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Weighing Risk(s) More Useful than Forecasting a Number
Around this time of year – a wrath of ‘experts’ forecast where they believe the S&P 500 will finish the year. For me it serves little purpose. For one, most of the time forecasts are typically wrong (and by a wide margin). Second, as time goes by, more information will come to hand which often changes our view. From there, forecasts should be updated. Third, there are almost always random events which reset the game. What happens to forecasts then? They are typically tossed out the window. With that, let’s look at what the market “experts” believe we will see this year – and I will offer my approach.
Jobs Data: Choose Your Narrative
Today we learned that December added 216K jobs. CNN reported it as a “red hot” print. Was it? From mine, the headline number offers us very little. For example, what I want to know is the following (a) where are the jobs are being added (e.g. public vs private sector and what sectors); (b) what are people being paid per hour (is it rising or falling?); (c) are people working longer hours (as part time work doesn’t pay a mortgage); and finally (d) what’s the prevailing trend (as one month’s data doesn’t account for much). The headline number doesn’t provide this detail – therefore we need to dig a little. My quick take – this report is weaker than what the headline suggests.
Santa’s Rotten Apple
What happened to the Santa Clause Rally? Bahhh humbug! For those less familiar, a Santa Claus Rally involves a rise in stock prices during the last 5 trading days in December and the first 2 trading days in the following January. Over these 7 trading days in question, stock prices have historically risen 76% of the time (to the tune of ~1.3%) – far more than the average performance over a 7-day period. But this year the market received a fat lump of coal. Or more accurately – perhaps a “bad apple”. Some feel that’s potentially a bad omen for the year ahead… giving rise to the popular Wall St. maxim “… if Santa Claus should fail to call, bears may come to Broad and Wall”….
Reverse Goldilocks Coming?
2024 has not started the way we ended 2023. From mine, late last year feels a lot like what we saw at the end of 2021 (and early 2022). At the time, investors chased momentum in fear of missing out (‘FOMO’) – pushing multiples into what I considered ‘higher risk’ territory (i.e., above 20x forward). It was a time to lower exposure. As we start the new year – stocks are taking a pause. And it’s not unexpected given the sharp run higher. However it begs the question… could it be something more than a pause? Of course we don’t know the answer (no-one does). Where there is uncertainty – all we have are probabilities.