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On its face, the second month of Q4 reporting was much more positive than the first. After sagging in January, the S&P 500 bottom-up EPS estimate rose back to $54—almost exactly where it stood before Q4 announcements got underway (Chart 1). With just a few stragglers left to report, full-year 2023 EPS will come in at $214. That’s almost 9% better than 2022’s final result.

Phil Segner examines Nvidia's meteoric rise to the four percent club and juxtaposes it with Cisco's dot-com bubble surge.

Read this week's MTI update.

Join us for a Zoom Call with Chief Investment Officer, Doug Ramsey where he will share his thoughts and observations on today's market and what he sees looking ahead.

Real Estate was the top performing sector in the final quarter of 2023, climbing an impressive 18.8% against the market’s 11.7% gain.  Signs of enthusiasm for the REIT industry have been rare in recent times.  While the S&P 500 gained 96% over the last five years, REITs returned a paltry 31% over that time.  We wondered if last quarter’s success signaled that it was time to take a fresh look at the group.  This report examines the investment merits of REITs as an asset class, using the mental model of evaluating “what you pay vs. what you get.”

Read this week's Major Trend. 

The Core composite gained 1.3% in January. Among the underlying holdings, excellent long-short performance offset negative returns from the fixed income allocation.

See this week's Major Trend Index Update.

As detailed elsewhere in this section, the notion of an economy with unstoppable momentum is undermined by an historic divergence between real growth estimates (GDI vs. GDP), and by the weakness in full-time jobs and total hours worked.

Select Industries has been successful at finding leading industry groups outside the handful of stocks driving the S&P 500 over the last year. Homebuilding, Semiconductor Equipment, and Trading Companies & Distributors have all been key contributors to the strategy.

The stock market leader in the first month of the new year has an above-average chance of persisting during the remaining eleven months. Historical results showed this to be true, not only for index results, but at various other levels of granularity, including sectors, themes, and asset classes.

The jobs numbers are not the first we’d expect to provide evidence of an impending economic turning point, but that is not the view of those in the soft-landing camp. And the most recent “soft” (survey-based) employment numbers have probably contributed to that camp’s swelling membership.

Yale professor Robert Shiller popularized the idea of smoothing out earnings for cyclical fluctuations about 25 years ago. However, about 25 years before the famed “Shiller P/E,” Steve Leuthold was charting S&P 500 5-Yr. Normalized EPS by hand. 

Last month’s break in the S&P 500 above its January-2022 high means that we must officially label the rally since October 2022 as a new bull market. This also means we can now say with certainty that the October-2022 low was the priciest bear market bottom in history—and by a long shot.

It’s too soon to know if the October low for small caps will stand, but it would have been a better, more buyable low if it had been accompanied by a recession. It’s all about “initial conditions.” Russell 2000 lows associated with recessions bottomed with a normalized P/E multiple nearly five points below that of the median multiple for non-recessionary lows—and subsequently gained an average of 185% versus +75%.

As noted earlier, “Don’t fight the Fed” is an adage that last year’s performance seems to have debunked, although we think it is too early for equity investors to declare victory.

The semiconductor stock is now within spitting distance of becoming the eighth firm ever to enter the prestigious 4% Club (achieving a 4% weight in the S&P 500). Over the last four years, NVDA has posted a return of +945%, pushing its index weight from 0.54% to 3.74%. The stock’s 24% gain in January contributed nearly half of the S&P 500’s +1.6% monthly return.

At the end of 2023, market breadth finally widened. That short run came to an end in January as the momentum champ of 2023—Large Cap Growth—was back in control.

The soft-landing camp is growing, but the new members are not offering anything original to support their case. Most believe the yield curve is broken, though many argued the same in both 2007 and 2019. They say households are in good shape, but that is only true for the consolidated consumer balance sheet and it’s the behavior of marginal consumers that’s most critical at turning points.

The stock market remains “externally” strong, with the S&P 500 and DJIA at new all-time highs on February 2nd.  However, the YTD performance gap between the S&P 500 and the Russell 2000 is already 8%—the worst five-week start ever for Small Caps on a relative basis. And, on a trailing 12-month basis, the percentage of S&P 500 stocks outperforming the index, itself, is the lowest on record at just 25.6%. That’s made it a challenging time for active managers and dart-throwers alike.