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Last Holiday For Stocks? Thumbnail

Last Holiday For Stocks?

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Is this one of the last holidays for stocks, or can the FOMO trade continue?  This is the fundamental question moving forward.  Retail investors have pushed equities higher in the 2nd half of 2024, all other metrics be damned.  Unfortunately, this kind of market can continue, but I'm hearing from more and more investors about buying into asset classes and holdings that are outside of their normal risk parameters, which makes me think a top could be near. This week's musings is inspired by the 2006 Christmas movie, "Last Holiday."

  • This movie was actually star-studded with some major talent - LL Cool J, Timothy Hutton, Giancarlo Esposito, Gerard Depardieu, & Alicia Witt.  As for Queen Latifah, this was only her 3rd starring role in a movie, although she had plenty of smaller roles up until this point.
  • The movie did not do especially well at the box office, earning only $43 million on a $45 million budget.  However, the studio (Paramount) made a mistake by releasing the movie to theaters after the traditional Christmas movie season, choosing to role the movie out on January 13, 2006.
  • All of the dishes in the film were prepared by Food Network chefs who also taught Queen Latifah some basic cooking techniques so she would look like a professional chef in the movie.
  • This movie was a remake of the original film, also titled "Last Holiday" (1950) staring a young Alex Guinness, before he learned the ways of the Force.
  • The hotel featured in the movie, Grand Hotel Pupp, was also used in the Bond film "Casino Royale."

Here's what we've seen so far this week..

The Start Is Not As Important As The Finish.  For most well-positioned clients who have a sound financial plan, they should view the current market environment as noise.  The FOMO trade has taken full root in equity markets and digital currency making life difficult for financial advisors trying to keep their clients on track.  While equities are makings new all-time-highs, corporate insiders are reducing concentrated positions.  This should concern the average investors, but, alas, it is not.  Instead of sticking to a stated risk tolerance or financial goal, investors are pouring into assets that either do not match or exceed their asset allocation strategy.  We've seen this before at other equity market peaks in history.  If we use a 50-day average for inflows into equity ETFs, current flows are at a 5-year high.  To put that into some perspective, when the market recovered from the initial throws of the pandemic, the S&P 500 Index rose 63% off the March 23, 2020 low.  Since the October 12, 2022 low, stocks are up slightly more than in 2020, but the inflows are more voluminous.  The latest move higher, starting in October of this year, makes the 2020 move in flows look paltry.  Yet the trend data would suggest investors take caution.  If we break down the S&P 500 Index by components, we see that the move in the broad index is not equal to the sum of its parts.  Currently, only 31% of stocks in the S&P 500 are actually out-performing the overall index.  Why is that important?  We saw a similar trend in 1998 and 1999.  A similarly low amount of S&P 500 constituents out-paced the index in 1998 as did in 2023.  In 1999, that number inched higher, but not by much.  Similarly, this year has seen a slight increase in the number of stocks out-performing the index.  This denotes concentration in the market and a lack of depth, which is problematic moving forward.  As Chef Didier (Gerard Depardieu) noted in "Last Holiday," "The start is not nearly as important as the finish."  Investors need to stay focused on the end goal, not the noise in between.

No Substitutions.  As long as I've been in the financial services industry, I have been approached by people at cocktail parties or family events who want to know the latest stock idea or the fastest way to make money.  Of course, there are a handful of luck investors who are savvy enough to find a canary in the coalmine.  However, those stories are few-and-far-between, despite people making them seem as if they are the norm.  Often, there is no substitution for basic economic theory.  This week, the November reading on the Producer Price Index showed a much higher rise than expected.  It was anticipated that PPI (producer prices) would increase +0.2% in November, when it came in at +0.4%.  This took the year-over-year number to +3.0%.  PPI now exceeds CPI (consumer prices).  Typically, when this happens, that means that producers will gladly pass along price increases to consumers, resulting in the CPI headed higher.  For how long is up for debate.  So, despite inflation seemingly headed higher, markets are showing a 94% probability that the Fed will cut rates next month by another 25 basis points.  This runs contrary to the Fed's stated mandated to control inflation.  If the Fed continues cutting, that invites greater activity as consumers will have support to spend, which will in turn cause inflation to move higher.  As of this date, most analysts are calling for equities to move higher, as the average forecast is for the S&P 500 to finish 2025 +7.5%.  In fact, the consensus among the group of analysis at the major banks and financial institutions is crowded into a range between 6,500 and 7,000.  Historically speaking, when the forecasts are crowded into a tight consensus, the forecasts are usually incorrect.  The one analyst of note calling for the S&P 500 to be lower next year is at BCA Research.  We've covered in recent blog posts that the 3rd year of a Bull Market is typically low.  There is also evidence that the political landscape may come into play, as well.  The historical data tells us that the first year of a Republican-led administration is typically not good for equities.  The 2nd half of year 1 in a GOP presidential term shows a negative return.  The first time that Trump took office in 2017, the trend was bucked as the S&P 500 Index was up more than 21% that year.  Will we see a repeat?  That much is unknown at this point until we see what happens after the first 100 days of the new administration's term.  However, more historical information reared its head today as the final plot of the yield curve uninverted today.  As of this writing, the 10-year Treasury Bond was 4.40%, which is now 7 basis points above the yield on the 3-month T-bill at 4.33%. If it closes at those yields, it would be the first time the yield curve was officially uninverted since October of 2022.  As the graph indicates, that's typically problematic from an economic standpoint as recessions usually occur within 6-8 months thereafter.  As Chef Didier also famously quipped at his guests letting them no he was not making any substitutions in his dishes, investors shouldn't substitute emotion and greed for sound financial and investment planning.

Here's the famous scene where Georgia shows up Kragen...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general. 

Past Performance does not guarantee future results.