It’s nearly a sure thing that – as everyone anticipates – merger volumes and initial public offerings will start to proliferate, trends that tend to coincide with a higher-metabolism market, bolstering valuations and investor confidence for a time before they overshoot into value destruction and excess equity supply.
Bull market hits an early December soft patch
Dec 14, 2024
