NEWS
What Happened Last Week
The S&P Global Flash US Composite PMI rose from 54.9 in November to 56.6 in December, suggesting the strongest performance in the private sector since March 2022. This was driven by services rather than goods, a common theme since the rush for goods in 2020.
China’s manufacturing and non-manufacturing PMI measurements showed signs of continued expected growth, especially with a strong resurgence of service and construction activity.
Ukraine halted the flow of Russian gas to several European countries after its five-year transit deal expired.
Supply of completed single-family homes is up nearly 300% since 2022 and is at its highest absolute level since 2009, causing home pricing to be down 6.3% since one year ago.
30-year mortgage rates, however, continue above 7% due to the expectations of a slower frequency of interest rate cuts.
The median forecast for the S&P 500 performance this year is about 12%. Remember that stock markets rarely do what the majority expects, however.
Investor sentiment borders on fear at the moment according to the AAII Investor Sentiment Survey and Fear and Greed Index.
The S&P 500 just recrossed its 50-day moving average to the upside.
The S&P 500 has been moving overall sideways for about two months.
How I See It
This is key: markets almost never do what the majority expects.
If the majority expects the S&P 500 to be up 12% on average this year, then it is likely to end the year significantly different either side of that number.
The 5-year standard deviation of the SPX (the S&P 500) is about 18. That tells me a fairly typical range might be somewhere between -6% and +30%. But that’s huge, so let’s narrow it down.
We’ve already experienced two above-average years for growth, even in comparison with the average positive year. The bull market began in October 2022, so has just recently completed its second birthday.
The best returns tend to happen in the first and last third of a bull market. The middle can often be lackluster with a fair bit of volatility.
But here’s the strange thing about this bull market. It wasn’t birthed out of a recession. Historically, recession helps to reset the growth potential for the longer term. With this one, history suggests the lack of recession might be a headwind for the length of this present run.
The average bull market following a recession has been about 61 months (5 years) versus the average bull market not preceded by recession being about 33 months (just shy of 3 years).
So here’s what I think.
I think the year will be positive, but if I had to bet, it will likely come with plenty of volatility that ends with a positive single digit positive return.
The reason I don’t expect a bear market to be likely is because we still have room for the Federal Reserve to implement meaningful monetary policy. We’re operating below our capacity due to reasonably elevated interest rates.
Evidence suggests that our economy remains healthy overall with still further capacity for boosts from monetary policy if needed.
But even now may be a time of potential further downside because of the interplay of fear, a 2-month sideways movement, and a price trying to keep its head above the 50-day moving average.
Regardless, if this is not the beginning of a bear market (which I’ll continue to monitor), then it is not something which requires a major shift in portfolio strategy. Even modest growth is worth capturing, and any error in attempting to time the market could totally wipe out one’s growth for the year.
Better to ride it out than to risk missing out on a whole year’s potential returns.