Great 2023 for Markets, Not So for Forecasters

Jeff Buchbinder (00:00):

<Silence> Hello everyone, and welcome to the latest LPL Market Signals. Jeff Buchbinder here, your host for today with my friend and colleague, Adam Turnquist. Adam, first Market Signals of 2024. Exciting way to ring in the new year, talking about markets, reviewing a great 2023, certainly. And sharing some thoughts on the new year. How are you, how was your New Year's?

Adam Turnquist (00:26):

Good. Happy New Year to you and lots to talk about when we think back on 2023, certainly a challenging year, but a great year for equities. We'll go over some of that today. And any New Year's resolutions for you this year?

Jeff Buchbinder (00:41):

New Year's resolutions. Well, I guess I'd probably say try to be a little bit more accurate with forecasts. How about that? Because we were too low. We were too conservative, certainly. If you're going to miss on forecast, you're better off missing low than high. So maybe that's one. I don't know what maybe beyond that, expand the wardrobe. You know, we were just talking before we started recording here that you know, the sport coat collection is kind of limited these days, so maybe expand that. How about yourself?

Adam Turnquist (01:20):

I think I could qualify for that one. I think my one New Year's resolution was to golf more, but my wife didn't like that <laugh>, so I'm going to go with sleep more this year. Get to bed a little earlier.

Jeff Buchbinder (01:31):

Oh, I like that one. That's excellent. Good health. Good health. So, here's our agenda for today. By the way, we took the week off last week, so back to you for the first time in two weeks. We're going to review last year and last week for markets. Of course, we know it was real strong. Not only that, but it was a strong finish. We are on a nine week win streak for the S&P 500. I think I got that right, Adam. The next we're going to go over the Weekly Market Commentary, which you can find on lpl.com. Just posted here this morning. It is Tuesday, January 2, 2024, as we're recording this. It is on hits and misses. So, what did we get right? What did we get wrong? So, we're certainly going to try to get more right than wrong this year and with our forecast as we always do.

Jeff Buchbinder (02:25):

You know, I guess sure we had some misses, but I think our predictions were actually generally better than consensus <laugh>. So, you know, we've got that going for us. So next charts to watch. So of course, that's your specialty, Adam, we've got a lot of great analysis for you, some seasonality which, you know, a lot of people talk about as we start a new year, and, you know, we're done with tax loss harvesting. We're in the, you know, the Santa Claus Rally period and all of that. So then of course, as we always do, we'll finish up with a preview of the week ahead with the economic calendar. So starting with you know, the recap, I mean, I mentioned we were up you know, nine straight weeks for the S&P. Total return for the S&P for the year, over 26%.

Jeff Buchbinder (03:16):

Of course, just outstanding. We have had two years that were a little better than that recently, 2019 and 2021. So I think it's the third best year in the past decade, but still, we'll take it. Just a little shy of all-time highs on the S&P. But we did end the year with an all-time high on the Dow, you know, so Adam, I mean, if you ask me for just one takeaway on the year, you know, in terms of the markets anyway, it's really about tech and the magnificent seven. You see here on the sector column, year to date column, you've got communication services, which is where Alphabet and Meta are up 56% for the year. You've got tech up 58%, certainly NVIDIA and Microsoft a big part of that, Apple too. And then you have consumer discretionary which is where Amazon and Tesla are, up 42, right? Huge year for growth. A huge year for tech. So, that would probably be my one key market takeaway. What would you highlight you know, in terms of markets last year that stands out to you?

Adam Turnquist (04:26):

I think one of the most interesting aspects of last year was just how well seasonality trends played out. If you think throughout the year, you know, we started off with the trifecta. We had a positive Santa Claus Rally, positive first five days, positive January average return for those periods historically is about just over 17%. Obviously, we did better, better than that this year. But if you go through the rest of the year, the worst month for the S&P was in September. That's historically in line with seasonal periods. The lows were set in the second half in October. Another one that's right in line with seasonality. Best month for the year, November, of course, up nearly 9% for the S&P that lined up with seasonality. So, I think it's been pretty interesting to see these seasonal trends play out. It doesn't always happen that well. But last year was certainly a pretty strong seasonal period, or at least aligned with the seasonality pretty well.

Jeff Buchbinder (05:24):

Yeah, that's a good point. You know, I think it, you know, because it was such a growth led year, it was also the year of the U.S., right? U.S. continued to outperform international, which has really been the trend for most of the past decade. So that stands out as well. And of course, why did the markets do so well? We had a soft landing. We had falling inflation. We had that dramatic drop in interest rates later in the year related to the Fed pivot. So all of that, that story you know, it wasn't really so obvious to the market that that was a great bullish narrative in late October <laugh>. But I think the, you know, 14% rally the last two months of the year certainly the market voted that those, you know, that narrative was playing out and the concerns about stubborn inflation and recession had really moved to the background.

Jeff Buchbinder (06:18):

So you know, I mentioned rates down, you know, remarkable comeback for bonds. I think it was the best two-month rally for the Bloomberg Aggregate Bond Index since 1982, up about 8%. So, you basically went from, you know, down three to up five and a half for the year for bonds after November 1st. So, just tremendous. We know rates collapsed. Actually, we'll talk about our rate forecast in a minute, but we actually almost got that right. You know, our original forecast was 3.25 to 3.75, and we ended the year at about 3.87 <laugh>. The problem is we changed it intra-year maybe that's a theme, Adam, for the year. We should have left our forecasts at the start of the year alone. They would've been about as good as anything out there <laugh>, right? Absolutely. But we changed them.

Jeff Buchbinder (07:10):

We changed them intra-year and then you know, ended up kind of regretting those decisions. But nonetheless, if you're going to be wrong, you know, on a stock market forecast, better to be a little conservative we think than certainly too aggressive. So strong gains for bonds. You know, the surprise from Lawrence Gilmore our fixed income strategist, for last year, I think was how strong high yield was, right? But you know, the key point I think that he would make in reviewing last year is your starting yields and your end yields were about the same. That left you with a coupon. And the coupons were pretty good. So even though we didn't get much movement in rates from January 1 to December 31, we got a pretty good year for bond returns. So, that's a key takeaway there. I think maybe the disappointing year for oil, although it's good for consumer spending declines in oil, I think was another surprise especially given the geopolitical situation. Anything else you'd call out here?

Adam Turnquist (08:19):

I think one of the other things that stood out was just last, over the last two months, you noted how the Agg had its best two month run since the 80s. The 60/40 actually did well, it was bonds rallying and stocks rallying. I think the 60/40 Bespoke put out some research. It was the best two month period for the 60/40 portfolio nearly since 1990, up almost 12% based on the basket that they looked at using the S&P 500. So, pretty remarkable run there. And then when you look at energy prices, yeah, big disappointment, especially in natural gas, you can see year to date down almost 50%. You had an unseasonably warm December that really weighed on the overall heating demand outlook and really exacerbated kind of the supply demand imbalance right now for natural gas. But when we look at crude oil, technically, we do think the lows were likely set kind of in the $64 to $68 range. Prices were oversold. We had a little bit of a rally off that level. Obviously, a lot of that's been more predicated on geopolitical risk coming in with over the weekend. Now we have Iranian warships entering the Red Sea, but I think enough to buoy crude oil above that kind of $64 to $68 level. Little more time though, I think for upside here, it could be a little bit of a consolidation as we kind of form a base down here.

Jeff Buchbinder (09:45):

Yeah, we're hanging in there in the low 70s right now on crude oil. So we'll certainly watch that as a barometer of what's going on in the Middle East. So you know, I mentioned upfront that we didn't quite get to an all-time high on the S&P 500, but we sure got close Adam. I've heard a metaphor from Sam Stovall over at CFRA, we're big fans of Sam's. He refers to new all-time highs as rusty doors. You know, you got to like kick at them a couple of times before they eventually open. That seems to fit this scenario. How long do you think it's going to take us to get through the all-time high? Do you think that's going to, you know, happen early this year, or, or do you think we maybe need to roll over here in the first quarter?

Adam Turnquist (10:36):

Tough to say. I do like Sam's rusty door analogy. I've heard that one before. So it takes a few pushes to open it up. I think when you look at the broader marketing, look at some of the other indices, whether that's the NASDAQ 100 or even the Dow Jones Industrial Average and even global indices that have already made new highs, I think it's likely you'll see the S&P 500 follow suit. If you look at the advanced decline index for the S&P 500, which just tracks the number of advancing shares versus declining shares, that's already broken out to new highs. Typically when that leads, you see the S&P 500 follow. And then on the chart that we brought today, you can see on the bottom panel just the overall participation in the rally. It started off pretty narrow when we kind of gapped above key resistance at 4,400.

Adam Turnquist (11:24):

That was the magnificent seven really doing the heavy lifting. However, you did see broad participation build into this market as we went into year end. And again, close just shy of that record high, but I think we'll get there. And then of course, the next level you're going to want to watch is 4,819. That's the all-time, intraday high, but moving in the right direction. A little bit concerned when you look at it on a short term basis, just how overbought the market is. Typically when you see these kind of parabolic rallies, they do not end in a sideways correction. Typically, you get a pullback that retraces generally anywhere from a third to two thirds of that initial move. So we could see a decent pullback if we start to, you know, roll over a little bit here and take a bit of a breather. But the good thing is we're in a bull market, and I think that would be a buying opportunity for investors to reenter this bull market.

Jeff Buchbinder (12:19):

Yeah, a lot of people are talking about participation. I actually have been impressed. The small caps have had a really nice run the past couple of months. And I think something like 90% of the Russell 2000 is now over its 50-day moving average. You've got, you know, really strong really strong statistic for large caps right above these moving averages. So there's good breadth now, we needed that. You can't just have seven stocks carry you every year. Really, really good to see a healthy, healthy sign for the bull market. How about the 10-year here, Adam? I mean, this actually, we're getting a little bit of a move higher this this morning back towards 4%. You know, how do you see this shaking out? Is the 10-year kind of finding a floor here, or do you think we could move lower?

Adam Turnquist (13:09):

I think there's still more downside risk for yields. You can see this developing downtrend that started off right around that 5% level. There's a head and shoulders top formation that developed right around that period. And from there, it's really been a downhill ride for yields, of course, supporting equity markets. But when we look at support for the 10-year, there's some around 3.60. And as you highlight here, the big support level that we're going to want to watch for 2024 is kind of this, call it 3.31 area. That goes back to the lows that we witnessed in late 2022. I think for equity markets, the best case for yields is just consolidation. Call it sub 4%. Maybe that's the cap on yields for next year. Stocks did very well in that environment. If you look back late 2022 and then into the summer of 2023 yields more or less went sideways, stocks went higher. I think that would be a pretty good scenario for equity markets this year.

Jeff Buchbinder (14:09):

Yeah, no doubt. Just like last year, rates are going to be a big key in determining where stocks go this year. So let's go to the, you know, the painful part of the presentation here, Adam, where we have to, you know, talk about what we missed. Although we had some, some hits too. So you know, I guess this is maybe a comfortable miss to talk about, right? We generally, we got it right that we thought inflation would come down quite a bit and that the Fed would, you know, end its rate hiking campaign. We thought it would end its campaign a little earlier and we thought maybe inflation would come down a little bit faster. Is that fair?

Adam Turnquist (14:50):

Yeah, it was a tough year. But we didn't get the inflation direction and we did anticipate that we'd get the pause. I think it's just we had this kind of slower than expected cooling in inflation, of course, a resilient U.S. economy, notably the American consumer really helped drive that. And I think kept the Fed comfortably higher for longer. As we look at, you know, you can see in the dark blue line with the Fed really pausing in July, but I don't think there was any type of confidence in a pause <laugh> back in July. It was really until, you know, this last FOMC meeting in December, where I think the market became confident that the rate hiking cycle is over. And it was really just about guessing the Fed. And if you think back in early 2023, everyone was anticipating kind of the same thing. A pause and cuts, I remember, coming as early as the fall, sometimes they would get baked into, you know, that August, September timeframe. Of course, those got pushed back as the economy did better than expected. So a tough year. But I think importantly, inflation came down to a level where the Fed's now comfortable no longer raising rates and the markets welcome that message.

Jeff Buchbinder (16:06):

Yeah, and certainly, I mean, we did expect a mild and short recession at some point during the year and that was expected to bring down inflation. So that's part of why, you know, inflation came down maybe a little more gradually than we expected, but we were right in saying, I think all year, that whatever mild slowdown or contraction we might have had, we thought the market was going to manage through it quite well because consumers and companies had been preparing for it, right? And we were going to get that Fed pause. So you know, a few hits, I guess. But <laugh> certainly some misses in there.

Adam Turnquist (16:49):

Include the housing market, I think that's a win too when we think about, when I was reading through our Outlook for 2023, and we had noted how multifamily units were surging in terms of the build outs, and that would eventually lower the rent component of CPI, which is a big factor in inflation. And we did see the shelter component of CPI fall considerably in the latter half of 2023. And of course, we were relatively bullish, I think on the housing sector, we'll call it, as well as we kind of witnessed those multi-family units build and just the dynamics playing out with supply in the housing market. So, we call that a win, I guess.

Jeff Buchbinder (17:32):

Great year for home builders, which we had highlighted on a number of occasions. So, good call out there. So, you know, turning to the stock market, you know, in a sense, I, I feel really good about this forecast. You know, we started the year 4,400 to 4,500 as our year end fair value range. And we were there pretty close to the end of the year <laugh>, right? But then we ended up, you know, having that strong late year rally pushing the S&P up, you know, north of 4,700. So sure, that was a miss. But consensus, oh, and we did take the target down a hundred points in early summer. So that was a miss, you know, 4,350, we should have left it at 4,450 at the midpoint. But when you compare that to consensus, I highlighted that here on this slide. You know, 4,017 was strategist consensus in May, right? And there have been some high profile bulls that have gotten some, you know, positive media attention certainly. But when you look at collectively the consensus and the majority of forecasters, they were below the 4,350 that we were at for the back half of the year. So, I'd call this probably more of a hit than a miss just based on what our competitors were doing.

Adam Turnquist (18:47):

Yeah. And we kept the overweight equity recommendation, which was a challenge when you flash back to the banking crisis or mini banking crisis, whatever you want to call it, when the S&P was down to right around 3,800, of course you're worrying and flashing back to the Global Financial Crisis and systemic risk sweeping across the market. Of course, no one really knew what was going to happen there. We didn't have very good precedent <laugh> when you think about the GFC era. So, we did stick with our equities overweight recommendation. And at that point, I think in I believe in April or May we also take advantage of the dislocations in the banking sector, we went positive on preferreds as well. And that one's, I think that would be another, another hit for LPL Research last year.

Jeff Buchbinder (19:34):

Yeah, absolutely. So when we, after the banking crisis a lot of firms, you know, took their targets down and went underweight equities, even at S&P 500 3,800, we hung in there with that equity overweight. And that certainly was proven to be the correct decision. We did take off that equity overweight a little early <laugh>, right? Wish we were taking it off now instead of taking it off back then. But nonetheless again I think handled that generally better than the industry. So turning to rates you know, this is another one where we wish we'd have just left it <laugh> 3.25 to 3.75 was our forecast at the start of the year. And we just finished a little above the high end, Adam, as it turned out, after that collapse in rates over the last couple months of the year.

Adam Turnquist (20:27):

Yeah, this <laugh>, I don't, not envious of Lawrence Gillum, our chief fixed income strategist over the last couple years, predicting interest rates amid one of the biggest rate hiking cycles we've seen in, you know, 40 years has, has been obviously a challenge. We witnessed some huge volatility in the fixed income market, and speaking of volatility, it is still pretty high right now compared to the VIX. So, I think Lawrence is going to have a challenging job ahead for 2024. But again, if we would've stuck with our guns, we'll call it, and held our original forecast. We'd be right in line there, but I think a pretty challenging market for fixed income last year to really nail the number here.

Jeff Buchbinder (21:12):

Yeah. So you know, our target is 3.75 to 4.25 for the end of 2024 now. So we think rates will be maybe just a touch lower when all is said and done. So I guess we'll move on from that. And this is where we get into seasonality, Adam, and, well, first we'll start with the nine week win streak, which is pretty rare, right? I know we haven't seen one of these since 2004. Statistics to me say we maybe need a period of digestion here in the short term.

Adam Turnquist (21:50):

The one-liner, short-term pain, long-term gain I think when you look at the history of nine week winning streaks, there's only been nine of them since 1950, on average a week later, only a third of those are higher. So pretty low odds in terms of turning this into a 10 week winning streak, especially when you look at some of the price action today, bit of a struggle on the first trading day of the year, but longer term still looks pretty good. Average returns up on average 8%, median 12.2%, and then roughly 78% of the time the index has been higher. So that momentum begets momentum kind of strategy here when you see these nine-week winning streaks. But I think you could see a little bit of a pause here at least this week when we look at price action.

Jeff Buchbinder (22:41):

Yeah, just like when we started last year, we had a lot of these studies pointing to double digit gains for 2023, which obviously we got, even better. I think this year these and other studies are maybe pointing to high single digit gains <laugh>. So, in general, and that's what we're seeing here, another study that points to high single digit gains is you know, after a 20% up year, you on average get a gain of about 9% in the following year. So this is this is the AAII Bull Bear Sentiment Index. I know our colleague George Smith put this together, and I know you studied this too, Adam. This is a massive move in bulls relative to bears, right? You could see it, you know, with this arrow pointing higher. Pretty rare, and tells me that maybe we're getting close to the point where we have too much optimism, right?

Jeff Buchbinder (23:40):

And next here we have the table of the returns that you tend to see after these bullish readings where you have a lot of bulls relative to bears and you see the returns. Well, here's another one. Returns, you know, 8% on average after you're in this quintile of standard deviations of bullishness relative to bearishness. We're not in the very bullish range where you tend to see weaker returns, but you know, the returns are a little bit softer than you tend to see when the survey of an individual investors is more bearish.

Adam Turnquist (24:16):

Yeah, not exactly solid three month average return at 1.7%. And I think when you bring this, you know, the collective evidence here in terms of sentiment getting pretty extreme, and of course overbought conditions getting pretty extreme, that does raise the odds of a potential short-term pause or a pullback. No guarantees. But I think it does definitely elevate those odds. We could see a little bit of softness here, whether it's in January or February when we start to see that play out.

Jeff Buchbinder (24:49):

Yep, absolutely. So you're probably going to get some tax loss or delayed tax loss selling hit in January right. And then you know, because people didn't want to take the tax hit last year and pay taxes this year. So you know, that's kind of aligned with this study, right? That maybe you'll get that. And we're seeing that today with Apple shares down on an analyst downgrade. Big techs are underperforming, so you might get a little bit of a correction in the big techs that had such a strong year in 2023 as people take some profits and of course, stocks are getting a little expensive, yields maybe have found a little floor. So it all kind of lines up. By the way, seasonality in a presidential election year you tend to see some volatility early in the year, so maybe we'll see that.

Jeff Buchbinder (25:40):

It just all points to this year being a little bit more of a grind and maybe not an up 20 kind of a year, you know, hopefully we can do 10, but our forecast the LPL fair value target on the S&P 500 of 4,850 to 4,950 implies about a 6% return from here. Something like that. So, not bad, but not, we're certainly not forecasting you know, another booming year like we had last year. So, Adam, the Santa Claus Rally we're losing our gains today, but we have another, what trading session and a half here. We hopefully can end positive and continue the streak. We have a streak going on the rally game.

Adam Turnquist (26:26):

Cutting it a little close I think with today's price action, we're still above the level, which is going to be 4,747. That's the line in the sand for a positive Santa Claus Rally. If you're not familiar with the Santa Claus Rally period, it's represented by the last five trading days of the year, plus the first two trading days of the year. It's a seasonally strong seven-day stretch. Your average returns are about, as you can see here, 1.3%. So pretty impressive for a seven day stretch. And then a lot of people will look at this to extrapolate it out into what it means for the rest of the year. It's got a pretty good predictability rate in terms of if Santa shows up and you get a positive Santa Claus Rally, you can see the next year returns up 10.4% with 74% of those positive. On the flip side, of course, if Santa doesn't show up, you get the lump of coal, average returns only 4.1% for the S&P 500 next year.

Jeff Buchbinder (27:24):

Hopefully Santa comes, hopefully he delivered presents <laugh> to everyone over the last five days. But we still got two more in this stock market period. So, we'll see, going to be close. All right, so we had a great December. What S&P up about 8% I believe if memory serves. And now we're going into January, of course, and the seasonals look pretty good there too.

Adam Turnquist (27:52):

Yeah. So we'll see if the momentum can continue into January. More recently, it hasn't been a super strong month. I think it's ranked seventh over the last I think it was the last 20 years. Can't remember the exact ranking order, but overall it's a pretty solid year or pretty solid month for the S&P 500. You can see some of the various return scenarios going back to even 1950. So, and has a relatively high positivity rate in terms of January finishing positive. So of course we'll be looking at the first five days of January. There's an indicator goes from Yale Hirsch and the Stock Trader’s Almanac. And then of course the January barometer. If January's positive, or as the saying goes "as goes January, so goes the year." We'll see if we get that trifecta, but we got to get that to really get the trifecta, we need a positive Santa Claus Rally period. So we'll, we'll start there and see how it goes for the rest of the month.

Jeff Buchbinder (28:51):

Yeah, all those patterns pointed bullish last year, certainly and markets delivered. So yeah, so good seasonality, but not great you know, heading into January. But then we still are in the positive, you know, six-month period for "sell in May go away." So I know that's looking a little bit further out, but generally speaking, seasonality would be a tailwind between now and April. So, let's preview the week ahead and then we'll wrap. Lot of good content here. So it's a huge week. I mean, last week, you know, most people weren't paying any attention and there really wasn't any data, any meaningful data, I guess. But yeah, we don't get any time to kind of ease into 2024 because we have the ISM tomorrow and then the jobs report or ISM on Wednesday, I should say, for those who are listening to this on Wednesday. The jobs report is going to get the most attention. I've actually seen consensus numbers in the range, depending on your source between 155 and 170, right? We were at 199 last month. The jobs report for November.

Jeff Buchbinder (30:05):

I actually, I think there might be a little bit of downside to this number. I mean it's really, this is notoriously a hard number to predict, right? A lot of people following the data, including our chief economist, Jeffrey Roach, more closely than I do you know, have a difficult time predicting this. But after a 199 and with how strong the economy was, you know, last year, it just feels like we're in a little bit of a slower period of job growth based on some of the other indicators that we've seen. So yeah, I think something closer to maybe 150, 160 rather than the 200 we got last month, makes sense. The unemployment rates expected to tick up marginally as more people come back into the labor force. That's a good thing. And then average hourly earnings 0.3%, we want to see point threes. That's a normal rate. If you have, if you analyze that, you've got, you know, 3.6% per year that's consistent with a, you know, a reasonable inflation rate, generally close to the Fed's target, right? We don't have to get wage growth to 2%, we really have to just keep it in threes. And that should be healthy. So, we'll be watching that. We want point threes and point twos. We don't want point fours. Anything else here, Adam, that you think will be interesting for markets?

Adam Turnquist (31:25):

No, I think you nailed it, in terms of the employment report, that's going to be key. I think it's really going to be interesting to see how the market reacts, if it's above or below. And if we can stick to kind of this Goldilocks theme where it's not too hot, not too cool with the labor market. So, I think that's going to be a key one to watch. And of course, the ISM data. I think the ISM services will be interesting. Of course, services sector, a big driver of our GDP, so we'll be watching that closely as well.

Jeff Buchbinder (31:55):

Yeah, absolutely. You know, the Fed minutes are also coming out this week. We want we want the economy to slow a bit from that, you know, breakneck pace of Q3. The Atlanta Fed GDP Now is at a little over 2% for Q4. So clearly we're in recession in Q4 based on the data. But we did certainly slow and we would anticipate slowing further. Our forecast probably a little over 1% GDP for 2024. I think consensus is 1.4, so we're a little lower than that. We'll have to see. But you know, slowing job growth and slowing inflation is certainly part of that, you would think with the slowing economy. So, the data this week should be consistent with that, and we should continue to cement the market's expectations for a pivot, maybe not six, seven rate hikes for this year but certainly three or four in the back half of the year seems like a reasonable expectation if inflation continues to come down. So that's the week ahead. And I think with that, we'll go ahead and wrap, unless Adam, you have any closing remarks to to launch us into the new year?

Adam Turnquist (33:05):

No, just wish everyone a great 2024, so looking forward to another year here at LPL Research.

Jeff Buchbinder (33:12):

Awesome. Yeah, thanks everybody. Hope everybody had a wonderful New Year's. Thank for listening. You know, it's great. We have heard from some of you directly that you have enjoyed what we do. So please keep the feedback coming, hopefully mostly positive <laugh>, but keep the feedback coming. We'll take all feedback, appreciate your support. So happy New Year, everybody. Have a great 2024 and we'll see you next week for another edition of LPL Market Signals.