Issue 1 / December 20th
By Noah Bohman | The Risk Report
View the Full Report on TheRiskReport.org including our outlook and the current risk rating
The federal Reserve gave the stock market some welcomed news for December with the first dovish tone in nearly two years. Stocks have come off October lows and rallied through December. On October 30th the S&P 500 was trading around $4140 and by the close of December 13th the S&P 500 was trading at $4707. That is a modest gain as Autumn was an unfavorable time for equity markets this year.
The main point, the Fed gave its first sign of potentially lowering rates as the economy seemed to be slowing which sparked investors interests and spurred the market ahead. The Fed will be watching the economy very closely in the first half of this year, their biggest commitment is still inflation and if the needle moves in the wrong direction the Fed will have no issue with tightening policy further or holding for longer. Best case scenario at this point is the Fed holds rates for the first half of 2024 as the economy cools a bit more and inflation comes down. We will have to wait and see when The Fed could lower interest rates in 2024.
View the economies Hard Risk Points on the risk report website
With the pause in rate hikes getting priced into the markets in the November rally and now in December as well, expectations of lowering rates has seemed to take effect into current market moves, investors should be cautious of reality vs. fundamentals. In reality good news has been pushing prices of stocks higher which nobody is complaining about, however fundamentals may be telling a different story. Outlooks for companies were lower in Q3 and had a large negative effect on markets up until the beginning of the November rally. Earning were fairly good for most companies which added to the gains in November, but companies like Google, and Meta both had disappointing numbers which brought down the broader market at the end of October. Later in this article we will talk about how forward outlooks were the sticking points that left investors with bad market sentiment. Investors should be cautious of these moves as results from Q4 and Q1 trickle in. While keeping a keen eye on reality vs. Fundamentals as the new year comes about.
The other big story is with consumers. The holiday season is upon us and big box retailers have been celebrating Black Friday since November 1st. Everybody should be looking at how the consumers are spending this holiday season, they are one of the main reasons that the economy has stayed strong through 2023. Recent reports have shown non housing consumer debt is at all time highs raising by 1.3% to 17.29 Trillion and with student loan repayments about to take full effect in January (unless the Biden administration steps in again) and with credit card interest rates high, this arm of the economy might quickly be getting weaker. First reports show that consumer spending was up for online sales, good for the e-commerce market and sales are slightly up for traditional brick and mortar stores over the Thanksgiving holiday weekend. Good to note that pay-over-time services were used frequently at the check out stand this holiday season. The big question is will the consumer stay strong through the holiday season, and what picture does that paint for the first half of 2024?
View the economies Soft Risk Points on the risk report website
The early Santa Rally seems to have given breadth back into equity markets for the time being. Look for a favorable sediment to keep the rally going on the back half of December. As long as inflation numbers are relatively declining or holding that will be good news for the economy.
Outlook
Hopefully the Fed can strike the right balance here, the economy has slowed and supply is getting back on track. The question is what does it mean for the market when demand is slowing? The Fed is pausing on their rate hikes for the third time in a row which is good, they have given the economy time to breathe and see what results come from a having a 5.5% interest rate and everything seems to be going in there favor at the moment. But the lack of demand could be a strong catalyst to market participants. If demand is slowing that means money is tightening and if corporations slow spending the risk increase when it comes to fundamentals. lower outlooks and and less money on the books could cause trouble for stocks in Q4 and Q1 earnings season and possibly into Q2. Hopefully The Fed is able to bring down interest rates and spur spending without outlooks getting too bleak.
With corporate outlooks, consumer spending and real estate prices softer, we see the effect of the quantitative tightening (QT) taking effect on the economy as a whole. This seems to be good from an economic stand point as the Fed pointed to the first dovish tone they have taken since the QT had begun. they expect to bring interest rates down around 2.25 and 2.50 between 2024 to 2026, given that there are no bumps in the road along the way. if this is the case we can expect economic activity to pick up along the way.
This is a very tricky time to be invested in the stock market over the medium term, there are plenty of catalysts that are not helping you to get any gain out of being exposed to the market. Traders should have a good risk strategy right in place. Investors should be very keen on reality vs. fundamentals, do not let the tone of the Fed offset guidance provided by the companies you invest in. If the economy is slowing companies will feel this in the coming quarters so be patient and do not get ahead of the economy.
Bonds are looking good and always safe as well as money markets and CD's. Building a latter investment in short term treasuries is a great idea and gives you access to cash regularly if you need the cash if the sediment starts to turn in the stock market.
Staying exposed to the market certainly has risk after the holiday seasons. Economists are hoping the Fed can create a soft landing but there is plenty of sediments out there that thinks we will have a rough landing as well. If you are staying invested in equity markets you can always go for your strong value companies with good dividend returns if you need to stay exposed to stocks. You can also rotate into safe havens for recession safety sectors healthcare, utilities and consumer staples. Do be mind full of consumer staples the outlook is that consumers are going to stop spending as they have burned through there covid cash piles, this sector known to be safe in a recession could see more negative territory if this theory comes true.
This is a very cautious time for investors but there are plenty of safe investments with decent returns for the time being. Stay cautious and risk adversed heading into the first half of 2024.