Wentz Weekly Insights
Strategists Expecting Another (Slightly) Positive Year For 2024

U.S. stocks were higher again last week and were higher for 10 of the past 11 weeks. The markets were driven by the top tech names, particularly Nvidia which reached a new record high and Meta, apparent by the NASDAQ’s 3.09% outperformance.
Meanwhile, Treasury yields saw a meaningful drop across the curve with the inversion of the yield curve (the difference between the yield on the 2-year and 10-year notes) the least inverted since July 2022 at 20 basis points (2-year yielding 4.14% and 10-year yielding 3.94%). The market is continuing to price in six or seven rate cuts by the end of the year and is increasingly pricing this into the Treasury markets.
This all came despite inflation in December more than what was expected. The consumer price index rose the fastest in several months with a 0.3% increase in the month in both the headline and core (excludes food and energy prices) indexes. In addition, as we note in the economic data section below, the index that looks more closely at prices in the services sector, called “super core” where inflation is still the highest, is up 4.5% on an annualized pace over the past six months, over double the Fed’s 2% target. Overall, what you could buy for $100 in May 2020 would now cost you $120.71. Despite this data, policymakers have started to talk about rate cuts and how they may be necessary this year, just uncertain on timing and the magnitude.
Last week also kicked off the start to fourth quarter earnings season with some of the big banks reporting Friday morning. Results were mostly mixed between banks, with net interest margins (difference between what banks make on the loans and what they pay on deposits) higher at JPMorgan but lower at Citi, Wells Fargo, and Bank of America over higher deposit costs. Banks continued to build loan loss reserves (cash set aside for potentially bad/defaulted loans) but it was nothing unexpected.
We highlighted last week that analysts and market strategists have forecasted earnings are expected to grow 11% this year. The upcoming fourth quarter results should provide greater insight on the trajectory of earnings for 2024 and how accurate these estimates are.
With earnings growing about 11% this year and markets trading at 19.3 times those earnings, where do strategists see the stock market ending 2024 and how did estimates from the past two years turn out? Looking back at forecasts and results shows strategists have not been good at predicting stock prices.
At the end of 2021 when the S&P 500 index was 4,766, strategist were expecting the S&P 500 to end 2022 at 5,000, a 5% increase. However, the index ended at 3,839, down 19.4% and 25% away from strategists’ forecasts. At the end of 2022, strategists were estimating the S&P 500 would end 2023 at 4,000 for a 4.2% increase. However, they were wrong again as the S&P 500 returned 24%, ending at 4,769 and 19% away from strategists’ forecasts.
At the end of 2023, a Bloomberg survey of 20 equity strategists showed their average year end price target for the S&P 500 at 4861, which would be a 1.9% increase. The highest estimate was 5,400, equaling a 13% increase, while the lowest estimate was 4,200, equal to a 12% decline. The index ended 2023 at 4,769, less than half a percent from its closing high. The range of estimates is wider than usual and reflects the level of uncertainty as we head into 2024. For markets to continue pushing higher, the Fed needs to orchestrate a soft landing to keep the economy out of a recession and markets need to see earnings exceed expectations to justify the high valuations.
Week in Review:
The week started with markets mostly lower, but that quickly changed after the open. Several catalysts may have been the New York Fed’s survey showing inflation expectations have dropped to the lowest level since 2021 and less hawkish comments from several Fed policymakers. Several other big headlines revolved around Boeing and Alaskan Airlines after the flight incident the Friday prior that caused the grounding of 737 Max jets, Nvidia unveiling its new, more powerful GPU chip, and consumer credit rising more than expected with revolving credit up an annualized 17% in November. After a slow start, markets ended strong and were driven by risk assets with tech and consumer discretionary sectors leading the way. The S&P 500 rose 1.41%, the NASDAQ rose 2.20%, and the 10-year Treasury yield fell slightly.
There was a negative bias to start the day Tuesday over higher rates and markets taking a breather after a solid day Monday. It was a quieter day on Tuesday with no economic data or big macro news, mostly just individual company headlines out of the several conferences happening (tech, healthcare, and retailer conferences). Stocks had a very mixed day, but ended up closing off the lows of the day with an underperformance in small caps (Russell 2000 down 1.05%) while the S&P 500 closed down 0.15% and Treasuries were unchanged.
Stocks bounced on Wednesday but finished off the highs after comments from NY Fed President Williams that were slightly more hawkish in that policy is expected to remain restrictive “for some time” while pushing back again easing its quantitative tightening efforts (reducing the Fed’s balance sheet by selling bonds). It was again a quieter day with Treasury yields slightly higher, stocks higher across the board with the NASDAQ’s 0.75% increase leading the way, and oil nearly 2% lower over a surprise build in U.S. oil stockpiles. The big news after the close was the SEC approved exchange traded products that track the prices of cryptocurrencies for the first time after years of rejections.
In international market news, Japan’s Nikkei index extended its recent gains and closed above 34,000 for the first time since the early 1990’s bubble. In U.S. markets, stocks were volatile in the morning as the latest batch of inflation data was released that showed an uptick in inflation to close out 2023. Stocks were higher pre-market, moved lower after the inflation report, moved higher at the open to surpass the previous record closing high where it seemed to hit resistance, then moved lower through the day but recovered off the lows of the day to finish roughly unchanged for the day.
Crude oil saw a larger increase on Friday after a U.S. led coalition launched drone strikes against the Iran-backed Houthi rebel group in Yemen, along with the group seizing an oil vessel in the area. Several of the U.S. largest banks reported earnings before the bell with results mixed while Delta reported with strong demand, but lower earnings forecast. Outside of that it was a quiet day with stocks mixed – the S&P 500 rose less than 0.10%.
Stocks ended up having another positive week, the 10th of the past 11, which was driven by mega cap tech stocks like Nvidia and Meta. Treasuries had a positive week as well as yields fell across the curve, particularly on the short end where the 2-year note’s yield fell 26 basis points to 4.14%, while the 10-year yield fell 11 bps to 3.94%, tightening the gap between the two (a small inversion of the yield curve). The dollar index was relatively unchanged, gold rose just 0.1%, oil fell 1.5% in a volatile week, while Bitcoin continued its impression run, rising to the highest level since December 2021, after the SEC approved spot Bitcoin ETFs. The major U.S. stock indices finished as follows: NASDAQ +3.09%, S&P 500 +1.84%, Dow +0.34%, and Russell 2000 -0.01%.

Recent Economic Data

  • Inflation picked up its pace slightly in December, according to the latest data on the consumer price index. The index increased 0.3% in December, after a 0.1% and 0.0% increase the prior two months but was slightly more than the 0.2% increase expected. Over the past 12 month, the index is 3.4% higher, up from the 3.1% 12-month rate in November and slightly more than expected. Core prices, which is the index minus energy and food categories, were the same story – prices rose a slightly more than expected 0.3% (although matching the prior months increases) with the annual rate at 3.9%, although slowing from 4.0% in November (the first time below a 4.0% annual rate since early 2021). Looking more at the details, higher electricity prices drove the 0.4% increase in energy prices, food away from home (restaurants) continues to run hotter and is up 5.2% over last 12 months, and within the core index small declines were seen in medical care commodities and vehicle maintenance, but inflation is still running hot in vehicles, shelter (by far the largest part of the index), medical care services, and transportation (particularly insurance costs and airfares). In addition, the “super core” index, which excludes food, energy, certain goods, and housing, rose 0.4% for the second consecutive month and is up an annualized 4.5% over the past six months. This inflation report was a reversal from the prior several months which saw inflation cooling slowly. This should cause markets to slow its rate cut expectations and matches the Fed’s message that progress on inflation will not be a straight line (will be up and down).
  • Inflation at the producer level declined slightly in December, according to the producer price index. The index fell 0.1% versus the expected 0.2% increase, while core prices were flat, also slightly less than the expected increase. Over the last 12 months the index is up 1.0% with core prices up 1.8%. The index was driven down by a 0.9% decline in food and 1.2% decline in energy prices on the goods side, and a 0.8% decline in trade services and 0.4% decline in transportations/warehousing in the services side. Excluding food, energy, and trade services, the index was up 2.5% from a year ago.
  • The number of unemployment claims filed to the states for the week ended January 6 was 202,000, relatively unchanged from the prior week, with the four-week average also relatively unchanged at 207,750. The number of continuing claims fell to 1.834 million, down 34k from the prior week for the lowest since October. The four-week average of continuing claims fell slightly to 1.862 million.
  • The U.S. trade deficit shrunk slightly in November, at $63.2 billion for the month, down from $64.5 billion in October. The small drop was due to a 1.9% decline in exports (to $253.7 billion) and a 1.9% decline in imports (to $316.9 billion). The smaller deficit is a slight positive to fourth quarter GDP but the report should be viewed as a bigger negative due to the drop in trade activity/volume. Through the first 11 months of 2023, the deficit decreased 18.4% compared to 2022, with imports down 3.6%, or $133 billion from 2022 levels. The total volume of trade fell $11 billion in November, or 0.2%, from the same period a year ago due to a 0.4% increase in exports and 0.1% increase in imports.

Company News

  • Nvidia shares rose to new all-time highs after it unveiled three new, more powerful graphic processing units (GPUs) that it says will let gamers, graphic designers and computer users to make better use of AI.
  • Twilio announced its new CEO, the former President of Twilio Communications, to succeed the outgoing CEO and co-founder, and with the announcement said its Q4 and full year results are expected to exceed its outlook. Shares were up nearly 7% on the news.
  • After several reports on Monday, Hewlett Packard Enterprise announced on Tuesday evening it has agreed to acquire the network gear maker Juniper Networks for $14 billion, or $40 per share, about a 32% premium to where shares traded prior to the initial report. The report said the deal would help bolster the company’s artificial intelligence offerings and expand its total addressable market.
  • CVS, along with other US health insurers, shares dropped after its executives said at the JPMorgan Healthcare conference that its medical costs as a percentage of premiums collected would be higher than its previously expected, adding that it continues to see pressure in the healthcare benefits business. In the previous quarterly update, the company forecasted medical costs as a percentage of premiums (the medical-loss ratio) would be 86%, but now is forecasting it to be over 87%.
  • Car rental company Hertz said it will be selling about one-third of its electric vehicle fleet, equal to about 20k vehicles, in a strategic move to bring supply back in balance with where demand is, according to the company. This reverses a move that started in 2021 to invest heavily in its EV fleet with 100k new Tesla vehicles and tens of thousands more from others, but due to low demand and higher operating costs, it will now sell the vehicles and use the proceeds to purchase combustion engine vehicles.
  • Netflix head of advertising Amy Reinhard said at the CES last week that the company had exceeded 23 million global subscriber of its advertising based plan, up from about 15 million in its October update. She added the company is most excited about the engagement of consumers, with more than 85% streaming for two hours or more per month. The ad based plan has been out for about 13 months now and costs $6.99 per month, about half the cost of the no-ad plan of $15.49 per month.
  • Chesapeake and Southwestern Energy announced they have come to an agreement to merge in an all-stock deal valued at $7.4 billion. Under the deal, Southwestern shareholders will receive 0.0867 shares of Chesapeake for each share of Southwestern owned which will result in Chesapeake shareholders owning 60% of the combined company and Southwestern shareholders owning 40%.
  • DocuSign shares traded higher on Thursday after a Reuters report that private equity firms Bain Capital and Hellman & Friedman were in competition to acquire the company. The report said the PE firms have not made a joint bid, but it is possible they could go in on a deal together. This report follows a recent one several weeks earlier from the WSJ that DocuSign could be going private through a leveraged buyout.

Other News

  • For the first time, the SEC approved 11 spot Bitcoin exchange traded products (ETPs) which comes after a series of cryptocurrency ETF rejections over the years. The SEC Chairman said the “action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.” SEC Chair Gary Gensler made it clear to point that the SEC was in a way forced by the courts, and made it clear of the difference between Bitcoin ETFs and ETFs that track commodities like previous metals, saying the “underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing,” and the SEC did “not approve or endorse bitcoin.”
  • Due to the ongoing attacks on shippers traveling through the Red Sea (one of the world’s biggest shipping routes that takes ships through the Suez Canal and eventually the Mediterranean Sea and Europe and North America) by Yemen’s Houthi rebels, a U.S. led coalition along with the UK launched dozens of airstrikes on Houthi targets in Yemen. This came several days after Yemen forces ignored an ultimatum to stop attacks on ships traveling through the Red Sea, according to the WSJ. The Houthi attacks, which are back by Iran, are said to be in response to Israel’s attacks on Hamas in the Gaza Strip. Following the strikes, the Houthis said they would not back down and will continue to target ships adding any “American attack won’t go unpunished” and would cause a response from the rebels.
  • Volatility in crude oil has been higher lately due to the events happening in the Red Sea and Middle East, but the price of crude moved lower to begin the week after Saudis said they would lower its selling price to all buyers including Asian buyers which is its largest market. This came in response to lower demand (mainly from China) and increasing global supplies as the U.S. saw new production records.
  • The U.S. Energy Information Administration said in its latest short-term energy outlook report that U.S. oil production will hit new records over the next two years, but grow at a slower rate than recent years. It forecasts 2024 crude oil production to rise to an average of 13.2 million barrels/day and increase again to an average of 13.4 million bbl/day in 2025. This is up from the average production of roughly 12.9 million bbl/day from 2023 which was a 1 million bbl/day growth from 2022 levels from higher drilling activity.
  • Fed updates:
  • Dallas President Logan made a case that the Fed could slow its balance sheet runoff plans while adding the recent easing of financial conditions (lower treasury yields and market rates and higher asset prices) could reverse the progress made on inflation, leaving a rate hike on the table.
  • Boston’s Fed Bostic said inflation has fallen faster than expected but progress still needs to be made.
  • Governor Bowman said rate hikes are likely over, but said cuts are not appropriate yet and upside risks to inflation remain (she has been one of the bigger hawks).
  • NY Fed President Williams said his base case sees current policy as restrictive and will continue to bring inflation lower but expects to stay at these restrictive levels “for some time” adding it will only be appropriate to dial back when the Fed is confident inflation is moving back to 2% on a “sustained basis.” He was one of the first to push back against rate cut expectations after the Fed’s most recent December meeting. He also touched on quantitative tightening (shrinking the balance sheet), saying “we don’t seem to be close” to slowing or stopping the shrinking of the balance sheet (comes after recent comments from Lorie Logan that suggested it made sense to slow QT).

Did You Know…?

The Magnificent Seven

As we have mentioned several times over the past year, the top seven names in the S&P 500 index – Microsoft, Apple, Amazon, Alphabet, Nvidia, Meta, and Tesla – account for nearly 30% of the S&P 500’s total weighting. In fact, the seven names, dubbed the “Magnificent Seven,” are so valuable that the combined market cap of around $12 trillion accounts for nearly one-fourth the total U.S. stock market and is four times as valuable as the entire Russell 2000 index (the index of 2,000 of the smallest companies in the Russell 3000 index), according to Apollo Global Management and reported by Barron’s. In addition, the Magnificent Seven is more valuable than any single country’s stock market (beside the U.S.). At one point last week, the market capitalization of Microsoft surpassed that of Apple, making Microsoft the most valuable company in the world. Apple had taken that crown from Exxon Mobil in 2011 and held the title as the most valuable for nearly every day since then. Below is a chart of the market cap between Apple (blue) and Microsoft (orange).

WFG News

Economic & Market Outlook Meeting

Thursday, February 1 – 6:00 pm – WFG Auditorium in Hudson, OH
Thursday, February 8 – 12:00 pm – WFG Auditorium in Hudson, OH
Thursday, February 8 – 6:00 pm – WFG Auditorium in Hudson, OH
Wentz Financial Group will be holding its semi-annual Economic and Market Outlook Seminars on the dates above. Join us as we recap a surprisingly positive 2023, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in another challenging year ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.

The Week Ahead

Stock and bond markets are closed Monday to observe Martin Luther King Jr Day, leading to a shorter week, but it will be busier than recent weeks. The pace of fourth quarter earnings reports picks up with the focus still on financials/banks. Notable reports will come from Morgan Stanley, Goldman Sachs, PNC on Tuesday, Charles Schwab, U.S. Bancorp, Alcoa on Wednesday, Truist Financial, KeyCorp, Fastenal on Thursday, and Comerica and Fifth Third on Friday. The economic calendar will be lighter of major events, with most focus most likely on December retail sales which are estimated to be up 0.4% in the month, with a 4.8% 12 month increase. Updates will also come from the housing market with the housing market index, housing starts and permits, and existing home sales at the end of the week. Other data releases include the Empire State Manufacturing survey index on Tuesday, import and export prices, industrial production on Wednesday, jobless claims, the Philly Fed Manufacturing survey index on Thursday, and consumer sentiment on Friday. Fed speak will continue with at least eight public speeches scheduled this week by policymakers. We are sure to see political headlines as well with the Iowa caucuses Monday, continued negotiating on a 2024 budget with possibly another shorter-term bill in the works, and more developments from the Red Sea as the Houthi rebel group continues its attacks on shipping vessels.