Daily Stock Market Articles

Third Times a Charm – Early “January Effect” Likely to Push Russell 2000 to New ATHs

It’s no secret that the Russell 2000 small cap index has not closed at a new all-time high (ATH) in over three years. Russell 2000’s first attempt was on November 11 when it traded up to 2441.72 intra-day. That attempt failed and Russell 2000 retreated. The second attempt started on November 25 and lasted until December 2 with multiple intra-day highs exceeding the old closing ATH of 2442.74 from November 8, 2021. Will a third attempt next week finally see Russell 2000 at a new ATH?

Looking at the seasonal pattern chart above, updated through the markets close on December 6, Russell 2000 does appear to be following its historical pattern and trend this year eerily closely. Since late October small-cap outperformance in November and December this year (orange line) closely following the pattern observed from July 1979 to June 2024. We suspect that once tax-loss selling pressure abates, likely sometime later next week, that Russell 2000 will finally break out and close at a new ATH. Should this occur, small-cap outperformance could persist into early March next year.

 

Argentina ETF (ARGT) on Top in 2024
Mon, Dec 9, 2024

Below is a look at year-to-date total returns for 46 country ETFs available to investors on US exchanges. While the US (SPY) is sitting on a huge gain of 28.6% this year, the average year-to-date change for these country ETFs is just 8.7%, while the median is even lower at 5.8%. Keep in mind that returns also take into account any movements in the dollar.

Before we get to the biggest winners, nine country ETFs are in the red for the year. France (EWQ) is the most notable and the only G7 country that's down in 2024. South Korea (EWY), Mexico (EWW), and Brazil (EWZ) have been the biggest losers with declines of 17%+. Brazil (EWZ) has gotten smoked with a decline of 24.3%. It's bad enough to see a drop of 20%+, but it's especially bad when the average country is up 8.7% and the US is up nearly 30%.

On to the positives...other than France, the other six G7 country ETFs are all up more than 10% on the year. Behind the US, Canada (EWC) has been the second-best of this group with a gain of 18%.

Interestingly, China (MCHI) and the US (SPY) are up nearly the exact same amount this year at just over 28%. Peru (EPU) ranks as the third best just ahead of SPY with a gain of 31.6%. Israel (EIS) has been the second best with a YTD gain of 34.5%. And finally, the best country ETF this year by a significant margin has been Argentina (ARGT) with a gain of 66%. US investors have so far given Argentine President Javier Milei two thumbs up...way up!



Below we highlight the price change (not total return) of country ETFs going all the way back to the COVID-Crash low on 3/23/20. While China (MCHI) is up about as much as the US (SPY) in 2024, it's the only country ETF that's in the red since the COVID lows.

On the flip side, Argentina (ARGT) once again crushes every other country ETF with a massive 491% gain. Behind Argentina is Greece (GREK) with a gain of 173.5%, followed closely by the US (SPY) and India (INDA), which have essentially seen the same price change of 171% since 3/23/20.

 

Opposite Day to Start the Week
Mon, Dec 9, 2024

If you've had a good year so far in the stock market, chances are you had a pretty bad day in the market today. On the surface, today's action wasn't awful. The S&P 500 (SPY) was down 0.5% while the Russell 1,000 was down 0.7%. Within the Russell 1,000, the average stock was down even less at -0.33%.

So what's the big deal? Well, what made today noteworthy was the near-perfect performance distribution based on how stocks had performed so far this year heading into today. In the chart below, we've broken up the Russell 1,000 into deciles (10 groups of 100 stocks each) based on YTD stock performance through last Friday. Decile 1 contains the 100 best-performing stocks YTD, decile 2 contains the next best 100, and so on until you get to decile 10, which contains the year's bottom 10% of performers. In the chart, we show the average performance today of the stocks in each decile. As shown, the decile of the best-performing stocks YTD through last Friday was down 2.9% today, while the decile of the worst-performing stocks YTD was up 2%! As you work your way down from the best decile to the worst, today's performance gets better and better.



At the very top end of the YTD performance spectrum are the 26 stocks in the Russell 1,000 that entered today up more than 100% on the year. As shown below, these stocks fell more than 5% on average today, and every single one was down!



On the flip side are the 25 worst-performing stocks YTD coming into today. These 25 stocks were down an average of more than 50% on the year through last Friday, but they averaged a gain of more than 3% today!

Rarely do we see such uniform performance in one direction based on prior performance in the opposite direction, but that's exactly what we saw today. Investors were selling winners and buying losers to quite an extreme degree.

Given this type of action, we wouldn't make any rash long-term investment decisions based on one day's moves. Sometimes it's just opposite day in the market where we see downside mean reversion from winners and upside mean reversion from losers.

 

Small Business Facts vs. Feelings
Tue, Dec 10, 2024

Early this morning, the National Federation of Independent Business (NFIB) released its November survey for small business sentiment. As shown below, the headline Optimism Index surged by 8 points month-over-month for its biggest jump since 1980 and up to the highest level since June 2021. The main catalyst for the surge in optimism was the election. As we often discuss with this indicator, this release has increasingly been politically sensitive in recent election cycles. Republican administrations have tended to correlate with stronger small-business optimism and vice versa when Democrats have been in power. That means that while the indicator is useful, there is a political caveat that needs to be acknowledged.



In the table below, we show readings for each category in the report both for the most recent month and the previous month, the month-over-month change, and how those rank in percentile terms versus all periods in the survey's history since it began releasing on a monthly basis in 1986. Under the hood, expectations for the economy to improve shared in seeing a record month-over-month gain, rising 41 points from -5 up to +36. Capital expenditure plans, expectations for higher real sales, and viewing now as a good time to expand were not far behind with some of the largest increases in their respective histories. Positive moves were observed far and wide with only one category declining on the month: credit availability.



As previously noted, the index for economic outlook saw a record increase rising an astonishing 41 points from a negative reading up to the highest since June 2020.



Given the strength in the economic outlook, the highest share of firms see now as a good time to expand since June 2021. While the reading is surging, it has plenty of ground to make up to return to levels seen during the last Trump administration.



Fortunately, the survey provides a detailed breakout into the reasons why firms are either positive or negative, and the results are perhaps the most clear sign of responding firms' political biases. For those firms that did give a negative expansion outlook, economic conditions and political climate have been the two most commonly offered reasons in the past several years. However in November, in addition to fewer firms offering a negative outlook, fewer firms reported economic conditions or political climate as the culprit. For other categories, there was only a marginal uptick in financials & interest rates. Conversely, for those that gave a positive expansion outlook, the highest percentage of firms pointed to the political climate for their optimism.



In reviewing the data, it may have become clear that a number of the categories that observed major improvements have the basis in answering a question of how a firm is feeling rather than how it is actually doing. For example, while there was a six point increase in plans to increase capex, there was no change in actual capex spending. In other words, there has been a divergence in the survey's soft and hard data.

In the charts below, we have taken each category of the report (standardizing using a z-score) and averaged whether they are based on hard or soft data. As shown, although November did see stronger hard data, the jump in soft data was much larger. In other words, businesses did see improvements, but their expectations and feelings are much more rosy than more substantiated data may imply. Taking a spread of the two, soft data now leads hard data to the widest degree since the end of the last Trump administration. Looking back historically, that's normal. On average, the spread has tended to be modestly positive (+0.07) during Republican administrations versus a firmly negative (-0.23) average reading when the Democratic party was in power.

 

Copper’s Rally Gaining Momentum as Historically Bullish Season Arrives

Copper tends to make a major seasonal bottom in November/December and then tends to post major seasonal peaks in April or May. This pattern may be due to the buildup of inventories by miners and manufacturers in anticipation of the construction season that usually begins in late winter to early spring. Auto makers are also preparing for the new car model year that often begins in mid- to late summer. Traders can look to go long a May futures contract on or about December 13 and hold until about February 24.

In this trade’s 52-year history, it has worked 34 times for a success rate of 65.4%. The average gain in all years is 5.4%. After four straight years of declines from 2012 to 2015, this trade has been successful in six of the last eight years with solid theoretical gains. Last year, copper was essentially flat from mid-December until mid-March before ripping higher through mid-May. Strictly following the suggested hold period did result in a minor loss, while holding positions longer (which was done in the Sector Rotation ETF Portfolio last year) resulted in well above average gains.

In the accompanying chart, the front-month copper futures weekly price moves (top pane), and seasonal pattern (bottom pane) are plotted. Typical seasonal strength in copper is depicted by a blue arrow and yellow shading in the lower pane of the chart. Last year’s seasonal period is visible in the top pane of the chart. Since copper’s mid-May peak, its trend has generally been lower with a brief surge in September. Copper’s August low appears to have been retested in November and now appears to be beginning a new trend higher. This new positive trend does align well with copper’s typical seasonal pattern.

 

Now the Bears Are Apologizing?


“Any company that has an economist certainly has one employee too many.” Warren Buffett

Another bear issued a mea culpa last week. This time it was David Rosenberg of Rosenberg Research. Rosie, as he is affectionately known, has been steadfastly in the camp that any data has been bad, will lead to trouble, and a recession would be right around the corner. After more than a decade plus of saying this (he was ‘right’ for two months when we shut the economy down for two months in 2020) he has issued an apology. Here’s an excerpt from a great article on MarketWatch:

“It’s high time for me to stop pontificating on all the reasons why the U.S. stock market is crazily overvalued and all the reasons to be bearish based on all the variables I have relied on in the past — from valuation, to sentiment, to overcrowded positioning. So, what I am going to start doing is assessing what it is the market is saying, because the market can certainly move to excesses in both directions and make faulty assumptions, but the market is not stupid,” he said in a piece he titled, “Lament of a Bear.”

“What I clearly underestimated was the dramatic impact this was going to exert on market psychology and the powerful upward shift in investors’ long-term earnings expectations that were the primary drivers of valuations this past year. And I have gained a greater appreciation that it is going to take a whole lot to upset this apple cart and trigger a fundamental re-evaluation of what AI will exert on productivity growth and profitability in the future,” he says.

As readers of this blog know, for more than two years we’ve been looking at the same data and we’ve come to a drastically different opinion. So what does it mean?

For starters, this isn’t a major sign of the top, as Morgan Stanley and JPMorgan were both well-known bears during this huge bull market, but changed their tunes this year. I’ve long said that you need bulls for a bull market, but there are some other signs things could be getting near-term frothy:

• Put/call ratios near their lows of this year, suggesting option markets are complacent
• The VIX was sub 13 last week
• Huge flows into equity ETFs
• Various sentiment surveys showing excessive bulls

Then I also saw that Paul Krugman, economist/writer at the New York Times, retired. He is famous for being wrong more often than just about anyone else. He compared the internet to the fax machine, said the market would never recover after Trump won in 2016, didn’t expect inflation in 2022, missed the housing bubble, and I’m sure there are more but those are the easy ones you can find with a quick search.

Let me point out that I’ve been wrong many times before and I’ll be wrong many times in the future. But I’ll put what our team has said the past two years up against anyone and when the data changes we too will change our views.

The bottom line? We are in a bull market and it is alive and well, but some of this froth needs to be worked off eventually. Here are three more reasons this bull market isn’t done yet.

Not an Old Bull Market
We’ve noted week after week this year why we thought stocks would likely rally and fortunately that’s what we’ve seen happen. The S&P 500 is up more than 27% in 2024, which would go down as the best election year return ever, and it has made 56 new all-time highs, among the most ever as well.

Stocks are looking at back-to-back 20% gains for the first time since the late 1990s, bringing many to worry this bull market could be about to end. Looking at the evidence, we don’t think so. This current bull market is nearly 26 months old and is now up more than 70% from the mid-October 2022 lows. But the good news for investors is that once previous bull markets got to this point there were many more years of gains left.

That’s right, going back 50 years, we found five other bull markets that had lasted at least this long and the shortest any of them lasted was five total years. Think of it like a cruise ship — once it gets moving, it can be quite hard to stop. As you can see here, not only could there be a lot of time left, but there could be more impressive gains as well.



Major Milestones All Over
The Dow recently closed above 45,000 while the S&P 500 hit 6,000 for the first time ever. We are aware as stocks go higher, these 1,000 point milestones are easier to hit, as the percentage gain needed to achieve the milestone gets smaller. Still, this year will go down in the record books as a year that saw a lot of major milestones.

The Dow hit a record eight 1,000 point milestones this year and with a few more weeks to go, more could possibly be coming. In fact, it took only seven trading days to go from 44,000 to 45,000, the second fastest 1,000 point milestone ever.



Turning to the S&P 500 at 6,000, it appears that these 1000 point milestone levels can be a good sign, as stocks have never been lower six months later. We’ve discussed before that new highs tend to be bullish and these milestones are by definition new highs, so strong results over the ensuing six months makes sense.



One More Bit of Good News
November was a huge month for stocks, but the big winner was small caps, with the Russell 2000 up an amazing 10.9%. Optimism over lower taxes, a stronger economy, animal spirits, and strong earnings all were likely reasons for the surge.

We found 22 other times the Russell 2000 gained at least double digits in a month and six months later it has been higher 90% of the time and a year later up a very solid 15% on average. The bottom line is strength like we just saw isn’t the hallmark of the end of bull markets, but more likely the beginning.

 

The Drivers of Long-Term Stock Returns


We sometimes get questions about why we think stocks will continue to go up in the long run. That gives me an opportunity to refer back to some of our favorite long-term investing charts that capture our views.

Almost exactly a year ago, our Global Macro Strategist Sonu Varghese wrote a piece called, “This Is Likely the Best Investment Over the Next Five Years.” The “this” in the title is the S&P 500 and looking at 2024, Sonu’s analysis is off to a pretty good start. In case you might have missed out on some of those gains, Sonu wrote a kind of companion piece back in June called, “How Does One Positively Expose Oneself to Luck While Investing?”

The downside of stocks’ return potential is volatility, something we experienced in the second half of July and early August this year during the S&P 500’s largest drawdown of the year. Our Chief Market Strategist Ryan Detrick provided perspective on that in an August 6 blog called “10 Talking Points About the Recent Volatility.” In addition to including some favorite long-term investing charts, it also provided some timely advice, as the day it was published stocks began to rebound.

Getting back to the question of why we think stocks will continue to rise in the long run, there are two perspectives to take. One is to look at stock market history, which provides a helpful picture of the risk premium stocks have historically earned. But there are also sound underlying reasons for those gains. Primarily, stock ownership is an equity interest in a company’s profits, some of which is distributed via dividends (and indirectly through share buybacks) and some of which is reinvested, potentially contributing to future earnings growth and dividends.

S&P 500 earnings gains have been fairly consistent over the last 70 years from a big picture perspective. (The chart is scaled so that the trend line represents a steady growth rate.) There is a lot of short-term wiggle in earnings per share that can have a large impact on short-term market returns, but over the long run there’s a clear trend. It’s there due to a combination of economic growth supporting sales growth, margin expansion, US companies competing effectively for global market share, and index construction (better growing companies being added to the index over time as they meet the criteria for inclusion, worse growing companies being removed as they fail to meet the criteria). At it’s simplest, if you believe in long-term GDP growth (that is, the economy won’t be in a perpetual recession or near recession) you should believe in earnings growth, and if you believe in earnings growth, you should believe in the prospect for long-term stock gains.



But earnings growth is not the only driver of returns. Stock returns can easily be broken down into three pieces: dividends, earnings growth, and valuations. The chart below has our estimate for the 10-year rolling contribution of each to the S&P 500’s return staring in the labeled year (so the final data point is 2014 – 2023).



Some quick observations and then we can take a deeper dive. Earnings (green) tend to be the dominant driver of returns and are rarely negative over a 10-year period. The exceptions are the periods ending during the Great Depression and the one period ending the year of the Great Financial Crisis (2008), since earnings took a historically unusual tumble that year. Dividends (blue) are your slow and steady contributor, although their contribution has narrowed over time. Multiple growth is unusual because it can swing between being a contributor and a detractor for an extended period of time.

Dividends’ contribution is always positive, since it’s a distribution. The typical level of dividends has generally fallen steadily over time, running at about 2% per year over the last decade, but it’s still an important contributor to returns.

Multiple growth (also called valuations) depends on the amount investors are willing to pay for a dollar of prospective earnings, and it therefore reflects how investors are pricing the market at any given time. Price multiples have some natural unknown fair value that acts as a center of gravity over longer time periods. High multiples will tend to revert lower; low multiples will tend to revert higher. But it’s very difficult to know when that mean reversion will take place, with the general guideline that “some time in the next decade” is a reasonable assumption. That means it’s entirely normal for multiple mean reversion not to happen over the next five (or more) years, which is why we always emphasize that valuations aren’t a market timing mechanism.

That fair value multiple may also trend very slowly over time as business fundamentals, technology, index make-up, and economic fundamentals change, but the impact on prices from that is modest. That potential trend does add to the difficulty in knowing what the fair value level is, which is part of why using a long-term history for estimating today’s level should be taken with a grain of salt. In the near term, multiples changes are driven largely by runs of positive or negative sentiment that eventually get pulled back to fair value. Because that fair value level is a center of gravity, changes in multiple can have a profound short-term effect on stock returns but are generally neutral in the very long run.

Finally, there’s earnings, which typically grow more quickly than dividends in the long run, especially over the last 50 years as the index’s dividend yield has contracted. Earnings growth is easily the largest contributor to stock gains, but there was a time when stocks distributed more of their earnings and dividends were almost as important. Over the last 100 years, earnings growth has had 1.4x the impact of dividends on index gains. Over the last decade, earning growth has had 3.6x the impact.

Looking at the numbers overall, over the last 50 years, through the end of 2023, the S&P 500 has had a compound annual growth rate of 11.1%. 6.7% of that has come from earnings growth; 2.9% from dividends; 1.6% from multiples changes. If you take that as a percentage of the whole, 60% came from earnings growth, 26% from dividends, and 14% from multiples expansion. That means the fundamental drivers of stock returns (earnings and dividends) have accounted for 86% of returns over the last 50 years.

That doesn’t mean that the 1.6% per year that came from multiples expansion is all from sentiment. Profit margins were running at roughly 6% in 1973. In December of 2023, trailing year, they were running over 10%. That deserves a higher price multiple on a fundamental basis, reflecting the drift in the fair value multiple mentioned above.

What’s the upshot of all this? Throughout our blogs we have provided many long-term investing charts speaking to the long-run potential of stocks while offering guidance on how to handle the shorter-term volatility that can lead investors to make costly behavioral mistakes. It’s important to understand that our view is not just based on an expectation that future stock returns will mirror the past with no deeper justification. Rather, the expectation is based on the underlying fundamentals of what stock ownership means. If you believe that stocks can continue to grow earnings, then you ought to believe in stocks in the long run. In the short run there will be volatility and periods of weaker returns. But if earnings can grow, stocks will continue to have an intrinsic value that will flow through to higher returns over time.

 

General Electric (GE), Spin-Offs, and Dividends
Thu, Dec 12, 2024

Back in March, long-standing blue chip company General Electric (GE) spun-off and merged its energy businesses (formerly GE Power, GE Digital, and GE Renewable Energy) into GE Veranova (GEV). Since the spin-off on March 27, GEV is the second best performing stock in the S&P 500 with a 161.9% gain. That is second only to the near-200% gain in shares of Palantir (PLTR) in that same span and compares to a 15.76% gain for the S&P 500. Meanwhile, parent company General Electric (GE) has slightly outperformed the S&P 500 with a 16.5% gain while another one of its semi-recent spin-offs (occurring in January of last year), GE HealthCare Technologies (GEHC), is down double-digits.



The S&P U.S. Spin-Off Index measures the performance of companies that have a market cap of at least $1 billion and have been spun-off of a parent within the past four years. In the chart below, we show the return of this index versus the S&P 500 over the past decade. As shown, spin-offs have offered respectable returns albeit coming up short of that of the S&P 500. On a relative strength basis, spin-offs were actually outperforming the broader market throughout 2014 into 2017, but the trend has shifted out of favor in the past several years. With that being said, the recent strong run in GEV among others has meant that the relative strength line has made a considerable pivot higher in recent months.



Of course, in being one of the best performing S&P 500 stocks this year, GEV also leads in performance since the spring among other spin-offs. In the table below, we show the members of the spin-off index in addition to when they were spun-off, their performance since GEV's spin-off, and their dividend yields. The only one of these companies holding a candle to GEV has been Victoria's Secret (VSCO) which has also more than doubled since the spring. Conversely, there are ten that have fallen in that span.

In addition to its big rally, GEV is also worth mentioning because in a press release earlier this week the stock instated a dividend and announced a buyback. Among the aforementioned spin-off stocks, about half pay a dividend and GEV's new dividend yield of just 0.3% is at the lower end of these names. The $0.25 payout goes ex-dividend on December 19 with it planned to be paid out in late January.



Switching over to the parent company, General Electric (GE) is an interesting story with a dividend history worth mentioning. Currently, GE has the 14th lowest dividend yield among dividend payers in the S&P 500 Industrials sector. While the sector itself doesn't have a particularly large yield, almost half (45%) of its member stocks have a larger yield than the S&P 500. For GE, the company had an impressive 32 year run of raising its dividend annually from 1977 through 2009. However, hard times during the Financial Crisis resulted in that dividend to get slashed. The 2010s saw the company undergo significant restructurings which have clearly continued into today. Those culminated in another big cut in the dividend in 2017 and 2018. After the continued restructurings, in the current iteration, General Electric is focused primarily on the aerospace business. While the stock's price has rebounded (currently it is around some of the highest levels since 2008), the dividend yield is a shell of its former self. With that being said, GE raised its dividend by 20 cents in the first quarter of the year, marking the first time GE raised its dividend since 2016.

 

Get Ready for the Real Santa Claus Rally

Headed down to Wall Street yesterday to pave the way for Santa. As Yale Hirsch’s now famous line: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

This rather typical early December seasonal weakness sets up the Santa Claus Rally well. The Street has been buzzing about the Santa Claus Rally for three months now. Most still get it wrong. It’s not the yearend rally, the Q4 rally that runs from Halloween through January. Yes, November, December and January are the best three months of the year, but they are not the Santa Claus Rally.

Santa Claus Rally was devised by Yale Hirsch in 1972 and published in the 1973 Stock Trader’s Almanac. The “Santa Claus Rally” is the last 5 trading days of the year plus the first 2 of New Year. This year it begins on the open on December 22 and lasts until the second trading day of 2024, January 3. Average S&P 500 gains over this seven trading-day range since 1969 are a respectable 1.3%.

Failure to have a Santa Claus Rally tends to precede bear markets or times when stocks could be purchased at lower prices later in the year. Down SCRs were followed by flat years in 1994, 2005 and 2015, two nasty bear markets in 2000 and 2008 and a mild bear that ended in February 2016.

This is the first leg of our January Indicator Trifecta (2025 STA p 20) which includes the “First Five Days” (2025 STA p 16) and the full month “January Barometer” (2025 STA p 18), also invented and named by Yale Hirsch in 1972. This January Trifecta helps us affirm or readjust our outlook. When we hit this Trifecta and all three are positive S&P is up 90.6% of the time with an average gain of 17.7%.”

Based upon the outcome of these three indicators, we may adjust our outlook for the balance of Q1 and 2025. Until then, we remain bullish as this is the seasonal favorable period for stocks. Valuations are a concern, but economic data is holding up, the Fed is cutting interest rates, and the market continues to track seasonal trends and patterns rather closely.”

Stay tuned for more on the rest of my January Indicator Trifecta and sign up for my newsletter to get my official readings and analysis. And get the 2025 Stock Trader’s Almanac as a free bonus. https://stocktradersalmanac.com/LandingPages/get-Almanac-for-free.aspx

 

Superstitious or not, S&P 500 Up 8 of 13 Friday 13th Days in December



Since 1930, the S&P 500 has traded a grand total of 159 Friday 13th across all twelve months. The overall track record is 88 up days and 71 down days with a modestly bullish average gain of 0.05% on all Friday 13ths. The worst Friday 13th loss was 6.12% in October 1989. This day is often referred to as “Black Friday.” The best Friday 13th gain was 9.29% in March 2020. Digging deeper into the data reveals that December Friday 13th has been up 8 times, down 5 times with an average gain of 0.06%. Although a modest gain, there is no reason to fear Friday 13th in December.

 

A Big Unknown for 2025 Is the US Dollar, and That Matters


The dollar has been on a tear since the end of September, and especially post-election. It took a bit of a breather over the Thanksgiving week but swung up again over the last couple of weeks. The dollar is now up over 6% since the end of September (through December 12th). Just before the Thanksgiving break, I wrote a piece on why the dollar was surging and the risks posed by a strong dollar, including headwinds for US manufacturing, US company earnings, and international equity investors (in USD terms). Looking at the chart below, the dollar is clearly elevated relative to the last decade (when the dollar had already strengthened relative to the mid-2000s and early 2010s).



A big driver of the dollar is relative growth rates between the US and everyone else, and US economic data has come in strong over the last few months. Expectation for stronger economic growth in the US means interest rates are likely to remain high, with the Fed keeping policy rates higher relative to other countries. That means interest rate differentials are likely to run high, driving the dollar higher.

So, the outlook for the dollar really depends on how you think the US economy will do relative to everyone else.

Outlook for Global Growth Ex US Is Very Different From 2017
The dollar plunged about 14% in 2017 through February 2018, Trump’s first year in office. But back then, the global economy was recovering. Europe showed signs of growth after several years mired in debt crises, and China was re-stimulating its economy after the weakness in 2015-2016. Note that this also helped international equities outperform US equities in 2017 (through Feb 2018). As I’ve pointed out previously, Emerging Market (EM) returns are helped by a weaker dollar even in local currency terms. This is because a lot of EM companies borrow in USD, and so a weaker dollar helps their balance sheets.



The situation is very different now. Global manufacturing is in a funk as we enter 2025. US manufacturing PMI woes are well known, but the one advantage for the US is that manufacturing is not a big part of the economy. So, a slowdown in manufacturing, or even contraction, is not enough to push the economy into recession. However, that’s not true outside the US, especially for countries like Germany and South Korea. As of November, 13 of 18 major countries across the globe had manufacturing PMIs below 50, indicating their respective manufacturing sectors are contracting — including powerhouses like Germany, France, Japan, and even Mexico. India is a notable exception, with a manufacturing PMI of 56.5, but then India is not known for its manufacturing prowess.



What’s the Problem with Germany? (Hint: It’s China)
As you may have noticed above, Germany’s PMI of 43.0 is amongst the worst of the lot. Industrial production in Germany has completely collapsed. It’s down 2.7% year to date (through October) and down a massive 15% from the end of 2018. Note that 40% of Germany’s economy relies on exports (and hence, manufacturing), versus just 7% for the US (for goods exports). The big story is really the collapse in German auto production. Germany used to produce on average 5.6 million vehicles a year between 2014 – 2018. That collapsed in late 2018, and through the pandemic. Despite a recovery in 2023, production has now stagnated to around 4.2 million vehicles — a whopping 25% below the 2014-2018 average.



A big reason for this is the takeover of global auto manufacturing by China. Brad Setser (an economist at the Council of Foreign Relations) recently wrote about how China became the world’s largest car exporter, with 6 million cars exported in 2024. Five years ago, that number was less than 1 million. China is now on track to export over 5 million vehicles on “net” in in 2024 (exports minus imports). Back in 2020, it was a net importer of vehicles!



China now has enormous capacity to produce cars — over 40 million internal combustion engine (ICE) cars a year, and about 20 million electric vehicles (EVs) by the end of 2024. This means China has the amazing capacity to supply over half the global market for cars. Globally, about 90 million cars are sold a year.

Of course, as Setser points out, China has nothing close to this level of internal demand. The internal market is about 25 million cars, and it’s not growing. Interestingly, domestic EV sales are rising rapidly (expected over 15 million next year). And as a result, ICE vehicle capacity is geared to exports — especially to Europe and other EMs (US and India are notable exceptions because of tariffs imposed on Chinese vehicles). And China’s massive overcapacity is a revolution for the global manufacturing and auto industry. China’s also added shipyard capacity for exports.

This has all come on the back of massive subsidies from the Chinese state, including for downstream manufacturers like battery and chemical industries (along with cheap steel). This gave Chinese car companies a huge leg up over Western companies that don’t benefit from subsidies. These subsides also go towards building out industrial robots. An interesting story is that Volkswagen apparently uses only one German robot in its latest Chinese factory. The other 1,074 robots were made in Shanghai. I should note that China hands out subsidies dime a dozen, but the competition for those is fierce. China has about 100 different EV companies. But a true market economy wouldn’t be able to support them all. It’s generous government funding that provides crucial support to all of them, allowing them to scale up.

What does this have to do with the dollar? Well, if global manufacturing remains in a funk due to Chinese overcapacity, along with continued subsidies for the Chinese industrial sector, manufacturing-dependent economies in particular will continue to struggle. This means global central banks are likely to ease rates more rapidly than the US. That’s going to put upward pressure on the dollar.

Global Political Dysfunction Is Another Factor
On top of slowing growth abroad, global crises mean there’re even more potential tailwinds for the dollar. There’re the events in the Middle East (Syria), but what happened in South Korea and France is perhaps more relevant.

South Korea’s President imposed martial law last week, only to withdraw it a few hours later. But it’s plunged the country into political chaos. France’s government, led by Michel Barnier, collapsed last week, as left-wing and far right-wing parties voted for a no-confidence motion. Their main gripe was a proposed budget that looked to rein in the deficit, with spending cuts and tax hikes.

The common theme was that these events arose amid political dysfunction, both in South Korea and France. But the problem is that political dysfunction in these countries (and even in Germany) is not a scenario for economic growth to pick up. In fact, in Europe, EU rules mean we may even see the straight jacket of government austerity imposed on budgets, which is not what you need amid slowing growth prospects. This could result in more political upheaval as left- or right-wing governments gain power.

Keep in mind that all this is happening while the US economy continues to remain solid and likely to be supported by fiscal policy over the next couple of years. Again, this is a scenario under which the dollar strengthens.

But What Exactly Does Trump Want?
President-elect Trump clearly wants to revive American manufacturing and one pathway to that is a weaker dollar. He’s said that that US has a “big currency problem,” which reflects what you saw in the first chart of this piece — the dollar is near its strongest level in a long time. In fact, in real terms the dollar has been stronger than now in only four months since the 1985 Plaza Accord. That was when the leading nations got together and agreed to devalue the dollar. Interesting side bar, Trump bought the Plaza hotel, where the accord was signed, in 1988. (He sold at a loss in 1995).

Yet, proposed policies inadvertently lead to a stronger dollar. In my prior blog, I noted how expected tariffs are being front-run by a strengthening dollar. Policies to boost US growth (even as other countries struggle) is another dollar tailwind.

Trump also wants to protect the reserve currency status of the dollar — including threatening tariffs against the BRICS countries if they move away from the dollar. For one thing foreigners don’t trade in USD out of charity. It’s because they sell a lot of stuff to Americans and get USD in return. Those USD are used to buy US assets. In a sense, they have no choice, given their own policies to run trade surpluses. If the US wants to revive domestic manufacturing and reduce the massive trade deficit (by boosting exports), that implies the rest of the world will receive fewer dollars on net, as they’ll be using the USD they receive for selling goods to us to turn around and buy American manufactured goods. You can’t really have it both ways. Ultimately, the administration will have to choose which direction to go in, and that’s really the question for 2025. And that will potentially have big implications for the dollar, and probably other assets tied to the dollar as well.

 

Quantum Stocks Leap
Mon, Dec 16, 2024

Alphabet (GOOGL) has continued to surge higher since last week when it had a delayed response to news that its Willow quantum computing chip had made a breakthrough in the speed in which it can solve problems. GOOGL shares are up another 4.5% today and are now up more than 13% since last Monday's close. As shown below, GOOGL experienced a sharp drawdown (-22%) from mid-July to mid-September, but its recent jump higher has taken it back to new all-time highs.



Since the "quantum" news from Google last week, smaller companies focused on quantum computing have skyrocketed. Below is a table of four small-cap quantum computing stocks along with their year-to-date and quarter-to-date percentage changes. Below the table, we provide price charts for each stock.

As you can see, all four of these stocks are up more than 300% this quarter alone, while Rigetti (RGTI) and Quantum Computer (QUBT) are up more than 1,000% quarter to date! A little over a month ago, QUBT was trading for $1.38/share, but today shares are trading at $10.91. Rigetti (RGTI) was at $1.41/share on 11/15, and this afternoon shares are trading at $8.73.



While these quantum stocks are experiencing a quantum leap right now as speculators trade the Google news, this is their second rodeo. As you can see in the charts below, IONQ is the only one of these four quantum stocks that is currently trading at an all-time high. RGTI, QUBT, and QMCO all traded at prices higher than they're at now during the COVID stimulus-fueled SPAC and meme-stock craze back in 2021, and then they all experienced drawdowns of more than 95%! IONQ managed to only see a drawdown of 88% from its 2021 high to its late 2022 low.



For investors that would rather play an ETF than a specific stock in the quantum computing space, there's the Defiance Quantum ETF (QTUM), which we show below.



During bull markets, you often see short bursts higher like this in speculative industries due to the "FOMO" trade (fear of missing out). And they often end in tears, as we've already seen once in the quantum computing space. This is another way of us reminding you to "be careful out there." These kinds of moves are not normal and usually prove that there is no easy money on Wall Street.

 

Nine Reasons We Still Believe in a Santa Claus Rally


Stocks have been weak lately, with the Dow recently down eight days in a row and the Russell 1000 Value Index also down 11 days in a row. In fact, the S&P 500 had more stocks down than up for 11 days in a row, the most since 1996.

Some of this weakness has been masked by strength in communication services and consumer discretionary. Just last week the Nasdaq hit 20,000 for the first time ever and only two weeks ago we were talking about the Dow at 45,000 and hitting a record eight 1,000-point milestone levels in 2024. So are things really that bad? I don’t think so.

After the huge run stocks have seen this year, we aren’t overly surprised that the second week of December has seen some weakness overall. After all, this is what tends to happen in the early part of December, but there is more of the month to come and things tend to look different in December’s second half.

Here’s a nice chart that shows the second week in December tends to be a historically weak time for stocks, with nearly all of December’s gains occurring in the month’s second half. Should you still believe in Santa? We think so and continue to expect a potential year-end rally and more new highs before 2024 is officially in the books.



Eight Other Reasons to Believe
The S&P 500 is up only slightly on the month in December, but here are some other reasons we expect an end of year rally:

• No month is more likely to be higher than December (74.3% of the time).
• No month in an election year is more likely to be higher (83.3% of the time).
• When the S&P 500 has been up double digits at the midpoint of the year, December has never been lower.
• The Fed is expected to cut rates this Wednesday, which will be the last big event of the year, opening the door for little news the next two weeks. Remember, stocks tend to do well in the absence of news and this is why strength around holidays tends to occur.
• Only once has December been the worst month of the year for the S&P 500 (2018).
• There are signs stocks are oversold and in many cases near oversold levels that marked lows earlier this year.
• The past 10 election years saw the S&P 500 gain in December nine times.
• Lastly, when stocks were up 20% or more going into December the final month has been higher nine of the past 10 times.

How do we sum it all up? Don’t stop believing in a Santa rally just yet.

 

DJIA’s Longest Losing Streak Since 1978 Not Likely to Cancel Santa Claus Rally

DJIA has now declined in nine consecutive trading sessions. The last DJIA losing streak of similar duration was in February 1978. Since 1901, DJIA has suffered just 12 (including the current streak) daily losing streaks of nine or more trading days. The longest was 14 trading days beginning in July 1941, the worst based upon total decline ended in October 1974 when DJIA shed 13.28% in eleven trading days. DJIA’s current streak is below average with a cumulative loss of 3.47% as of the close on December 17. Historically, it took DJIA around 50 trading days to recover the losses accumulated during the past streaks. This can be seen in the top chart of DJIA’s performance 30 trading days before and 60 trading days after the previous 11 streaks.

When DJIA’s current losing streak ends, it may be a slow grind higher, but higher has historically been the subsequent path. Following the end of the previous eleven streaks, DJIA was higher 72.7% of the time 1-week, 2-weeks, and 1-month later. By the 3-month-after mark DJIA was higher 81.8% of the time with an average gain of 5.80% and a median advance of 7.59%. Odds still suggest a Santa Claus Rally later this month.