Wentz Weekly Insights
All Eyes on the Fed’s 2024 Forecast

Six straight weeks. After squeezing out a 0.21% gain last week, stocks have now increased for six consecutive weeks, ending last week with a new 12-month high and less than 5% from all-time highs. During this winning streak, the S&P 500 has risen 11.8% from the October lows. But unlike the first ten months of the year, it is a broader based rally, with all size companies contributing to the move higher, and more so the most highly shorted stocks, as we discussed last week. For example, the equally weighted S&P 500 index was up 12.7% over that same period (whereas it underperformed the first 10 months of the year with a 2.5% decline compared to the S&P 500’s 9.5% increase). As we mentioned, we were in a quiet period for the markets with very little macro news headlines, so we thought the path of least resistance was to the upside and did not rule out new year-to-date highs, which was also helped by it being a seasonally strong part of the year.
While there were no macro events or headlines, there were many company specific headlines from several brokerage conferences as well as several investor day meetings. Several headlines included Walmart less upbeat on the consumer in 2024, saying spending will be tougher to predict, AMD unveiling its new AI chip taking aim at Nvidia and saying the market for its products will be $400 billion over the next four years, Google saying it will release its own AI model ‘Gemini’ that it says will outperform OpenAI’s ChatGPT/GPT-4, and McDonald’s laying out its plan to open nearly 9,000 new location and adding 100 million loyalty members by 2027. In addition we saw a spike in M&A activity, Alaskan Airlines acquiring Hawaiian Airlines, AbbVie buying biopharmaceutical company Cerevel Therapeutics, Honeywell buying Carrier’s security business, Five9 revising merger possibilities with ZoomVideo, and Macy’s approached by private investors to be taken private.
The quiet period has led to a new low in volatility. The VIX, the volatility index, also known by investors as the “fear index,” fell to 12.35 to end last week, the lowest level since January 2020. In addition, after recently seeing the highest level on record, volatility in the bond market, measured by the Merrill Lynch Option Volatility Estimate (the MOVE index), has fallen to 111 from a recent high of 180 several months ago, according to Barron’s. Treasury yields have fallen, as stocks have increased, with the 10-year Treasury note’s yield back down to 4.23% after reaching a 17 year high of 5.00% just six weeks ago.
The quiet period is likely to change this week with inflation data on Tuesday and the Federal Reserve’s policy decision on Wednesday afternoon. While the Federal Reserve is expected to keep rates and policy unchanged following its meeting, the bigger question will be what it is looking to do in 2024. A contributing factor to the rally over the past six weeks has been investors now pricing into the markets and expecting 1.25% in rate cuts by the end of next year with the first cut happening as soon as March, a significant pull forward from several weeks ago.
While markets are projecting those rate cuts, the Fed has told us it only projects one rate cut by the end of 2024, based on its most recent projections filed at the September 20 meeting. We believe the biggest focus will be on this – where the Fed projects rates at the end of 2024, based on its Summary of Economic Projections (released every other FOMC meeting – about every three months). While markets are expecting the Fed’s projections to move closer to the market, we do not think it will be by as much as what the markets want. The Fed wants to maintain its credibility and keep its somewhat hawkish stance to keep inflation expectations in check, and we see this as one way in doing so.
In addition to rate projections, we will see where Fed members see inflation, economic growth, and unemployment by the end of 2024 and the following two years. Any resetting of expectations will lead to a pickup in volatility and puts risks on stocks which are at new highs and pushing forward price-to-earnings (P/E) multiples of closer to 20x, a level that historically sees resistance.
Week in Review:
Stocks took a breather on a day light of headlines to start the week on Monday, following a solid streak of gains the prior several weeks. The main indexes were lower while the equal weighted S&P 500 and small caps held up much better. Geopolitical conditions may have played a role with Israel resuming and expanding its offensive to the south in Gaza while a US Navy destroyer was attacked in the Red Sea by Houthi rebels (backed by Iran). The main corporate news was Alaska Air announcing it would acquire Hawaiian Airlines. Treasury yields were slightly higher and stocks were mixed – the S&P 500 fell 0.54%, the equally weighted S&P 500 gained 0.05%, while the small cap index Russell 2000 rose 1.04%.
It was a slow start to the day on Tuesday with global stocks lower following US trading on Monday, but particular weakness in China after Moody’s cut its credit rating outlook to negative over growing stress from regional and local governments from excess off-balance sheet debt. Data included job openings which fell to the lowest since March 2021 and an improvement in activity in the services sector, according to the ISM survey. Breadth was weaker on Tuesday with stocks mostly lower across the board – the S&P 500 fell 0.06% while small caps were down 1.38% and Treasury yields were lower across the curve.
Wednesday saw data on payroll growth from ADP that was slightly higher than expected while the US trade deficit expanded in October. It was a quiet day from a macro perspective, while many individual stocks made company specific headlines. After a 4% decline in oil, the price per barrel fell below $70 for the first time since early July. Treasury yields fell further while stocks were lower with the S&P 500 falling 0.39%.
Asian stocks were lower Thursday, particularly Japan after its central bank came out with more hawkish comments. It was a quiet day in the US with the only data on jobless claims that were relatively unchanged in the latest week, but continuing claims that surprisingly fell sharply after reaching a 2-year high the prior week. Treasuries were relatively unchanged while stocks rose 0.80%.
The most anticipated event for the week was the release of the November employment report where 199,000 jobs were added in the month with slightly higher wage growth than expected and an unemployment rate that fell back to 3.7%. With no big surprises either way, stocks continued their move higher with Treasury yields seeing a move higher as well over still solid job gains. Small caps outperformed with a 0.67% increase, while the S&P 500 gained 0.41%, and the 10-year Treasury yield rose 8 basis points.
After seeing the sixth consecutive weekly gain, stocks settled with new year-to-date highs after employment data was not too hot, but not too slow either. The dollar was mixed versus other currencies, but the dollar index was 0.7% higher. Oil fell for the seventh consecutive week with a 3.8% decline over continued demand worries, while gold was down 3.6% after hitting record highs. Treasuries were mostly lower across the curve with the 2-year yield rising 18 basis points to 4.73% and the 10-year rising 3 basis points to 4.23%. The major US stock indices finished the week as follows: Russell 2000 +0.98%, NASDAQ +0.69%, S&P 500 +0.21%, and Dow +0.01%.

Recent Economic Data

  • Nonfarm payroll employment increased by 199,000 in November, slightly ahead of expectations of 180,000, according to the latest data from the DOL. This follows 150,000 job gains from October (unrevised) and 262,000 job gains from September (revised down from 297,000). The most job gains were seen in health care, government, leisure and hospitality, and manufacturing, and only transportation/warehousing saw declines, which were minimal. Also in the establishment survey, the average hourly earning increased 0.4%, above the expectations of 0.3% and follows a 0.2% increase in October. Wages are up on average 4.0% over the past year. However, at the same time, the average work week increased to 34.4 hours, back to the pre-pandemic trend and below the pandemic high when workers were asked to work more hours due to the lack of employees. On the other hand, the household survey shows a big jump in the labor force and number of people employed – the labor force grew by 532,000 individuals while the number of people employed improved 747,000 to 161.969 million (3.220 million above pre-pandemic). The number of people unemployed fell 215,000 which moved the unemployment rate back down to 3.7% (the lowest since July) and the U-6 rate (underemployment rate) back down to 7.0%.
  • The number of job openings on the last day of October was 8.733 million, a sizeable amount below the 9.300 million expected. This was the lowest level of job opening since March 2021. Job openings decreased the most in health care, social assistance, finance, and real estate, while increasing slightly in information. The number of separations was little changed while the number of quits was 3.628 million, down slightly from September but relatively unchanged over the past several months, and layoffs were 1.642 million, up slightly from September but down slightly over the past several months.
  • ADP said it saw 103,000 new payrolls in the month of November, slightly below what economists were forecasting and roughly matching the pace of gains from October. Leisure and hospitality, which saw massive job gains through the post-pandemic recovery, is now seeing small job losses, while gains were seen in education, health services, finance, and trade/transportation. One thing noted by ADP’s Chief Economist was we are seeing more moderate hiring and slower wage growth.
  • The number of jobless claims filed the week ended December 2 was 220,000, relatively unchanged from the prior week, with the four-week average at 220,750, also unchanged. The number of continuing claims was 1.861 million, down 64k from the prior week which was a multi-year high, with the four-week average relatively unchanged at 1.925 million.
  • The ISM services index, a measure of activity in the non-manufacturing sector, was 52.7, up slightly from October and in expansion territory for 41 of the past 42 months. A reading above 50 reflects expanding activity while a reading below 50 reflects contracting activity. New orders rose to 55.5 for the best in four months, while prices paid (an inflation reading) was 58.3 which is a positive, but employment disappointed at 50.7 reflecting slow growth.
  • The US trade deficit expanded slightly in October with a monthly deficit of $64.3 billion, $3.1 billion higher than September. The larger deficit was due to a 1.0% decline in exports combined with a 0.2% increase in imports. Year-to-date the deficit is down about 20% from the same period in 2022. Another way to look at the data is the volume of trade, which better reflects demand both domestically and abroad – imports are down $133 billion through the first ten months of the year compared to 2022 while exports are up $28 billion. Smaller imports could be another warning sign of much slower demand.
  • New orders for manufactured goods, also known as factory orders, fell 3.6% in October after two consecutive months of solid increases. Shipments declined 1.4%, following no change from the prior month. Driving the decline, as is the case with most months, was transportation, more specifically aircraft orders which fell nearly 50% in the month, resulting in a 14.7% decline in the transportation segment. However, there was still weakness outside transportation as the index minus transportation was down 1.2%. The important number for GDP purposes, shipments of nondefense capital goods excluding aircraft, was flat in October following a 0.1% decline and 0.7% increase the prior two months.
  • The University of Michigan’s Consumer sentiment index was 69.4 for the first read in December, suggesting consumer felt more confident in their finances and the economy as stocks moved to new highs of the year and inflation expectations moved lower. This was a jump from 61.3 in November and broke a four-month streak of lower readings. The index on current conditions rose 6 points to 74.0 while the index on expectations rose nearly 9 points to 66.4. The expectation for inflation over the next year was 3.1%, a large drop from 4.5% last month and tied the lowest since March 2021. Long-run inflation expectations were 2.8%, falling from 3.2% last month, the second-lowest reading since July 2021.

Company News

  • In an investor day presentation, CVS reaffirmed its full year 2023 guidance while initiating 2024 guidance of at least $8.50 per share in earnings (consensus $8.51) and revenue of $366 billion that is $22 billion above estimates. It increased its dividend 10%. It also introduced a new pharmacy reimbursement model focusing on simplifying drug pricing and providing transparency called CostVantage and rebranding its patient care business to Healthspire.
  • One week after the reports surfaced, Cigna and Humana have scrapped their plans to merge after reportedly being unable to agree to financial terms, including a price, per the Wall Street Journal. Instead of the merger, Cigna said it would seek bolt-on acquisitions, value-enhancing divestitures, and implement a major stock buyback plan. Cigna said it will launch a new buyback plan worth $10 billion.
  • Honeywell said it has agreed to acquire Carrier’s Global Access Solutions business for $5 billion in cash. Honeywell said the acquisition supports its recent plans to align its portfolio to three megatrends (automation, the future of aviation, and energy transition) and will allow it to be a global leader in providing security solutions for the digital age.
  • Shares of Macy’s jumped in premarket trading Monday morning after a weekend report from the Wall Street Journal said the private equity group Arkhouse Management and Brigade Capital Management have made a $5.8 billion offer to take the company private.  The deal would value Macy’s at $21/share, a 21% premium to where shares closed prior to the report. The offer was made December 1 and the board is currently in process of meeting to discuss the offer.
  • Jetblue shares were higher last week after it issued new guidance after saying that demand trends in the industry remain healthy. It said close-in bookings have exceed expectations during both peak holiday travel as well as non-holiday travel since October. It increased its forecast for available seat miles, revenues, and earnings. Separately, its pending acquisition of Spirit, which saw a lawsuit from the DOJ to block the deal, is expected to see a court decision by early 2024.

Other News

Chinese stocks saw downside pressure last week, with its Blue chip index at the lowest level in five years, after credit rating agency Moody’s cut China’s credit outlook to “negative” citing growing stress from regional and local governments that will require the country to support them which could weigh on its finances. The issue stems from these local governments carrying as much as $11 trillion in off-balance sheet debt which is at high risk of default which could cause massive losses for banks and investors and in which Moody’s says the potential for China to financially support these governments could pose a risk to China’s fiscal and economic strength. In addition, these risks add to lower economic growth and the ongoing downsizing of the property sector.

WFG News

Toys for Tots Toy Drive

Wentz Financial Group is excited to have partnered with the United State Marine Corp on their Toy for Tots toy drive in 2023. We are collecting toys to be donated to the Marine’s efforts. We will be collecting toys until December 15th, feel free to stop by at any time during our office hours until then!

Career Development Day

Monday, December 18, 2023 – All Day
Do you know someone in high school or college looking to get real life work experience from the finance industry? Wentz Financial Group will be hosting its 3rd Career Development Day at our office on December 18. The day will not only be for those looking to get a first look into financial services field but is open to any student wanting to get their feet in the door of the professional world. Don’t forget to RSVP by responding to this email or calling the office at 330-650-2700.

The Week Ahead

Investors will likely be laser focused on two main events this week; inflation data Tuesday morning, and the FOMC policy meeting on Wednesday. While the Federal Reserve is widely expected to hold rates steady, investors will be looking for any hints of rate cuts in 2024 from Powell in his post-meeting press conference, as well as all of policymakers’ forecasts for rates, growth, inflation, and employment in the Summary of Economic Projections (SEP). The consumer price index comes out Tuesday morning where economists currently expect no change in the headline index thanks to falling energy prices but a 0.3% increase in core prices and a 4.0% increase in the 12 month rate. Other data includes the producer price index on Wednesday morning, then a busy Thursday and Friday with jobless claims, retail sales, import and export prices, industrial production and the Empire State Manufacturing survey index. Retail sales will be closely followed as well for additional signs of consumer spending strength. Sales are expected to have declined 0.1% in November for the first decline in months. The earnings calendar remains light, but several notable reports will come from companies with quarter ending November including Oracle on Monday, Johnson Controls on Tuesday, Adobe on Wednesday, Costco and homebuilder Lennar on Thursday, and restaurant group Darden on Friday. Other corporate highlights may come from several investor day events throughout the week. In the Treasury market, investors will be looking at upcoming auctions worth a total of $108 billion from 3-, 10-, and 30-year bonds to gauge the health of demand in the Treasury market. In other central bank news, the Bank of England and the European Central Bank hold their respective policy meetings with decisions coming on Thursday. Finally, Friday may see a boost in trading volume due to quadruple witching, a scenario that happens four times per year when four major future contracts expire, and leads to high volume into the close.