CWS Market Review – December 19, 2023

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Before I begin, a quick reminder: I’m going to unveil the 2024 Buy List next week.

I’ll send you the next free issue of CWS Market Review on Monday, which is Christmas Day. The stock market will be closed that day. This will be our 19th annual Buy List.

Normally, our Buy List has 25 stocks and each year: five new stocks go in, and five old ones come out. This year, we got an extra stock when Danaher spun off Veralto. That means six stocks will go out and five new ones will come in.

I’ll have all the details for you soon, but it appears that our Buy List has returned over 500% in its entire history. Here’s to the next 19 years!

The S&P 500 Hits a 23-Month High

Now let’s look at the stock market which has certainly been in the holiday spirit lately. On Tuesday, the S&P 500 closed at its highest level in nearly two years. The index is getting very close to its all-time high (less than 0.6% away).

Historically, there really has been a Santa Claus Rally. I broke down the entire history of the Dow back to its beginning in 1896. I found that from December 21 to January 8, the Dow has gained an average of 2.83%. That means that more than one-third of the Dow’s historic gain has come over a period of less than three weeks.

Roughly one-third of the stock market’s gain over the last four years has come in the last seven weeks. The stock market tends to act like a rabbit: it can sit still for long stretches before it suddenly hops away. That’s one of the reasons why I avoid trying to time the market.

The Federal Reserve meets again in six weeks, and I doubt they’ll make any changes to interest rates. But the meeting after that, the one on March 20, could be a very important meeting.

Wall Street has completely changed its mind on what could happen. One month ago, traders thought there was a 28% chance of the Fed cutting rates at the March meeting. Today, those odds are up to 75%.

What’s the cause for the change in outlook? Two things. The jobs reports have gotten noticeably weaker. Nothing alarming, but noticeable. The other is that the inflation reports have been relatively benign. We’re not out of the inflation woods just yet, but we have to note that there has been improvement.

Lower interest rates, or even the prospect of lower rates, can have a big impact on the economy. Notice, of course, the markets’ nice bounce since late October. Not only that, but interest rates also have a major impact on the housing market.

Housing Is On the Rebound

During the middle of each month, several of the important reports on housing are released. Many stock investors tend to overlook these reports, but that’s a mistake. The housing sector is vital to the economy. In fact, several years ago, Edward Leamer, a well-respected economist, went as far as to say that “Housing IS the Business Cycle.” I think he’s right.

On Monday, the National Association for Home Builders said that homebuilder confidence rebounded slightly in December. The confidence number rose from 34 to 37 while Wall Street had been expecting 36. That’s not a terribly large jump, but it’s good to see something positive as mortgage rates have started to move lower recently.

I don’t want to declare victory too soon, but it looks like interest rates have peaked for this cycle. Even the Fed sees rates being significantly lower by this time next year.

On Tuesday, we got a nice surprise from the housing starts report. Last month, single-family housing starts rose to a 19-month high. The report also said that the figure for permits for new construction rose to its highest level since May 2022. This was much better than Wall Street had been expecting.

The problem right now for housing is that there aren’t enough homes, and that’s caused prices to spike. Builders need to catch up to demand.

Activity was also likely supported by mild temperatures and dry conditions. Data for October was revised slightly lower to show single-family starts rising to a rate of 969,000 units instead of the previously reported 970,000 units.

Starts vaulted 42.2% on a year-on-year basis in November.
Single-family homebuilding soared in the Northeast, Midwest and the densely populated South. It declined in the West.

The rate on the popular 30-year fixed mortgage averaged 6.95% last week, the lowest level since August, from 7.03% in the prior week, according to data from mortgage finance agency Freddie Mac. It has tumbled from a 23-year high of 7.79% in late October, tracking the decline in U.S. Treasury yields.

The stock market turned right as mortgage rates peaked. I can’t say I’m surprised.

There are currently about one million homes on the market. Just before Covid hit, there were two million homes on the market. The housing reports helped Goldman Sachs raised its estimate for Q4 economic growth by 0.2% to 1.7%. The Atlanta Fed sees Q4 growth coming in at 2.7%.

I’m going to watch housing closely. The report on existing home sales is out tomorrow, and on Friday we’ll get the report for new home sales.

Q4 Earnings Season Will Start Soon

We’re getting close to Q4 earnings season, and I’ll caution that it probably won’t be a very strong one for the market as a whole. That’s more a reflection of how things have been rather than how they will be.

For Q3, the S&P 500 had earnings growth of 4.9%, and analysts expect growth to slow down to 2.4% for Q4. Analysts expect quarterly revenue growth of 3.1%. For the year, the S&P 500 is expected to post earnings growth of just 0.6% and revenue growth of 2.3%.

FactSet (which is not only a Buy List stock, but a great resource for stats on the market) said that the broadline retail industry is expected to report earnings of $30 billion this year. That’s up from a loss of -$1.2 billion last year.

The earnings figure for the consumer discretionary sector is expected to rise by 43.9%, but there’s a major caveat. If we exclude Amazon, then earnings growth for consumer discretionary would fall to just 16.2%.

Overall, businesses are healthy even though this has been a subdued period for growth. For 2023, the estimated net profit margin is expected to be 11.6%. That’s down slightly from 11.8% for 2022, but it’s still above average for the last ten years.

If interest rates come down in 2024, that will spur a housing rebound and that will be good for consumers and businesses. This is why stocks have been in such a good mood.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on December 19th, 2023 at 7:22 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.