A Polar Express Market

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

Like the Polar Express, equity markets raced across the breaking frozen lake and pulled into Christmas Square right on time. November and December have once again proven that it pays to Believe. 2023 is going to go into the record books as a winner for market bulls, and proof that the October 2022 low was indeed the end of that Bear Market and the birth of this current Bull Market. It certainly was not easy. It’s easy now to forget the dramatic decline in March when markets reeled at the news of the west coast regional bank failures. But we should  certainly remember the correction that ran from August through October and had market indexes breaking down major support levels. At that point it was very hard to believe. But here we are.

Market historians are quick to point out the many reasons why it is foolish to discount seasonal strength. Earnings cycles, political cycles and economic cycles can combine to create a powerful foundation for strong equity performance. This certainly has been the case for 2023 but each of these cycles have been called into question through the year. How much of the earnings were real and not fueled by inflation? The outcomes of the upcoming political battles are certainly difficult to imagine. Finally, many expert economists remain convinced that there will be dire consequences from the Federal Government’s actions during the COVID crisis, choosing to close down businesses and schools, flooding the economy with liquidity and saddling the economy with previously unimaginable levels of federal debt.

In spite of these formidable challenges, financial markets powered on. Holiday retail sales reports have been very positive. The once fabled ‘soft landing’ for the economy seems to be achievable. The Federal Reserve has signaled that they are ready to start cutting interest rates in 2024. And last but not least, “Yes, Virginia, there is a Santa Claus Rally!”

Our recent asset allocations into small cap and mid cap equities have proven to be successful, in addition to recognizing strength in the healthcare and consumer discretionary sectors. These are seasonally strong market sectors that we have been monitoring. That being said, once equity markets started their push in November, it was hard to find a sector that wasn’t participating. Even the beleaguered energy sectors have come into play. All of these equity market sectors have room to run into 2024. With such a broad advance, without any singular leadership and no signs of weakness, it is difficult to underplay the potential.      

Bond markets have been happy to come along for the ride, inspired by the promise of lower rates in 2024. The Bloomberg U.S. Aggregate Bond Market Index has risen 10% in the last 2 months alone, after enduring a slow but steady seven month decline. All of the other major bond indices have followed suit. Currently the yield curve remains inverted, with short term interest rates higher than ten-year bond rates. However, bond investors are looking past that traditionally cautionary signal. The most aggressive bond buyers have been betting on long-term bonds, which have soared as much as 20% higher in the past two months.

Most certainly, after such a strong performance by financial markets in November and December, it is reasonable to expect a pause. Historically, these periods of strength have continued to run into January and there is no doubt that they will have to ‘exhale’ at some point in the future. Once again, we will keep our eye on the Volatility Index, which jumped a little higher in the last week but then settled back down. There are a lot of unrealized profits on the table right now, and still a lot of harvested losses in the barn. Both of these can easily carry over to 2024 so there is no need to rush into any decisions at this juncture.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2023 Edward D. Foy.  [email protected], www.foyfinancial.com.

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.