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Wrapping Up 2023 and Peering into Early 2024

| December 11, 2023

November was spectacular for equity investors. It was the sixth best monthly performance for the S&P 500* in the last 30 years and ranks in the index’s top 15 months over the past 50 years, according to Bespoke Investment Group:

We said last week it’s been a roller coaster ride for investors lately and the research from Bespoke confirms that assertion. Over the past few years there have been several ups and downs in the market, yet look at where the S&P 500 stood two years ago and where it was as of Nov. 30, 2023:

  • 30, 2021: S&P 500 of 4,567.00
  • 30, 2023: S&P 500 of 4,567.80

Let that sink in.

Through all the gyrations, the index was flat overall. For everything we went through over the last two years – all the free money and interest rate fluctuations – it basically got us back to even.

So, if your investment accounts are net positive at all over the past couple years, you’ve crushed it. Plus, returns over the last five and 10 years have been modestly above average, which supports long-term, consistent investing:

Let’s turn our attention to December and the Dow Jones Industrial Average#. Over the past 50 years, 70% of Decembers resulted in positive returns for the Dow – 1.43% on average – and the numbers are comparable over both shorter and longer time horizons:

Remember, December ranks as the second-strongest month in the past century (July is first). Knowing that, we don’t see anything currently that should make this year any different. In fact, we expect more than the usual amount of performance chasing and fear of missing out (or “FOMO”) at work in the second half of this month.

We think it’s because so many investors anchored themselves to a bearish view dependent on sticky inflation forcing a “hard landing.” As our readers know, we argued against this all year because forward-looking data indeed predicted inflation was on a glide path lower.  

Bearish investors will be buying the tape as they rethink this dynamic of a better fundamental picture than they expected. However, we don't think it will be a smooth path up, but rather a zigzag culminating somewhere around the middle of the month, just after the Federal Reserve meeting on Dec. 13:

Until then, our expectation is for markets to consolidate somewhat as a lot of incoming economic data is absorbed, some of which could cause interest rates to slightly tick back up and stocks to fall. For that reason, this month we’d buy dips, which will probably be consolidations rather than a sustained decline.

The overall data continues to show inflation falling faster than consensus, which puts downward pressure on long-term interest rates. Thus, the “rate cut narrative” continues to build.

Turning to Ancient Greece for Early 2024 Views

To begin developing our base case for a better first half of 2024 in the U.S., let’s turn to some Greek words:

(OIKOS = household  +  NOMOS = law or management)

(TEKHNO = art, craft, or technique  +  LOGOS = study of)

(DEMOS = people  +  GRAPH = chart)

All three of these factors can and should fuel U.S. growth in the first half of 2024. The U.S. labor force and immigration (demographics) should drive business profits (economics) because scientific breakthroughs (technology) move markets. 

Let’s examine technology and economics together as they tend to supercharge each other. Our 2024 growth concept stems from our alignment with famed economist Dr. Edward Yardeni, whose main thesis is we can fuel another “roaring ‘20s” through technological innovation. Yardeni’s 2018 book, “Predicting the Markets,” offered some interesting thoughts:

Applying this today, we can solve the global shortage of labor by boosting productivity through artificial intelligence, automation, and robotics. Specifically, Yardeni cites the value of our soaring high-tech capital spending on technology equipment, software, and research/development in the U.S., which rose to a record $1.84 trillion last quarter:

That’s an average of about 50% of total capital spending since the pandemic – up from only about 25% around 1980. This can and should fuel economic growth via increasing business profits.

As for demographics, to put it bluntly: demographics favor the U.S. significantly. That’s especially true in comparison to the rest of the world's great economic powers.

For instance, China's population fell by a net 850,000 people in 2022 (according to what its government allows us to know). It was the first decline in China’s population since the Great Chinese Famine (1959-1961). Furthermore, in a land of 1.4 billion people, there were just 956,000 births last year, showing ripple effects of its former one-child policy.

The implications are widespread and massive. There simply aren’t enough young workers to continue exporting and funding pensions and services for the large number of elderly people in China. This adds rocket fuel to the deflationary collapse of property values because there's nobody to move into these properties.

To put this into perspective, the Shenzhen real estate stock price index peaked in 2020. It’s down 52.5% since then:

This issue isn’t localized to China; Japan is facing downward population pressures too. In both countries the issue is exasperated because they’re generally closed societies with limited immigration (Japan has altered course a bit to address labor shortages).

Without going into detail, it’s important to know data shows similar demographic declines are happening in Europe, especially Germany and Italy (for more detail, here is an entire series on world demographics).

Contrasting that to the U.S., even with as many problems and negative narratives as we seem to have, we’re still the most welcoming nation for immigrants and still have a relatively high birth rate compared to the rest of the developed world. We also have the most mobile workforce and most business-friendly, entrepreneurial structure, as evidenced by the volume of new companies and scientific breakthroughs that originate here versus the rest of the world.

Furthermore, U.S. household net worth (including all debts) was $154.3 trillion as of mid-2023. Turning back to Dr. Yardeni:

Perhaps even more shocking (especially considering the Chinese real estate crisis), is that 40% of U.S. homes (35 million households) are now mortgage free. Many of them are occupied by the newly retired.

But before we get too excited, there’s something that could throw a wrench in growth. Of course, it’s a Greek word:

(POLI = many  +  TICS = blood-sucking insects)

 Remember, 2024 is an election year. Let’s hope for gridlock.

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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

# The Dow Jones Industrial Average is a stock index tracking 30 large, American, publicly owned blue-chip companies and is generally considered representative of the broader U.S. economy.

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