Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

February 8, 2024

SP 500 5000

Almost…

Due to the Great Financial Crisis (GFC), financial markets around the world crashed. The U.S. stock market, represented by the SP 500 plummeted nearly 55% between November of 2007 and March of 2009. As the chart above shows, the SP 500 bottomed at 666 in the fall from the 1,576 high made in late ’07. Now it is almost 5,000. A new all-time record high. The “SP 5000” hats are being made now. It was just April 1, 2021 when the SP 500 reached 4,000 for the first time. That happened in 1,043 days. As the chart below indicates, these 1,000 point milestones for America’s primary stock index have occurred in increasingly shorter time. This, though, deserves proper perspective. It took 4,321 days for the SP 500 to get to 2,000 from 1,000. Note that was a 100% jump. The recent increase to 5,000 from 4,000 represents a 25% gain.

Again, keeping proper perspective, there is one primary reason the SP 500 has soared to new highs so quickly. That is because of a handful of stocks. They were named last year, “The Magnificent Seven”. These few stocks have had a dramatic impact on the index of 500 stocks. They have done the heavy lifting, propelling the index with its 493 other stocks higher. There is a less-than-obvious reason for this. It has to do with the “weighting” of the companies in the index. The SP 500 is a “market capitalization weighted” index. This determines the price of 500 stock basket. The index is not “equally weighted”. That means a large company’s stock with have a bigger impact in calculating the index value than a small company stock. Company size, or market capitalization is a function of shares outstanding times current share price. So, a $3 trillion SP 500 component will weigh more on the index’s value than one with a market-cap of $10 billion. Heres’ a real example: At year end, the total market cap of the SP 500 was $42 trillion. Apple’s stock market cap was about $3 trillion. This implies that Apple made up roughly 7.1% of the index’s market weight. The chart below shows how much the SP 500 index is impacted by these mega-cap stocks. It compares the performance of the SP 500 last year to its equal weighted version index. This is worth noting.

Yesterday, the SP 500 made an intraday high of 4,999.89. ALMOST 5,000. As of this writing, the index still slightly below the new milestone – but close. It will likely climb over that level today or tomorrow. Then what? The milliner will start on the “SP 6000” hats. Other than that, the index is likely to continue to be lifted by those heavily weighted mega-cap stocks. It’s teed up…

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“I am convinced that unless America changes course, we will become the France of the 21st Century.”

~~ Mitt Romney, 2008

What Happened On This Day February 8, 1926 – Walt Disney Studios is formed, occupying corner of small realty office in Los Angeles, and eventually growing into the largest animation studio in the world.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Market in Confirmed Uptrend. Since November 1 the market has been in a confirmed uptrend. The market’s technical’s and fundamental’s remain solid and support the market’s extended Confirmed Uptrend. The market is now up 13 out of the last 15 weeks.

Here are key market levels as of Monday, February 5:

Recapping Last Week

A volatile week on Wall Street ended with mostly positive performance from U.S. equities after the Federal Reserve’s hawkish comments and a much stronger-than-expected jobs report. The S&P500 and Nasdaq Composite indices each rose more than 1%, while the Russell 2000 fell nearly 1%. Nine of eleven S&P500 sectors gained ground, with strong earnings results from Meta and Amazon leading the communications sector higher by more than 2.5%. Crude oil prices plunged nearly 8% after production giant Saudi Aramco ditched plans to boost output capacity, souring views on future demand. Unconfirmed reports of a ceasefire between Israel and Hamas also kept oil traders on edge, while OPEC pushed off a decision on whether to extend output cuts until March. U.S. Treasury yields plummeted after the Treasury Department lowered its borrowing estimates and Fed Chair Powell said

that rate cuts would likely begin this year. However, Powell dashed hopes of a cut in March with his FOMC press conference remarks, which sent equity prices reeling. On Friday, rates ended up clawing back much of their weekly losses after news that the U.S. economy added 353K jobs in January and the prior month saw a big upwards revision. Wage growth increased 0.6% month over month, double the estimates, and jumped 4.5% year over year. Still, traders see a 70% probability of a rate cut in May despite the economy’s strength, according to the CME FedWatch tool. In other news, U.S. consumer confidence soared in January as Americans grew optimistic about the economy and easing inflation. Productivity advanced 3.2% in Q4 2023 while unit labor costs stayed in check. The U.S. Employment Cost Index increased just 0.9% in Q4, the smallest since 2021. Factory activity climbed to a 15-month high, but economists also noted the first rise in materials costs since April. Concerns about U.S. commercial real estate resurfaced after New York Community Bancorp reported a surprise loss, sending regional banks tumbling.

Internationally, the Bank of England signaled that lower inflation would be required before it would consider rate cuts, keeping rates steady for the time being. Europe received good news on headline inflation, with CPI slowing to 2.8% year over year in January, but policymakers remained concerned about services prices. Another source of distress is economic growth, as Germany reported a 0.3% GDP contraction in Q4. Finally, a Hong Kong court ordered the liquidation of China’s real estate giant Evergrande, creating more uncertainty for that nation’s fragile economy. China’s official manufacturing PMI shrank for a fourth straight month in January as new export orders remained weak, although the private-sector Caixin survey showed improvement in coastal regions.

Current View

The major U.S. stock indices rallied sharply higher as 2023 came to a close. The stock market climbed higher 9 straight weeks into year end. As noted above, the market is in the 12 up week out of the last 13. Yesterday the S&P 500 scored its fifth straight gain.

Stock market psychology is showing more positive sentiment. Bullishness among newsletter editors rebounded to 52.9% vs. 48.5% this week, according to Investors Intelligence’s weekly survey. That still falls shy of a near-term peak of 57.1% seen both in early December and at the start of 2024. The ratio of bearish pundits fell to 17.1% vs. 19.1%. Editors at Investors Intelligence noted that “low levels of bears (near 18% in July/August 2023, just 15.3% in July 2021) hint at tops.” This point is worth noting.

The Nasdaq, which led was the leading index last year, is continuing its bulling trend. As of yesterday, it marked a fifth up day in a row and is up more than 3% YTD. I see many parallels in the stock market between now and the 1999/2000 period. Like then, the market now is trending higher boosted by great momentum. Especially in the space of megacap tech growth stocks. This trend will end, as in March of 2000, and preservation will be paramount.

• Industry Group Strength:  BULLISH. As of yesterday, 131 out the 197 groups I monitor are up year-to-date. 66 are down.
• New Highs vs. New Lows: BULLISH.  In yesterday’s session, there were 371 new 52-week highs and 102 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 2.02%. The 10-year Treasury now 4.15%.
• Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is now 13. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BEARISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 75, the Fear & Greed Index is down from 77 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 54.3% and the bears came in at 17.1%. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.33.  The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Jobless Claims Fall, Labor Market Still Strong:  The number of Americans who applied for unemployment benefits in the first week of February fell by 9,000 to 218,000 and indicated that layoffs remain extremely low. Initial jobless claims declined from a three-month high of 227,000 in the prior week. New jobless claims are starting to become more normal again after the usual fluctuations during the holiday season stretching from Thanksgiving until Martin Luther King Jr. Day. What they show is a hot labor market that has cooled slightly but remains remarkably strong. Businesses are hiring at a slower pace compared to last year, but they have been reluctant to lay off workers because of a tight labor market and steadily growing economy.

U.S. Trade Deficit Falls to 3-Year Low: The U.S. trade deficit rose slightly in December, but the annual gap still fell to the lowest level in three years and added to economy’s strong performance in 2023. Record deficits in 2021 and 2022, by contrast, acted as a big drag on gross domestic product, the official scorecard of the U.S. economy. In December, the trade gap widened by 0.5% to $62.2 billion. It was sharply lower compared to the same month a year earlier, however. The U.S. trade deficit was driven to record highs during the pandemic because of seismic shifts in the global economy.

ISM Services Show Positive Signs: A barometer of business conditions at service-oriented companies rose in January to a four-month high in a burst of fresh optimism about the U.S. economy. The Institute for Supply Management’s survey climbed to 53.4% from 50.5% in the prior month. The index had fallen in December to a seven-month low. Numbers over 50% are viewed as positive for the economy. The index ranged between 50% and 55% throughout 2023. The economy never really slowed down last year even after the Federal Reserve jacked up interest rates to a 23-year high to try to tame inflation.

Consumer Sentiment Highest in Over 2 Years: Consumer sentiment shot up in January to the highest level since the summer of 2021, as Americans got some relief from waning inflation and saw an improved economy. The final reading of the sentiment survey edged up to 79.0 from a preliminary 78.8 earlier in the month and from 69.7 in December, the University of Michigan said last Friday. That is the highest mark since July 2021. The consumer-sentiment survey reveals how Americans feel about their own finances as well as the broader economy. While sentiment has improved lately, it’s still well below pre-pandemic levels of around 100. Inflation is waning, but the economy is still growing faster than the Federal Reserve expected. A lot faster, it turns out.

Job Report Shows Big Gains: The U.S. economy added a whopping 353,000 new jobs in January, but the surprisingly large gain may have been flattered by the adjustments the government makes to smooth out seasonal swings in employment. Still, the increase in employment last month easily beat the market estimate and underscores the remarkable strength of the U.S. labor market. The unemployment rate, meanwhile, stayed at 3.7% in January. It’s near the lowest level since the 1960s. The January jobs report is often hard to decipher because of big changes in the labor market at the start of each year. Temporary workers hired for the holiday shopping season are let go, for one thing, and many companies announced job cuts at that time. Businesses are still hiring and unemployment remains surprisingly low despite the highest interest rates in a few decades.

U.S. Manufacturing PMI Improves, but Still Contractionary: A closely watched index that measures U.S. manufacturing activity rose to 49.1% in January from 47.1% in the prior month, according to the Institute for Supply Management last Thursday. That is the highest level since October. Any number below 50% reflects a shrinking economy. Manufacturing has contracted for 15 straight months. Regional manufacturing surveys were very weak in January, but the national ISM index showed some signs of life. Economists said it will take time before the sector stabilizes even if the Federal Reserve cuts interest rates.

U.S. Productivity Rises Rapidly Again: The productivity of U.S. businesses and their workers rose in the fourth quarter at 2.7% pace compared with a year earlier, possibly a sign the economy could grow faster than expected even as inflation slows. Productivity advanced 3.3% in the fourth quarter, the government said, after a frothy 4.9% surge in the third quarter. Higher productivity is the secret sauce for an economy. When it rises, businesses earn bigger profits and workers reap bigger wages. Higher productivity also helps to reduce inflation. Productivity is hard to measure and it often takes time for new trends to emerge. But the most recent trend looks promising.

S&P Case-Shiller Home Prices Hit New High: Home prices in the 20 biggest U.S. metros rose for the 10th consecutive month, hitting a record high, due to a low number of home listings. The S&P CoreLogic Case-Shiller 20-city house price index rose 0.1% in November compared to the previous month. Home prices in the 20 major U.S. metro markets were up 5.4% in the last 12 months ending in November. The 20-city and the national index are at an all-time high. Even though mortgage rates were elevated between October and November — which sapped home-buying demand — the persistent and severe lack of supply of homes for sale has resulted in prices rising yet again.

PCE Rises at Slowest Rate Since Spring 2021: The rate of U.S. inflation based on the Federal Reserve’s preferred PCE gauge rose a mild 0.2% in December and pointed to smaller price increases in 2024. Inflation picked up at bit at year end after declining in November, but there’s little evidence of emerging trouble. The increase in prices in the 12 months ended in December was unchanged at 2.6%. In a big surprise, though, the economy has continued to grow at above-trend rates instead of slipping into recession as many Wall Street analysts had forecast. The Fed is all but certain to cut interest rates this year, but the strong rate of growth could discourage the Fed from acting in the next few months, as had been widely expected.

John J. Gardner, CFP®, CPM®.

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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