Resurrection of Markets?
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
Markets have been through a chaotic three years. First, we did some very stupid things in 2020 surrounding COVID. Then, in 2021, the federal government created unnecessary inflation and were slow to respond. 
Lastly, the Fed has spent the last 18 months attempting to fight inflation and playing word games to keep the market off balance. The aforementioned chaos provides the inspiration for this week's musings, "Beetlejuice." The 1988 movie was a surprise hit. Both Siskel & Ebert gave the film a "thumbs down" and went as far as to day that Michael Keeton's portrayal of Bettlejuice was "obnoxious" and what they "enjoyed the least" about the film. Well, the joke's on them. The film was turned into a Saturday cartoon series. There is a musical on Broadway right now based on the film. If that weren't enough, there's a sequel in production due out in theaters next year. Are they trying to break "Top Gun: Maverick" for longest time between sequels? Here's some trivia about the film:
- To the chagrin of Siskel & Ebert, the film's paltry budget of $15 million was easily beat by the gross box office of more than $74 million. Apparently, the popularity of the film is enough to produce a sequel more than 35 years later.
- Again, despite the critics, this film is one of Michael Keaton's favorites that he acted in. In fact, Keaton had a lot of input into the character, including the shock hairdo, mold make-up, and large teeth. Keaton also ad-libbed 90% of his lines.
- The original plan for the infamous dinner party was for the guests to dance to a song by the Ink Spots. However, Jeffery Jones (Charles Deetz) and Catherine O'Hara suggested the music be calypso. So, director Tim Burton switched the music to "Day-O (The Banana Boat Song)" by Harry Belafonte and the rest is history. In fact, when Glenn Shadix (Otho) died in 2010, the last song played at his memorial service was "Day-O."
Here's what we've seen so far this week...
Powell The Merciful. As we've pointed out many times over the past few months, the Fed (a la Powell) loves to play games with word salads whenever they speak or put out FOMC announcements. 
It reminds me of a scene in "Beetlejuice" when Lydia is asking how Beetlejuice can help her friends, the Maitlands. After telling her what she must do he says, "These aren't my rules. Come to think of it, I don't have any rules." That's pretty much where we've been with the Fed over the last decade or so - just when you think they are going to zig, they zag. 
Like Emperor Commodus in the movie "Gladiator," Fed Chairman Powell gave the markets a boost on Wednesday by declaring no rate hike at the end of the Fed's two-day meeting and providing a thumbs up for renewed buying of equities. The Chairman still tried to waffle on whether or not the Fed is done raising rates. While acknowledging the Fed has come a long way with its rate-hiking cycle, he also stated in the same breath that, "the Fed is close to the end of the cycle." In addition, he waivered, "Slowing down (economy) is giving us a better sense of how much more we need to do, if we need to do more." Despite the word salad from the Chairman, Nick Timiraos, lead journalist for the Wall Street Journal and so-called "Fed Whisperer" thinks the Fed is done raising rates and that the overall tone of the Chairman's comments were dovish. 
The market seems to agree as interest rates have plummeted and equities have risen. Since the Fed's announcement Wednesday, the yield on the 10-year Treasury has declined 27 basis points, while the S&P 500 Index is up 2.2%. The next Fed meeting, and their final meeting for 2023, is slated for December 13th. Fed futures have risen steadily over the past month to the point that there is now an 83% probability of no rate hike in December. This would provide a tailwind for equities to have a decent end to a challenging year.
What Are Your Qualifications? Economists and Wall Street Analysts alike have trouble predicting markets. Why? Because no one can see the future. It reminds of the of the scene in "Beetlejuice" when the Maitlands are trying to figure out how to handle a situation and whether or not they should enlist the help of Beetlejuice. When they ask him what his qualifications are, he responds:
"Ah. Well... I attended Juilliard... I'm a graduate of the Harvard business school. I travel quite extensively. I lived through the Black Plague and had a pretty good time during that. I've seen the EXORCIST ABOUT A HUNDRED AND SIXTY-SEVEN TIMES, AND IT KEEPS GETTING FUNNIER EVERY SINGLE TIME I SEE IT... NOT TO MENTION THE FACT THAT YOU'RE TALKING TO A DEAD GUY... NOW WHAT DO YOU THINK? You think I'm qualified?"
In all 6 occasions, the market was positive in November with an average return of +3.7%. In 80% of the cases, December was positive and the average return was +0.8%. We see a similar patter with Small Cap equities. Yesterday marked the 24th time the Russell 2000 Index closed at a 52-week low to then surge to it's best 4-day rally in 3 months. When this pattern occurs, the small cap index is higher one year later 100% of the time with a median return of +25.6%. Recession may be something on the horizon in 2024, but as of now, history points to more positive returns. 
Let's look at positioning in the market. According to data from the CFTC, net short positioning has been holding the market back. For the past 70 consecutive weeks, hedge funds and large speculators have held net short positions on the S&P 500 Index. That's the longest streak since records on that statistic began. Net positioning went long on the S&P 500 Index this week, ending the longest streak of net negative positions. Let's look at fixed income. 
The corporate bond index has been negative since the middle of 2021. If current returns hold up, that will make three consecutive calendar years of negative returns for the Barcap Aggregate Bond Index. This is a very rare - happening only twice since 1928. Corporate bonds suffered back-to-back negative years in 1956 & 1957. In the two years that followed, the S&P 500 Index was up 55.8%. Corporate bonds were also negative in back-to-back years in 1979 & 1980. In the two years that followed that, equities were up 15.7%. That doesn't necessarily mean that equities are going sky high from current levels, but since back-to-back negative bond years is rare, it's likely that yields have peaked and we could see more stable equity returns for a time. The point is, not to focus so much on predictions, but rather, what is the current data telling us and to change according when the time is right.
Here's the infamous dinner party scene from Beetlejuice....
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