Carlsquare weekly market letter: Can 2024 be a positive year despite, or perhaps because of, the US presidential election?

• There is a lot of fear in the market because 2024 is a big election year in many countries. What if Donald Trump is elected president again in the US?
• On the other hand, all governments in power have an incentive to make 2024 a good year to increase their chances of being re-elected. This is certainly the case for President Biden in the US
• In the short term, the equity market is still oversold. Once the overhang is cleared, we expect sentiment to improve as the real reporting season gets underway in a few weeks’ time

The third year of a US presidential cycle is considered a positive year for the stock market. The S&P 500 returned 24.23% (26.44% with dividends), making up for the 19.44% loss in 2022. That is huge volatility in the markets!

With a wall of worries to consider for 2024, it is easy to conclude that it is better to stay away from the stock market. High interest rates, inflation, recession in many countries, the war in Ukraine, the Gaza-Israel conflict and China’s threat to attack Taiwan make for choppy waters for all stock market sailors.

But we have also learnt in recent decades that central banks are trigger-happy to intervene in a financial crisis. This is fine, we believe, if it is a real crash. But over time, central banks get used to being more and more active in the market, and they also step in when there is a risk of recession.

FEDS’ TOTAL ASSETS DECLINE (USDbn)

Since the sovereign crisis was resolved with unprecedented central bank and sovereign support, the Fed has been unwinding its balance sheet at a rate of USD 60 billion per month. This removes the same amount of liquidity from the market.

On 13th December the Fed took the first step away from its current policy when Jerome Powel announced that the Fed might be through raising interest rates this time. See last week’s letter.

WJS SIGNALS ANOTHER CHANGE IN FED’S POLICY

Now the Wall Street Journal reports that Nick Timiraos has written a piece saying that the Fed may also be done with the balance sheet reduction. Presumably the Fed’s internal KPIs indicate that the market is drying up. But is also a big step towards increasing capital to the market. Nick Timiraos is seen as the Fed’s unofficial voice to the market. It will be very interesting to see the minutes of the next Fed meeting, as they are likely to show a move by the Fed more and more towards accommodating the economy.

Who would have the most to gain from a positive economy next year? The answer is the government in power.

PRESIDENT BIDENS APPROVAL RATING IN THE US IS CURRENTLY VERY LOW

After a sharp decline, the approval rating is now around 40 per cent. Between Biden and Trump, the result would be 50/50 if the election were held today.

When Donald Trump was asked to renew Janet Yellen’s mandate as head of the Fed in 2018, he refused. Instead, Donald Trump appointed Jerome Powell as head of the Fed, probably because Powell was more supportive of Trump’s proposed tax cuts than Yellen was at the time.

But it didn’t take long for Trump to diss the newly appointed Fed chief:

“I wasn’t a big fan of Powell. He was recommended by some people. I didn’t like him, he’s too fond of interest rates.” Trump said this after Powell, at least for a while, resisted a push by Trump to have the Fed cut US interest rates to stimulate the economy.

Subsequently, the White House openly criticised Acting Fed Chairman Powell and his cavalier approach to communicating with the market. The criticism was partly justified, but the means were of course completely unacceptable. For example, White House adviser Peter Navarro said that “if Jay Powell were selling sushi, he would market it as cold, dead fish”. Adviser Larry Kudlow said Powell should lighten up a bit sometimes. “You know, a smile now and then…. I’ll talk to him, and we’ll do some media training at some point.”

Against this backdrop, it is hard to believe that Jerome Powell will work for Mr Trump’s re-election. On the contrary, Powell may have good reasons to join Janet Yellen in supporting the incumbent in the upcoming election, even though a central bank governor must officially remain neutral.

The best way to prevent a Trump presidency is to get US consumers in a better mood. The best recipe is more disposable income and a big stock market party.

US Treasury Secretary Janet Yellen has already shown the cards. The US national debt is now spiralling out of control as the budget deficit is allowed to grow. It is easy to see that this is being done to support Mr Biden’s re-election as president.

Normally, the Fed should be warning about this development as it increases financial risk in the US economy. But the Fed has carefully avoided doing so. Instead, the Fed is now gradually changing course from a contractionary to a more stimulative monetary policy.

It remains to be seen how much the Fed will accelerate in 2024. Of course, one should not bet all one’s money on this thesis. But in general one can assume that all dips and stock market falls should be bought. One thing is for sure: if Powell wants to keep his job, 2024 will be another year of stimulating the global economy, which could lay the foundation for a good year for the stock market!

S&P 500 IN POSITIVE TREND, BUT NEEDS A BREAK

Looking at the charts, the S&P 500 rallied through Christmas but needs a period of consolidation. The upcoming earnings season could be the perfect time for interest to return to the market. Typically, the market tends to be weak in the first period with financials such as JPM, Citigroup and Bank of America. However, this often turns into a strong trend when the tech companies report. Tesla, Microsoft, Intel and Netflix are some of the early birds from 23-25 January.

Let’s take it one day at a time.

Q4 2023 reporting season

S&P500 stocks in the US

As of Friday 12 January 2024, around 30 S&P500 companies have reported their fourth quarter results. 76% of S&P companies have reported a positive EPS surprise, while 55% have reported a positive revenue surprise.

72 S&P500 companies have issued negative earnings guidance ahead of their Q4 2023 reports, while 39 companies have issued positive earnings guidance. Seven out of eleven S&P500 sectors are expected to report lower earnings today compared to 31 December 2023. Overall, estimated Q4 2023 earnings growth for S&P500 companies has been lowered by Wall Street Analysis from positive earnings growth of 1.6% on 31 December 2023 to negative 0.1% on 12 January 2024.

The table below shows twelve major US companies that have reported quarterly results for Q4 2023 so far, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. The average EPS surprise is 11.4% and the median is 7.0% for twelve reporting companies since 1 January 2024. The post-announcement price movement is minus 1.5% on average and minus 0.9% on median.

Below we have listed the market’s earnings per share expectations for each company and the date of each interim report for the coming week

Week Ahead

Reports on Wednesday, 17 January:  Charles Schwab, Prologis, and US Bancorp.

We start early in the morning in China with December house prices, Q4 2023 GDP and December industrial production, retail sales, investment and unemployment from 2.30 to 3.00 CET. In Europe we get the UK’s CPI and PPI and the Eurozone’s CPI for December 2023. Opec releases its monthly oil report. From the US, import prices, industrial production and retail sales for December 2023, Redbook retail sales, weekly data, NAHB housing market index for January, business inventories for November, weekly oil inventories (DOE) statistics and the Fed Beige Book will be published.

Reports on Thursday, 18 January: EQT, Fastenal, PPG Industries, Truist Financial and Taiwan Semiconductor.

The day starts with Japan’s Machinery Orders for November at 0.50 CET and Industrial Production for November at 5.30 CET. From the Eurozone, the current account balance and construction output for November are due at 10.00 CET. At the same time, the IEA will publish its monthly report on oil. The minutes of the ECB’s meeting on 14 December are due at 13.30 CET. In the US, housing starts for December, the Philadelphia Fed index for January, weekly initial jobless claims and oil inventories (DOE) will be released.

Reports on Friday, 19 January:  Avanza, Investor, Schlumberger, the Travelers Companies, HDCF Bank and ICICI Bank.

Japanese CPI for December 2023 is due at 0.30 CET. UK Retail Sales and German PPI for December 2023 will be released at 8.00 CET. From the United States, the Michigan index for January and existing home sales for December 2023 are due at 16.00 CET.

Reports on Monday, 22 January:  -At 11.00 CET, the Eurozone budget deficit for Q3 2023 will be presented. Five hours later we get the US leading indicators for December 2023.

Reports on Tuesday, 23 January: Ericsson, Alleima, TopDanmark, General Electric, Intuitive Surgical, Johnson & Johnson, Lockheed Martin, Microsoft, Netflix, Paccar, Procter & Gamble, RTX Corporation, 3M, Texas Instruments and Verizon.

The Bank of Japan releases an interest rate announcement at 4.00 CET. From Europe, the Eurozone Household Confidence Indicator for January is due at 16.00 CET. From the United States, we will get the Redbook Retail Sales for January, the Richmond Fed Index for January and weekly oil Inventories (API).

Valuation tables, Swedish Equities

Disclaimer:

The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

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