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The Russell 2000 Index soared 12% in December, which might reflect investors’ exuberance about the state of the U.S. economy — it appears the Federal Reserve has won its battle against inflation.
But if you are looking to broaden your exposure to the stock market beyond the large-cap S&P 500
SPX,
buying shares of a fund that tracks the Russell 2000 Index
RUT
might not be the best way to do it. This is because the Russell 2000 isn’t selective — it is made up of the smallest 2,000 companies by market capitalization in the Russell 3000 Index
RUA,
which itself is designed to capture about 98% of the U.S. public equity market.
A better choice might be the S&P Small Cap 600 Index
SML
because S&P Global requires companies to show four consecutive quarters of profitability to be initially included in the index, among other criteria.
Below is a screen of analysts’ favorite stocks among the S&P Small Cap 600, along with another for the Russell 2000.
Much of the small-cap buying in December might have resulted from covering of short positions by hedge-fund managers. This idea is backed by the timing of trading activity immediately following the Federal Open Market Committee’s announcement on Dec. 13 that it wouldn’t change its interest-rate policy, according to MacroTourist blogger Kevin Muir. The Fed’s economic projections released the same day also indicate three cuts to the federal-funds rate in 2024.
Heading into the end of the year, a fund manager who had shorted small-caps, and then was surprised by the Fed’s interest-rate projections, might have scrambled to buy stocks it had shorted to close-out the positions and hopefully lock in gains, or limit losses.
That buying activity and resulting pop in small-cap prices could set up a typical “head fake” for investors as the new year begins, according to Muir.
Looking at data for companies’ most recently reported fiscal quarters, 58% of the Russell 2000 reported positive earnings per share, according to data provided by FactSet. In other words, hundreds of these companies were losing money. These might include promising companies facing “binary events,” such as make-or-break drug trials in the biotechnology industry.
In comparison, 78% of companies among the S&P Small Cap 600 were profitable, and 93% of the S&P 500 were in the black.
Here are long-term performance figures for exchange-traded funds that track all three indexes:
| ETF | Ticker | 2023 | 3 years | 5 years | 10 years | 15 years | 20 years |
| iShares Russell 2000 ETF | IWM | 17% | 7% | 61% | 99% | 428% | 365% |
| iShares Core S&P Small Cap ETF | IJR | 16% | 25% | 69% | 129% | 540% | 515% |
| SPDR S&P 500 ETF Trust | SPY | 26% | 34% | 108% | 210% | 629% | 527% |
| Source: FactSet | |||||||
An approach tracking the S&P Small Cap 600 has outperformed the Russell 2000 for all periods, with margins widening as you go further back.
Brett Arends: You own the wrong small-cap fund. How to get into a better one.
For the first screen, we began with the S&P Small Cap 600 and narrowed the list to 385 companies covered by at least five analysts polled by FactSet. Then we cut the list to 92 companies with “buy” or equivalent ratings among at least 75% of the covering analysts.
Here are the 20 remaining stocks among the S&P Small Cap 600 with the highest 12-month upside potential indicated by analysts’ consensus price targets:
| Company | Ticker | Share “buy” ratings | Dec. 29 price | Consensus price target | Implied 12-month upside potential |
| Vir Biotechnology Inc. |
VIR, |
88% | $10.06 | $32.00 | 218% |
| Arcus Biosciences Inc. |
RCUS, |
82% | $19.10 | $41.00 | 115% |
| Xencor Inc. |
XNCR, |
92% | $21.23 | $39.83 | 88% |
| Dynavax Technologies Corp. |
DVAX, |
100% | $13.98 | $24.80 | 77% |
| ModivCare Inc. |
MODV, |
100% | $43.99 | $75.50 | 72% |
| Xperi Inc |
XPER, |
80% | $11.02 | $18.20 | 65% |
| Thryv Holdings Inc. |
THRY, |
100% | $20.35 | $32.75 | 61% |
| Ligand Pharmaceuticals Inc. |
LGND, |
100% | $71.42 | $114.80 | 61% |
| Green Plains Inc. |
GPRE, |
80% | $25.22 | $40.30 | 60% |
| Patterson-UTI Energy Inc. |
PTEN, |
75% | $10.80 | $17.00 | 57% |
| Ironwood Pharmaceuticals Inc. Class A |
IRWD, |
83% | $11.44 | $17.83 | 56% |
| Catalyst Pharmaceuticals Inc. |
CPRX, |
100% | $16.81 | $26.20 | 56% |
| Payoneer Global Inc. |
PAYO, |
100% | $5.21 | $8.00 | 54% |
| Helix Energy Solutions Group Inc. |
HLX, |
83% | $10.28 | $15.00 | 46% |
| Arlo Technologies Inc. |
ARLO, |
100% | $9.52 | $13.80 | 45% |
| Pacira Biosciences Inc. |
PCRX, |
100% | $33.74 | $48.40 | 43% |
| Privia Health Group Inc. |
PRVA, |
100% | $23.03 | $32.53 | 41% |
| Semtech Corp. |
SMTC, |
92% | $21.91 | $30.90 | 41% |
| Talos Energy Inc. |
TALO, |
78% | $14.23 | $20.00 | 41% |
| Digi International Inc. |
DGII, |
100% | $26.00 | $36.14 | 39% |
| Source: FactSet | |||||
Any stock screen should only be considered a starting point. You should do your own research to form your own opinion before making any investment. one way to begin is by clicking on the tickers for more about each company.
Moving on to the Russell 2000, when we narrowed this group to stocks covered by at least five analysts polled by FactSet, we were left with 936 companies. Among these, 355 have “buy” or equivalent ratings among at least 75% of the covering analysts.
Among those 355 stocks in the Russell 2000, these 20 have the highest implied upside over the next year, based on consensus price targets:
| Company | Ticker | Share “buy” ratings | Dec. 29 price | Consensus price target | Implied 12-month upside potential |
| Karyopharm Therapeutics Inc. |
KPTI, |
75% | $0.87 | $6.00 | 594% |
| Rallybio Corp. |
RLYB, |
100% | $2.39 | $16.50 | 590% |
| Vor Biopharma Inc. |
VOR, |
100% | $2.25 | $15.44 | 586% |
| Tenaya Therapeutics Inc. |
TNYA, |
100% | $3.24 | $19.14 | 491% |
| Compass Therapeutics Inc. |
CMPX, |
86% | $1.56 | $9.17 | 488% |
| Vigil Neuroscience Inc. |
VIGL, |
88% | $3.38 | $18.75 | 455% |
| Trevi Therapeutics Inc. |
TRVI, |
100% | $1.34 | $7.33 | 447% |
| Inozyme Pharma Inc. |
INZY, |
100% | $4.26 | $21.00 | 393% |
| Gritstone bio Inc. |
GRTS, |
100% | $2.04 | $10.00 | 390% |
| Actinium Pharmaceuticals Inc. |
ATNM, |
83% | $5.08 | $23.36 | 360% |
| Lineage Cell Therapeutics Inc. |
LCTX, |
86% | $1.09 | $4.83 | 343% |
| Century Therapeutics Inc. |
IPSC, |
86% | $3.32 | $14.67 | 342% |
| Acrivon Therapeutics Inc. |
ACRV, |
100% | $4.92 | $21.13 | 329% |
| Avidity Biosciences Inc. |
RNA, |
100% | $9.05 | $37.50 | 314% |
| Longboard Pharmaceuticals Inc. |
LBPH, |
100% | $6.03 | $24.17 | 301% |
| Omega Therapeutics Inc. |
OMGA, |
100% | $3.01 | $12.00 | 299% |
| Allogene Therapeutics Inc. |
ALLO, |
82% | $3.21 | $12.79 | 298% |
| X4 Pharmaceuticals Inc. |
XFOR, |
86% | $0.84 | $3.26 | 289% |
| Caribou Biosciences Inc. |
CRBU, |
89% | $5.73 | $22.25 | 288% |
| Stoke Therapeutics Inc. |
STOK, |
78% | $5.26 | $19.33 | 268% |
| Source: FactSet | |||||
That’s right — this Russell 2000 list is all biotech. And in case you are wondering if any companies are on both lists, the answer is no.
Don’t miss: 11 dividend stocks with high yields expected to be well supported in 2024 per strict criteria
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U.S. stocks capped off a wild 2023 with a two-month sprint that has carried the Dow to record highs and the S&P 500 index to within a whisker of a similar milestone.
But after such a powerful advance, some portfolio managers and strategists are concerned that the market could suffer its own post-New Year’s Eve hangover once the calendar turns to January 2024.
Instead of providing a tailwind for the market, several who spoke with MarketWatch worried that the “January effect” might work in reverse as investors scramble to lock in gains after the S&P 500 rose 24% in 2023, according to FactSet data.
“Any time you have a big burst like that, I think you’re vulnerable to some profit-taking,” said James St. Aubin, chief investment strategist at Sierra Investment Management, during an interview with MarketWatch. “It wouldn’t surprise anybody to see the market cool off a bit after a strong run.”
From high valuations, to bullish sentiment indicators, to economic data, to geopolitics and beyond, here are a few things that could trip up the market in January.
A technical gauge that’s widely followed by Wall Street portfolio managers and technical analysts has been screaming that U.S. stocks are overbought for a month.
The 14-day relative strength index on the S&P 500, a momentum indicator that’s supposed to help put the magnitude of the index’s latest moves into context, climbed as high as 82.4 on Dec. 19, its highest since 2020, according to FactSet data.
Although the RSI has since pulled back, it continues to hover around 70, seen by analysts as the threshold for when something can be considered “overbought.”
In the span of just two months, investors have gone from incredibly bearish to incredibly bullish, according to the American Association of Individual Investors’ weekly sentiment survey.
That should give investors pause, since the gauge is seen as a reliable counter-indicator. When sentiment becomes stretched in either direction, it can signal that the market is about to turn. Investors say that is what happened back in July, and also in October after the S&P 500 touched its 2022 bear-market nadir.
According to the AAII survey published ahead of the Christmas holiday, nearly 53% of respondents said they were bullish, the highest since April 2021. That number came down a bit this week, but it remains high relative to levels from October.
Wall Street’s favorite “fear gauge” is giving the all-clear. To some, that’s reason enough to worry.
The Cboe Volatility Index
VIX,
better known as the Vix, measures implied volatility, or how volatile traders’ expect the S&P 500 to be over the coming month based on trading activity in options contracts tied to the index.
In December, the Vix dropped below 12 for the first time since before the advent of the COVID-19 pandemic.
Nancy Tengler, CEO and CIO of Laffer Tengler Investments, said in emailed commentary that she is keeping a close eye on the Vix. Once volatility starts to climb, investors should consider taking some chips off the table.
Some investors are already anxious about the next U.S. inflation report, due Jan. 11.
The Cleveland Fed’s inflation nowcast has core CPI rising more than 0.3% in December. If this proves accurate, it would be the hottest inflation reading since May.
And even if core inflation comes in slightly cooler, stocks might not greet it with the same enthusiasm they have shown in the past.
“U.S. CPI for December will hopefully continue to show a disinflationary trend, although the question is: can we keep rallying on this same dynamic?” said Larry Adam, chief investment officer at Raymond James, in emailed comments.
For three straight quarters beginning with the final three months of 2022, the largest U.S. companies saw their earnings shrink on a year-over-year basis.
This “earnings recession” finally came to an end in the third quarter, but the conundrum that investors now face is whether companies can manage to satisfy Wall Street’s lofty expectations for 2024.
The artificial-intelligence software boom and the fact that the U.S. economy avoided a recession in 2023 has helped boost analysts’ confidence about earnings, strategists said.
According to the bottom-up consensus estimate from FactSet, analysts expect S&P 500 aggregate earnings to increase by 11.7% for the calendar year 2024.
“Markets have been baking in this 11.7% earnings growth figure for a while now. That’s a lot of optimism,” Goldman said during an interview with MarketWatch.
To be sure, this list is hardly comprehensive.
Politics and geopolitics also came up a lot in discussions with analysts. Investing professionals cited Taiwan’s upcoming presidential election, another looming federal debt-ceiling showdown in the U.S., the beginning of the 2024 Republican presidential primaries, the ongoing conflicts in Gaza and Ukraine, and more as potential threats to market calm.
Some expressed concern that the Treasury could spark a selloff in bonds and stocks with its next quarterly refunding announcement in early 2024.
But in the view of Cetera’s Goldman, a dynamic that Wall Street traders call it “buy the rumor, sell the news” could represent a bigger threat.
The thinking works like this: investors have already front-run aggressive Federal Reserve interest rate cuts. So, if the Fed delivers, the rush to take profits could drive stocks lower instead of propelling the main U.S. indexes to new highs. Put another way, many strategists believe investors have already priced in pretty aggressive Fed rate cuts.
So unless the central bank finds a way to deliver something even greater than what Wall Street is expecting, the main U.S. equity indexes could struggle to continue their advance.
“Markets are already buying the rumor that we’re going to have a better 2024, that the Fed is going to cut rates, that breadth is going to widen,” Goldman said.
“Maybe we’re already seeing that priced in.”
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The traditional portfolio of stocks and bonds has been on a tear over the past two months as the S&P 500 nears a record high, but it’s the big gains in fixed income that stand out, according to Bespoke Investment Group.
Fixed-income assets are typically the “insurance” part of the classic 60-40 portfolio, usually holding up during market weakness even if that wasn’t the case in 2022, Bespoke said in a note emailed Thursday. Both stocks and bonds in the U.S. have rallied during the fourth quarter and are up so far in 2023.
“With just two trading days left in the year, the market is on the verge of history,” Bespoke said. “After being written off for dead in the last year, the traditional 60/40 portfolio of 60% stocks and 40% bonds is within a whisker of its best two-month rally since at least 1990.”
Read: ‘The switch was flipped’: ETF flows pick up as stocks, bonds head for 2023 gains
In 2022, bonds failed to provide a cushion in the 60-40 portfolio as the Federal Reserve aggressively raised interest rates to battle surging inflation. Stocks and bonds tanked last year, with the S&P 500
SPX
seeing its ugliest annual performance since 2008, when the global financial crisis was wreaking havoc in markets.
Over the past two months, the classic 60-40 mix has seen a gain of 12.16% based on the total returns of the S&P 500 and Bloomberg Aggregate Bond Index, according to Bespoke. The current rolling two-month performance is stronger than gains seen in the two-month rally after the onset of the Covid-19 pandemic through May 2020, the firm found.
“The only other period that was better for the strategy was the two months ending in April 2009,” the firm said. “Back then, the strategy rallied 12.25%, so if the next two trading days even see marginal gains, the current rally will set the record.”
The Vanguard Total Bond Market ETF
BND
and iShares Core U.S. Aggregate Bond ETF
AGG
have each seen a total return of slightly more than 7% this quarter through Wednesday, according to FactSet data.
That puts the Vanguard Total Bond Market ETF on track for its best quarterly performance on record, while the iShares Core U.S. Aggregate Bond ETF is heading for its biggest total return since 2008, FactSet data show. The iShares Core U.S. Aggregate Bond ETF gained a total 7.4% in the fourth quarter of 2008.
In April 2009, “the bond leg” of the 60-40 portfolio was up just 1.87% on a rolling two-month basis, while in May 2020 it gained 2.25%, the Bespoke note shows.
“During this current period, bonds have rallied an unprecedented 8.87%, which far exceeds any other two-month period since at least 1990,” the firm said. “While they still underperformed stocks in the last two months, they have never acted as a smaller drag on the strategy during a period of strength.”
Bespoke found that the S&P 500, a gauge of U.S. large-cap stocks, is up 14.35% over the last two months on a total-return basis, “which is certainly strong relative to history but not anywhere close to a record.”
The U.S. stock market was trading slightly higher on Thursday afternoon, with the S&P 500 up 0.2% at around 4,791, according to FactSet data, at last check. That’s within striking distance of the index’s closing peak of 4,796.56, reached Jan. 3, 2022, according to Dow Jones Market Data.
As stocks were inching higher Thursday afternoon, shares of both the Vanguard Total Bond Market ETF and iShares Core U.S. Aggregate Bond ETF were trading down modestly, according to FactSet data, at last check.
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was rising about seven basis points on Thursday afternoon, at around 3.85%, but is down so far this quarter, FactSet data show. Bond yields and prices move in opposite directions.
Bond prices are rallying as many investors anticipate the Fed is done hiking rates — and may begin cutting them sometime next year — as inflation has fallen significantly from its 2022 peak.
As for year-to-date gains, the S&P 500 has surged 26.6% on a total-return basis through Wednesday, while the iShares Core U.S. Aggregate Bond ETF has gained a total 6.1% over the same period, FactSet data show.
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2023 will go down in history for the start of a new bull market, albeit a strange one.
Despite some year-end catch-up by the rest of the S&P 500 index, megacap technology stocks, characterized by the so-called Magnificent Seven, have dominated gains for the large-cap benchmark SPX, which is up 23.8% for the year through Friday’s close.
That’s…
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ICICI Securities has taken on lease around 1.9 lakh square feet of space in Mindspace Juinagar at a monthly rent of ₹92.2 lakh, registration documents showed.
The tenure of the lease is 144 months, starting from January 1, 2024 and the effective monthly rental rate works out to ₹49 per square feet. The rent escalates 4 per cent annually, according to the documents made available by the data analytics firm Propstack.
The company, which provides a range of financial services right from investment banking to investments, has taken space on five floors and the terrace of the building. Mindspace Juinagar, B3, is an office building located in Navi Mumbai, part of a 55-acre campus development and has been developed by K Raheja Corp.
The lease has a lock-in period of five years for ICICI Securities, while the entire term of the lease is locked in for the landlord. The lease also includes the use of 190 car parking slots.
ICICI Securities is in the process of being delisted and last month, its parent company, ICICI Bank, received ‘no objection’ letters from the exchanges for the delisting. The decision to delist its shares was taken in June, with the bank saying that it would drive synergies between the two companies.
The bank currently holds around 75 per cent stake in it and the delisting process, conducted through a share swap, will result in it becoming a wholly-owned subsidiary.
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Inside the $26 trillion Treasury market, perhaps the deepest and most liquid place for government debt in the world, a particular trade continues to draw scrutiny ahead of year-end. It’s the “basis trade,” a way of profiting on the differences in prices between Treasurys and Treasury futures. While such differences can be relatively tiny, one’s potential profit or loss can be exponentially magnified when leverage is involved.In a nutshell, the basis trade takes an arbitrage approach: It involves borrowing from the repo market for leverage and financing, and then taking a short Treasury futures position and a long Treasury…
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Almost as predictable as the big jolly man himself, many on Wall Street are eagerly waiting for the so-called Santa Claus rally to further fuel stock-market gains that have already put investors in a holiday mood.
As defined by the Stock Trader’s Almanac, the Santa Claus rally refers to the stock market’s tendency to rise during the last five trading days of the current calendar year and the first two trading sessions of the new year. Friday marks the start of the period, which will run through Wednesday, January 3 this time around.
If recent history holds, then stocks are set to have a good run in the next six trading days as Santa Claus tends to come to Wall Street almost every year. Since 1950, the Santa rally has boosted the S&P 500
SPX
by an average of 1.3% over the seven trading-day range. The benchmark large-cap index closed higher 78% of the Santa Claus trading window in the past 75 years, and gained during that time for the past seven years, according to Dow Jones Market Data.
This time, though, the stock market has already been in a party mood even ahead of Christmas, with some market watchers, including Yardeni Research’s Ed Yardeni thinking the Santa rally has come “ahead of schedule.”
U.S. stocks are sitting on hefty gains at the close of a rollercoaster year. The S&P 500 jumped 4.3% in December, just 0.7% shy of its record set nearly two years ago amid growing optimism that the Federal Reserve may begin cutting interest rates as early as the first half of 2024, a fervor that policymakers attempted to rein in since last week’s FOMC meeting.
Opinion: Santa Claus is coming to town and bringing presents for your stock portfolio
But a relentless rally in the run-up to the official Santa rally indicates some of Santa’s largesse may have already been delivered, said Pete A. Biebel, senior vice president and senior investment strategist at Benjamin F. Edwards.
“I do think that the market is a little bit extended, so our expectations for this traditional Santa rally period should be dialed back a bit,” Biebel told MarketWatch on Friday.
Biebel points to the midweek dip on Wednesday which made the Dow Jones Industrial Average
DJIA
down 475.92 points, or 1.3%, for its biggest one-day percentage decline since October. The blue-chip index ended a streak of five straight record finishes as a strong year-end rally briefly lost momentum, according to Dow Jones Market Data.
While there wasn’t any clear fundamental trigger for the selloff, some Wall Street analysts think a surge in trading of zero-day to expiry options (0DTE) should be blamed for the pullback. Others said the derivatives that have exploded in popularity this year were just one piece of the puzzle, as overbought technical conditions and low year-end trading volumes also were cited as likely factors.
The “air pocket” for stocks on Wednesday was an omen or a red flag that the markets have that potential for steep drawdowns, Biebel said. “It doesn’t mean it has to happen, but it’s a warning that the market is not as rosy as it seems — there is potential trouble below the surface.”
See: Chasing the Santa rally? Look out below!
However, some analysts suggest investors not to bet against the seasonal momentum, especially during the bull market with a strong uptrend which took the three indexes off their October lows, said Adam Turnquist, chief technical strategist at LPL Financial.
“Stocks are overbought, but the market can stay overbought for longer than most people expect, especially at this stage of a bull market,” Turnquist told MarketWatch via phone.
Meanwhile, stock-market returns during this time frame have historically correlated closely to returns in January and the subsequent year. Since 1950, the S&P 500 has generated an average forward annual return of 10.4% when Santa comes to town. That is well above the return when Santa doesn’t show up, which is only around 4%, according to data compiled by LPL Financial.
“There’s the potential [for a Santa rally] but we’ll likely see a little bit of a hangover as well as a reset in January or February from these overbought conditions,” he added.
Time will tell if investors receive the seasonal presents that history promises in 2023, or if an overly extended rally will let the Grinch steal Christmas. After all, Santa rally is more of a “curiosity” than a phenomenon, said Biebel.
U.S. stocks were edging higher on Friday, with three major indexes on pace for their eighth consecutive positive week. The Dow Jones Industrial Average has risen 0.4%, while the S&P 500 was up 0.9% and the Nasdaq Composite
COMP
has jumped 1.3% this week, according to FactSet data.
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Shares of Nike Inc. tumbled after hours Thursday after the athletic-gear giant warned of a “softer second-half revenue outlook” on its quarterly earnings call, and said it is targeting up to $2 billion in cost cuts over the next three years as it looks to shed management and focus on women customers and its Jordan brand.
Nike
NKE,
said that the savings could come from simplifying its product selection and using more automation and technology. But the athletic-gear giant has also reportedly begun to lay workers off, and said it expected to book pre-tax restructuring charges of around $400 million to $450 million, much of it in the company’s fiscal third quarter, “primarily associated with employee-severance costs.”
Nike did not immediately respond to questions about job cuts at the company, or how many staff have been or could be laid off. But on the company’s earnings call, management said its plans included “reducing management layers.”
In Nike’s earnings release, Chief Financial Officer Matthew Friend said the company’s fiscal second quarter — in which per-share profit beat expectations while sales were roughly in line — marked “a turning point in driving more-profitable growth.”
But investors appeared skeptical after hours on Thursday, as shares slid more than 11%.
Nike announced the cost-cutting drive as clothing and shoe brands try to steer through weaker demand overall and a broader price-cutting battle in retail stores for inflation-battered customers. Those customers have had to set aside more money to cover the costs of ever-pricier essential goods, at the expense of things like sportswear and sneakers.
“We are seeing indications of more cautious consumer behavior around the world in an uneven macro environment,” Friend said during the call.
Nike executives said consumer demand was strong through the back-to-school season, Black Friday and Cyber Monday, but lagged in between. Demand wobbled online, and in China and Europe.
They also said that the money they planned to save would be reinvested into helping Nike become more nimble and more responsive to consumer preferences, after years of shifting away from selling shoes and gear through traditional retail chains in favor of doing business through its own stores and e-commerce channels. They added that those efforts “added complexity and inefficiencies” as competition grew steeper.
Chief Executive John Donahoe said on the call that the Nike-brand women’s segment was already a $9 billion business. But he said new products — like bras, leggings, retro-themed running shoes and other offerings that span both sports and lifestyle — would help draw more women customers.
Within the Jordan category, Donahoe cited opportunities beyond basketball sneakers. Clothing and golf-, soccer- and football-related products, along with offerings targeted toward women and children, would also help drive growth, he said.
But for the rest of its fiscal year, Nike’s expectations were dimmer. The company said it forecasted “slightly negative” sales growth for its fiscal third quarter. For its fourth quarter, executives expect low-single-digits sales gains. And they said they now anticipate Nike’s full-year sales to increase around 1%, compared to an outlook in September for mid-single-digits gains.
In its fiscal second quarter, which ended on Nov. 30, Nike reported net income in the period of $1.58 billion, or $1.03 a share, compared with $1.33 billion, or 85 cents a share, in the same quarter last year. Revenue rose 1% year over year, to $13.4 billion.
Analysts polled by FactSet expected adjusted earnings per share of 84 cents, on sales of $13.39 billion.
Gross margin rose to 44.6%, helped by price increases and lower costs for ocean-freight shipping.
Outlooks this year from athletic-gear retailers like Foot Locker Inc.
FL,
and Dick’s Sporting Goods Inc.
DKS,
have also been cautious, and Nike has faced competition from the likes of Adidas
ADDYY,
and On Running
ONON,
Nike management also said in their previous earnings call in September that they aimed to do more to attract women and running-shoe customers. However, they noted that demand for the company’s products remained solid and they were “cautiously planning for modest markdown improvements for the balance of the year,” as the company tightens up its supplies of sneakers and clothing in stock.
On Thursday’s call, executives said that demand for higher-priced products had been “resilient,” and that they didn’t have to cut prices as much as their rivals. And they said new releases — like the Sabrina 1 and Luka 2 sneakers — were the best way to stand out in a sea of discounts.
“We know in an environment like this, when the consumer is under pressure and the promotional activity is higher, that it’s newness and innovation which causes the consumer to act,” Friend said.
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PRAGUE — The Czech Republic’s central bank cut its key interest rate Thursday hoping to give the country’s struggling economy a boost.
The cut by a quarter of a percentage point brought the interest rate down to 6.75%. It was the first time the bank cut the rate since June 22 last year.
Last year the bank raised its key interest rate as it tried to combat soaring inflation. The hike of a percentage point and a quarter took the rate to 7%, the highest level since early 1999. It was the ninth straight increase since June 2021.
The move took place at the last meeting of the bank’s board on monetary policy under outgoing governor Jiri Rusnok.
On July 1, Rusnok was replaced by Ales Michl, a member of the bank’s board since 2018 who opposed previous rate hikes.
Thursday’s move was expected by most analysts.
Inflation in the Czech Republic soared to 18% in September last year. It was at 7.3% in November this year, according to the Czech Statistics Office, which is still well above the bank’s 2% target.
The Czech economy contracted by 0.7% year-on-year in the third quarter and by .5% compared with the previous quarter, the third straight contraction.
Elsewhere, the European Central Bank kept its key interest rate at a record high of 4% last week on Thursday and said it will leave it there as long as needed to battle back inflation. That signaled that cuts are not around the corner despite expectations it will act next year to support the shrinking economy.
The U.S. Federal Reserve kept its key interest rate unchanged a day before for a third straight time, and its officials signaled that they expect to make three quarter-point cuts to their benchmark rate next year.
The Fed kept its benchmark rate at about 5.4%, its highest level in 22 years.
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Speculation that the 60-40 portfolio may have outlived its usefulness has been rife on Wall Street after two years of lackluster performance.
But as the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
hovers around 4%, some strategists say the case for allocating a healthy portion of one’s portfolio to bonds hasn’t been this compelling in a long time.
And with the Federal Reserve penciling three interest-rate cuts next year, investors who seize the opportunity to buy more bonds at current levels could reap rewards for years to come, as waning inflation helps to normalize the relationship between stocks and bonds, restoring bonds’ status as a helpful portfolio hedge during tumultuous times, market strategists and portfolio managers told MarketWatch.
Add to this is the notion that equity valuations are looking stretched after a stock-market rebound that took many on Wall Street by surprise, and the case for diversification grows even stronger, according to Michael Lebowitz, a portfolio manager at RIA Advisors, who told MarketWatch he has recently increased his allocation to bonds.
“The biggest difference between 2024 and years past is you can earn 4% on a Treasury bond, which isn’t that far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.”
Since modern portfolio theory was first developed in the early 1950s, the 60-40 portfolio has been a staple of financial advisers’ advice to their clients.
The notion that investors should favor diversified portfolios of stocks and bonds is based on a simple principle: bonds’ steady cash flows and tendency to appreciate when stocks are sliding makes them a useful offset for short-term losses in an equity portfolio, helping to mitigate the risks for investors saving for retirement.
However, market performance since the financial crisis has slowly undermined this notion. The bond-buying programs launched by the Fed and other central banks following the 2008 financial crisis caused bond prices to appreciate, while driving yields to rock-bottom levels, muting total returns relative to stocks.
At the same time, the flood of easy money helped drive a decadelong equity bull market that began in 2009 and didn’t end until the advent of COVID-19 in early 2020, FactSet data show.
More recently, bonds failed to offset losses in stocks in 2022. And in 2023, U.S. equity benchmarks such as the S&P 500
SPX
have still outperformed U.S. bond-market benchmarks, despite bonds offering their most attractive yields in years, according to Dow Jones Market Data.
The Bloomberg U.S. Aggregate Total Return Index
AGG
has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included.
But this could be about to change, according to analysts at Deutsche Bank. The team found that, going back decades, the relationship between stocks and bonds has tended to normalize once inflation has slowed to an annual rate of 3% based on the CPI Index.
The CPI Index for November had core inflation running at 4% year over year, a level it has been stuck at for the past several months. The Fed’s projections have inflation continuing to wane in 2024.
Staff economists at the central bank expect the core PCE Price Index, which the Fed prefers to the CPI gauge, to slow to 2.4% by the end of next year. If that comes to pass, investors should see the inverse relationship between stocks and bonds return, according to Lebowitz and others.
The dismal performance of 60-40 portfolios over the past two years has inspired a wave of Wall Street think pieces questioning whether it still makes sense for contemporary investors.
A team of academics led by Aizhan Anarkulova at Emory University in November presented findings showing that over a lifetime, investors would have reaped higher returns via a portfolio consisting of 100% exposure to stocks, split between foreign and domestic markets.
But fixed-income strategists at Deutsche and Goldman Sachs Group, as well as others on Wall Street, say investors wouldn’t be well-served by excluding bonds from their portfolio, particularly with yields at current levels.
Rob Haworth, senior investment strategy director at U.S. Bank’s wealth-management business, says investors now have an opportunity to lock in attractive returns for decades to come, ensuring that the bonds in their portfolios will, at the very least, deliver a steady stream of income that would reduce any losses in stocks or declines in bond prices.
There is, however, one catch: with the Fed expected to cut interest rates, that window could quickly close.
“The problem is, for investors in cash, the Fed’s just told you that is not going to last. I think that means it is time to start thinking about your long-term plan,” Haworth said.
Read: Fed could be the Grinch who ‘stole’ cash earning 5%. What a Powell pivot means for investors.
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Hilary Bricken
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Dec 19, 2023, 4:31 am EST
Stock futures traded flat Tuesday, a day after the S&P 500 finished up 0.5% and moved closer to its all-time. The broad market index stands just 1.2% below its record of 4,796.56 reached in early January 2022.
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Wall Street seems to agree that U.S. stocks will climb to fresh record highs in 2024. But the most important question for investors may still be the direction and speed of interest-rate moves.
Rate-sensitive groups of stocks with lackluster fundamentals, such as financials, utilities, staples, “may be able to outperform, at least early in the year,” if one expects interest rates “to come down quickly and permanently,” said Nicholas Colas, co-founder of DataTrek Research.
But if “one expects a bumpier ride on the rate front,” then stronger groups, like technology and tech-adjacent sectors “should do better,” Colas said in a Monday client note.
The S&P 500’s utilities, consumer staples and energy sectors have been the worst performing parts of the large-cap benchmark index so far in 2023, according to FactSet data.
With an over 10% year-to-date decline, the S&P 500’s utilities sector
XX:SP500.55
has significantly underperformed the broader index’s
SPX
23.6% advance.
The S&P 500’s best performing information technology sector
XX:SP500.45
was up 56.5% for the same period. But its consumer staples
XX:SP500.30
and energy
XX:SP500.10
sectors have slumped by 2.6% and 4.1% so far this year, respectively, according to FactSet data.
Utilities and consumer staples are usually considered defensive investment sectors, or “bond proxies,” because they can help investors minimize stock-market losses in any economic downturn. Companies in these sectors usually provide electricity, water and gas, or they sell products and services that consumers regularly purchase, regardless of economic conditions.
However, utilities and consumer staples stocks were under a lot of pressure this year. A relentless climb in U.S. Treasury yields in October made defensive stocks less attractive compared with government-issued bonds, or money-market funds offering 5%, especially as the economy remained strong, pushing recession expectations out further.
Colas expects “weaker groups” to catch a stronger tailwind if rates continue to decline.
See: Markets are declaring victory over inflation for Powell, and that has some economists worried
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
last week booked its biggest weekly decline in a year after the Federal Reserve signaled a pivot to rate cuts in 2024, which helped the S&P 500 score its longest weekly winning streak since 2017.
The S&P 500’s utilities and consumer staples sectors rose 0.9% and 1.6% last week, respectively, compared with the information technology sector’s 2.5% advance and communication services sector’s
XX:SP500.50
0.1% decline, according to FactSet data.
Earnings growth expectations for each S&P 500 sector in 2024 are indicated below. Sectors to the left of the dotted black line are expected to show better bottom-line results than the S&P 500 as a whole, while those to the right are expected to show weaker earnings growth.
Wall Street expects next year to see 11.5% growth in S&P 500 earnings-per-share (EPS), to $244, and 5.5% revenue growth, according to FactSet data.
However, there is a wide dispersion across S&P 500 sectors. The range goes from 2% revenue and 3% earnings growth for the energy sector, to 9% revenue and 17% earnings growth for the information technology sector, according to data compiled by DataTrek Research.
“Playing fundamentally weaker sectors therefore assumes even more good news on the rate front,” Colas said, adding that it still is riskier than sticking with “tried and true groups” like technology.
Moreover, sectors such as utilities, financials and consumer staples are not expected to show 10% earnings growth next year, while health care and big tech-dominated groups like communication services, technology and consumer discretionary, are expected to show much better than average revenue and earnings growth in 2024, said Colas, citing FactSet data.
U.S. stocks closed higher on Monday, with the Dow Jones Industrial Average
DJIA
building on its all-time high set last week. The S&P 500 gained 0.5% and the Dow Industrials closed fractionally higher. The Nasdaq Composite
COMP
finished up 0.6%, according to FactSet data.
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BANGKOK — Asian shares were mostly lower on Monday as the Bank of Japan began a 2-day meeting that investors are watching for hints of a change to the central bank’s longstanding near-zero interest rate policy.
U.S. futures and oil prices gained.
Investors have been speculating for months that rising prices would push Japan’s central bank to finally shift away from its lavishly lax monetary policy. But the meeting that ends Tuesday is not expected to result in a major change.
Tokyo’s Nikkei 225 index lost 0.6% to 32,758.98, while the U.S. dollar edged higher against the Japanese yen, rising to 142.17 from 142.11.
The BOJ has kept its benchmark rate at minus 0.1% for a decade, hoping to goose investments and borrowing to help drive sustained strong growth. One aim is to get inflation to a target of 2% after many years of falling prices. But while inflation has risen, wages have failed to keep up, and central bank Gov. Kazuo Ueda has remained cautious about major moves at a time of deep uncertainty about the outlook for the global economy.
Renewed selling of property shares pulled Chinese stocks lower.
Hong Kong’s Hang Seng lost 1.1% to 16,613.42 and the Shanghai Composite index sank 0.5% to 2,929.60.
Debt-laden developer Country Garden lost 2.4%, while China Evergrande declined 1.3%. Sino-Ocean Group Holding shed 2.2%.
Elsewhere in Asia, Australia’s S&P/ASX 200 declined 0.2% to 7,426.40. South Korea’s Kospi added 0.1% to 2,566.86 and Bangkok’s SET was down 0.3%.
On Friday, the S&P 500 finished down less than 0.1% at 4,719.19. But it’s still hanging within 1.6% of its all-time high set early last year, and it closed out a seventh straight winning week for its longest such streak in six years.
The Dow Jones Industrial Average, which tracks a smaller slice of the U.S. stock market, rose 0.2% to 37,305.16 and set a record for a third straight day. The Nasdaq composite climbed 0.4% to 14,813.92.
“As the S&P approaches record levels, market participants appear undaunted. The prevailing sentiment seems to be that there is no compelling reason to fade this rally until concrete evidence surfaces indicating significant economic or inflation headwinds,” Stephen Innes of API Asset Management said in a commentary.
Stocks overall bolted higher last week after the Federal Reserve seemed to give a nod toward hopes that it has finished with raising interest rates and will begin cutting them in the new year. Lower rates not only give a boost to prices for all kinds of investments, they also relax the pressure on the economy and the financial system.
The Fed’s goal has been to slow the economy and grind down prices for investments enough through high interest rates to get inflation under control. It then has to loosen the brakes at the exact right time. If it waits too long, the economy could fall into a painful recession. If it moves too early, inflation could reaccelerate and add misery for everyone.
Inflation peaked in June 2022 at 9.1%, the most painful inflation Americans had experienced since 1981.
A preliminary report on Friday indicated growth for U.S. business activity may be ticking higher. It cited “looser financial conditions,” which is another way of describing market movements that could encourage businesses and people to spend more.
The Congressional Budget Office said Friday it expects inflation to nearly hit the Federal Reserve’s 2% target rate in 2024, as overall growth slows. Unemployment is expected to rise into 2025, according to updated economic projections for the next two years.
In other trading early Monday, U.S. benchmark crude oil rose 72 cents to $72.15 per barrel in electronic trading on the New York Mercantile Exchange. It fell 15 cents to $71.43 on Friday.
Brent crude, the international standard, picked up 77 cents to $77.32 per barrel.
The euro rose to $1.0921 from $1.0897.
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Yields on 3-month
BX:TMUBMUSD03M
and 6-month
BX:TMUBMUSD06M
Treasury bills have been seeing yields north of 5% since March when Silicon Valley Bank’s collapse ignited fears of a broader instability in the U.S. banking sector from rapid-fire Fed rate hikes.
Six months later, the Fed, in its final meeting of the year, opted to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high, but Powell also finally signaled that enough was likely enough, and that a policy pivot to interest rate cuts was likely next year.
Importantly, the central bank chair also said he doesn’t want to make the mistake of keeping borrowing costs too high for too long. Powell’s comments helped lift the Dow Jones Industrial Average
DJIA
above 37,000 for the first time ever on Wednesday, while the blue-chip index on Friday scored a third record close in a row.
“People were really shocked by Powell’s comments,” said Robert Tipp, chief investment strategist, at PGIM Fixed Income. Rather than dampen rate-cut exuberance building in markets, Powell instead opened the door to rate cuts by midyear, he said.
New York Fed President John Williams on Friday tried to temper speculation about rate cuts, but as Tipp argued, Williams also affirmed the central bank’s new “dot plot” reflecting a path to lower rates.
“Eventually, you end up with a lower fed-funds rate,” Tipp said in an interview. The risk is that cuts come suddenly, and can erase 5% yields on T-bills, money-market funds and other “cash-like” investments in the blink of an eye.
When the Fed cut rates in the past 30 years it has been swift about it, often bringing them down quickly.
Fed rate-cutting cycles since the ’90s trace the sharp pullback also seen in 3-month T-bill rates, as shown below. They fell to about 1% from 6.5% after the early 2000 dot-com stock bust. They also dropped to almost zero from 5% in the teeth of the global financial crisis in 2008, and raced back down to a bottom during the COVID crisis in 2020.
FRED data
“I don’t think we are moving, in any way, back to a zero interest-rate world,” said Tim Horan, chief investment officer fixed income at Chilton Trust. “We are going to still be in a world where real interest rates matter.”
Burt Horan also said the market has reacted to Powell’s pivot signal by “partying on,” pointing to stocks that were back to record territory and benchmark 10-year Treasury yield’s
BX:TMUBMUSD10Y
that has dropped from a 5% peak in October to 3.927% Friday, the lowest yield in about five months.
“The question now, in my mind,” Horan said, is how does the Fed orchestrate a pivot to rate cuts if financial conditions continue to loosen meanwhile.
“When they begin, the are going to continue with rate cuts,” said Horan, a former Fed staffer. With that, he expects the Fed to remain very cautious before pulling the trigger on the first cut of the cycle.
“What we are witnessing,” he said, “is a repositioning for that.”
The most recent data for money-market funds shows a shift, even if temporary, out of “cash-like” assets.
The rush into money-market funds, which continued to attract record levels of assets this year after the failure of Silicon Valley Bank, fell in the past week by about $11.6 billion to roughly $5.9 trillion through Dec. 13, according to the Investment Company Institute.
Investors also pulled about $2.6 billion out of short and intermediate government and Treasury fixed income exchange-traded funds in the past week, according to the latest LSEG Lipper data.
Tipp at PGIM Fixed Income said he expects to see another “ping pong” year in long-term yields, akin to the volatility of 2023, with the 10-year yield likely to hinge on economic data, and what it means for the Fed as it works on the last leg of getting inflation down to its 2% annual target.
“The big driver in bonds is going to be the yield,” Tipp said. “If you are extending duration in bonds, you have a lot more assurance of earning an income stream over people who stay in cash.”
Molly McGown, U.S. rates strategist at TD Securities, said that economic data will continue to be a driving force in signaling if the Fed’s first rate cut of this cycle happens sooner or later.
With that backdrop, she expects next Friday’s reading of the personal-consumption expenditures price index, or PCE, for November to be a focus for markets, especially with Wall Street likely to be more sparsely staffed in the final week before the Christmas holiday.
The PCE is the Fed’s preferred inflation gauge, and it eased to a 3% annual rate in October from 3.4% a month before, but still sits above the Fed’s 2% annual target.
“Our view is that the Fed will hold rates at these levels in first half of 2024, before starting cutting rates in second half and 2025,” said Sid Vaidya, U.S. Wealth Chief Investment Strategist at TD Wealth.
U.S. housing data due on Monday, Tuesday and Wednesday of next week also will be a focus for investors, particularly with 30-year fixed mortgage rate falling below 7% for the first time since August.
The major U.S. stock indexes logged a seventh straight week of gains. The Dow advanced 2.9% for the week, while the S&P 500
SPX
gained 2.5%, ending 1.6% away from its Jan. 3, 2022 record close, according to Dow Jones Market Data.
The Nasdaq Composite Index
COMP
advanced 2.9% for the week and the small-cap Russell 2000 index
RUT
outperformed, gaining 5.6% for the week.
Read: Russell 2000 on pace for best month versus S&P 500 in nearly 3 years
Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.
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The stocks of long-neglected small companies are finally showing signs of life as the market rally broadens. But these tiny companies still remain vastly undervalued. So, they are one of the best buys in the stock market right now.
Small- and medium-cap companies, or smidcaps, have not been this cheap since the Great Financial Crisis 15 years ago. “Smidcaps relative to large caps look very attractive,” says says portfolio manager Aram Green, at the ClearBridge Select Fund LBFIX, which specializes in this space. “Over the long term you will be rewarded.”
Green is worth listening to because he is one of the better fund managers in the smidcap arena. ClearBridge Select beats both its midcap growth category and Morningstar U.S. midcap growth index over the past five- and 10 years, says Morningstar Direct. This is no easy feat, in a mutual fund world where so many funds lag their benchmarks.
The timing for smidcap outperformance seems about right, since these stocks do well coming out of recessions. Technically, we have not recently had a recession. But there was an economic slowdown in the first half of the year, and the U.S. did have an earnings recession earlier this year. So that may count.
To get smidcap exposure, consider the funds of outperforming managers like Green, and if you want to throw in some individual stocks, Green is a great guide on how to find the best names in this space.
I recently caught up with him to see what we can learn about analyzing smidcaps. Below are four tactics that contribute to his fund’s outperformance, with nine company examples to consider.
1. Look for an entrepreneurial mindset: Green’s background gives him an edge in investing. He’s an entrepreneur who co-founded a software company called iCollege in 1997. It was bought out by BlackBoard in 2001. He knows how to understand innovative trends, identify a good idea, secure capital and quickly ramp up a business. This experience gives him a “private market mindset” that helps him pick stocks to this day.
“Founder-run companies regularly outperform.”
Green looks for managers with an entrepreneurial mindset. You can glean this from company calls and filings, but it helps a lot to meet management — something most individual investors cannot do. But Green offers a shortcut, one which I regularly use, as well. Look for companies that are run by founders. This will give you exposure to managers with entrepreneurial spirit.
Here, Green cites the marketing software company HubSpot
HUBS,
a 1.9% fund position as of the end of the third quarter. It was founded by Massachusetts Institute of Technology college buddies Brian Halligan and Dharmesh Shah. They’re on the company’s board, and Shah is chief technology officer.
Academic studies confirm founder-run companies regularly outperform. My guess is this is because many founders never lose the entrepreneurial spirit, no matter how easy it would be to quit and sip Mai Tai’s on a beach after making a bundle.
In the private market, Green cites Databricks, a data management and analytics company with an AI angle. This competitor of Snowflake
SNOW,
is likely to go public in 2024. If you feel like an outsider because you lack access to private market investing, note that Green says he typically buys more exposure to private companies on the initial public offering (IPO), and then in the market. “We like to spend time with them when they are private so we can pounce when they are public,” Green says.
2. Look for organic growth: When companies make acquisitions their stocks often decline, and for good reason. Managers make mistakes in acquisitions because they overestimate “synergies.” Or they get wrapped up in ego-enhancing empire building.
“We favor entrepreneurial management teams that do not make a lot of acquisitions to grow, but use their resources to develop new products to keep extending the runway,” says Green.
Here, he cites ServiceNow
NOW,
which has grown by “extending the runway” with new offerings developed internally. It started off supporting information technology service desks, and has expanded into operations management of servers and security, onboarding employees, data analytics, and software that powers 911 emergency call systems. Green obviously thinks there is a lot more upside to come, given that this is an overweight position, at 4.6% of the portfolio (the fund’s biggest holding).
Green also puts the “Amazon.com of Latin America” MercadoLibre
MELI,
in this category, because it continues to expand geographically and in areas such as logistics and payment systems. “They have really morphed into a fintech company,” Green says. He puts HubSpot and the marketing software company Klaviyo
KVYO,
in this category, too.
3. Look for differentiated business models: Green likes companies with offerings that are special and different. That means they’ll take market share, and face minimal competition. They’ll also enjoy pricing power. “This leads to high margins. You don’t have someone beating you up on price,” he says.
Green cites the decking company Trex
TREX,
which offers composite decking and railing made from recycled materials. This gives it an eco-friendly allure. Compared to wood, composite material lasts longer and requires less maintenance. It costs more up front but less over the long term. Says Green: “The alternative decking market has taken about 20% of the market and that can get to 50%.”
Of course, entrepreneurs notice success, and try to imitate it. That’s a risk here. But Trex has an edge in its understanding of how to make the composite material. It has a strong brand. And it is building relationships with big-box retailers Home Depot and Lowe’s. These qualities may keep competitors at bay.
4. Put some ballast in your portfolio: Green likes to keep the fund’s portfolio balanced by sector, size, and business dynamic. So the portfolio includes the food distributor Performance Food Group
PFGC,
The company is posting mid-single digit sale growth, expanding market share and paying down debt. Energy drinks company Monster
MNST,
also offers ballast. Monster’s popular product line up helps the company to take share and enjoy pricing power, Green says.
It’s admittedly unusual to see a food companies in a portfolio loaded with high-growth tech innovators. But for Green, it’s all part of the game plan. “Rapid growth, disrupting businesses are not going to work year in year out. There are times they fall out of favor, like 2022. So, having that balance is important because it keeps you invested in the equity market.”
In other words, keeping some ballast means you’re less likely to get shaken out by sharp declines in high-growth and high-beta tech innovators when trouble strikes the market.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN, TSLA and MELI. Brush has suggested AMZN, TSLA, NOW, MELI, HD and LOW in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
More: Nvidia, Disney and Tesla are among 2023’s buzziest stocks. Can they continue to sizzle in 2024?
Also read: Presidential election years like 2024 are usually winners for U.S. stocks
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It may be a couple of years since the meme-stock feeding frenzy hit its heights, but we’re still seeing occasional bursts of meme-like activity in number of stocks.
No discussion of meme stocks would be complete without OG AMC Entertainment Holdings Inc.
AMC,
But while the movie theater chain and original meme stock darling still grabs plenty of attention, it no longer fits the bill of a meme stock, according to Alicia Reese, VP of equity research at Wedbush. “AMC has seemingly lost its meme status, its share price having come crashing back down to earth over the past several months, particularly since its APE fold-in and reverse stock split,” she said. “AMC is now trading at a more normalized valuation, even if still at the high-end of its pre-meme historic range.”
AMC’s shares ended Friday’s session at $6.65, a far cry from their high of $393.63 on June 2, 2021, during the meme-stock frenzy.
Related: AMC’s stock falls more than 5% after company completes $350 million equity offering
“AMC’s premium valuation here is driven in part by a sub-section of the shareholders it gained during its meme stage, who have remained loyal to the company and have long claimed to be AMC shareholders for life,” Reese added. “AMC shed all the rest of its meme-era shareholders and are now left with the lifers, along with some institutional shareholders now that valuation has come back to a more normalized range.”
The analyst thinks that in 2024, AMC will continue to issue pre-authorized shares to pay down its high-debt balance, as evidenced by the $350 million equity offering completed this week. “The company is focused on right-sizing the balance sheet, while attempting to maintain strong relations with the AMC lifers still propping up the stock,” said Reese.
Fellow original meme stock GameStop has also been in the news recently, with the company’s board of directors approving a new investment policy, which lets the company invest in equity securities, among other investments. The board also gave Chairman and Chief Executive Ryan Cohen the authority to manage the investment portfolio. The new policy was dubbed “alarming” and “inane” by Wedbush Managing Director Michael Pachter.
“If he can invest in anything – farmland, chicken feed, cryptocurrency – that’s not in the best interests of the shareholders,” he told MarketWatch. “Heaven knows what he will do.”
Related: GameStop’s plan to buy stocks with company cash ‘alarming’ and ‘inane,’ analyst says
As for GameStop, the analyst describes the videogame retailer as a declining business, pointing to the company’s third-quarter revenue of $1.078 billion, which was down from $1.186 billion in the prior year’s quarter. “They are shrinking, period, and they can’t save their way to prosperity,” he added.
The company’s new investment policy could also fuel more meme-style activity, according to Pachter, who says that Cohen’s moves will be closely watched. “He will invest in something and it will possibly become the next meme stock,” the analyst told MarketWatch.
Pachter pointed to Cohen’s decision in 2022 to unload his huge stake in beleaguered home goods retailer and sometime meme stock Bed Bath & Beyond Inc. just months after buying it. In August of that year Cohen sold his entire stake in Bed Bath & Beyond five months after accruing the stake in an activist campaign, amassing a profit of more than $58 million.
Stocktwits, a social platform for investors and traders, told MarketWatch that it has seen a dedicated core audience of retail investors stick with the likes of AMC and GameStop. “Message volume and sentiment have remained elevated on the platform throughout the year, with their audiences growing temporarily around earnings or other events that create volatility,” Tom Bruni, senior writer at Stocktwits, told MarketWatch.
Related: Small-cap Chinese stocks spark meme-like buzz
Retail traders are still on the lookout for high-volatility situations, according to Bruni, who cited the example of Vietnamese electric vehicle stock VinFast Auto Ltd.
VFS,
which had a “crazy month” in August before crashing back down. “However, we would note that there have been fewer instances of these types of meme stocks occurring this year, and their lifespan tended to be pretty short,” he added.
“For stocks with the ‘meme’ potential in 2024, look to beaten-down areas of the market that already have strong retail investor communities around them,” Bruni told MarketWatch. “Several that stick out are electric vehicle stocks (specifically startups), solar stocks, or anything China-related. Traders will likely be looking for stocks at the intersection of these themes, like Lucid Group ($LCID), as potential ‘powder kegs’ for volatility in 2024.”
Shares of Lucid Group Inc.
LCID,
are down 30.2% in 2023, compared with the S&P 500 index’s
SPX
gain of 22.9%.
One thing is for sure – the social media dynamics that created the meme stock phenomenon are not going away. “Internet culture will continue to be more prevalent in markets as the world becomes more digitized and young people age into participation,” Tommy Tranfo, head of community at Stocktwits, told MarketWatch. “Crypto markets are an area where we expect to see a large concentration of this activity, particularly within the context of a crypto bull market, which will likely bring in a new wave of market participants who will skew toward the internet culture demo.”
Related: This EV company has a bigger market cap than Ford or GM. But you may not have heard of it.
“New crypto meme communities such as the $BONK (a dog-themed coin on the Solana blockchain) are already clear examples of this craze taking place,” he added.
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Options contracts tied to more than $5 trillion worth of stocks, exchange-traded funds and indexes are set to expire on Friday as the latest “triple witching” expiration event collides with the rebalancing of the S&P 500 and Nasdaq-100.
The result could be a high-octane, and potentially extremely volatile, session where tens of billions of contracts and shares could change hands, market strategists said.
According to figures from Rocky Fishman, founder of Asym500, options with a notional value of $5.3 trillion are set to expire, with the biggest slug expiring ahead of the open.
On one side, many traders will be cashing in bullish bets that are deep in the money, while some roll their positions, forcing market-makers to continue to hedge their exposure.
At the same time, managers of index-tracking funds will need to finish adjusting their holdings before the announced index changes take effect.
Already, trading volume has been trending higher all week. In the U.S. market, 17 billion shares changed hands on Thursday, according to Steve Sosnick, chief market strategist at Interactive Brokers, during a phone interview with MarketWatch. That is up from 10.6 billion on Tuesday.
“I expect to see enormous volumes tomorrow in a lot of popular names,” Sosnick said.
“Not only will this one be the largest option expiration of the year (as is typical for December), but it is currently set up to become the largest SPX option expiration in more than a decade,” Fishman said in a report shared with MarketWatch.
Brent Kochuba, founder of Spotgamma, an options-market analytics provider, went even further during a phone interview with MarketWatch: “This might be the biggest options expiration ever.”
As markets have rallied, traders have been scooping up bullish options contracts at a record pace, according to data from Cboe Global Markets, the biggest operator of options exchanges in the U.S.
For S&P 500-linked options, typically the most popular product, 4.8 million contracts changed hands on Thursday, according to Cboe, a new record, surpassing the previous record from Nov. 14.
Also, total call-trading volume for all U.S. equity options exceeded 30 million contracts on Wednesday, according to Goldman Sachs Group, making it one of the busiest days for trading in bullish contracts this year.
Aggressive call-buying over the past month has helped push the S&P 500 to just shy of its record closing high, options-market experts said. The S&P 500
SPX
gained 8.9% in November, its best month of 2023, and the 18th best-performing month of the past 73 years. And it has continued to climb in December, having risen 3.3% through Thursday’s close, according to FactSet data.
Earlier this week, options strategists warned that markets might run into trouble at 4,600 on the S&P 500. They warned that a “call wall” of open-interest in bullish contracts around that level could force market makers to put the breaks on the rally.
Instead, bullish traders blew through the call wall, pushing it higher to 4,700, said Kochuba.
The S&P 500 closed at 4,719.55 on Thursday, its highest close since Jan. 12, 2022, according to FactSet data. The index is now sitting within 1.75 percentage points of its record closing high of 4,796.56 on Jan. 3, 2022.
Traders’ bullishness recently helped push the Cboe Volatility Index
VIX,
otherwise known as Wall Street’s “fear gauge,” to multiyear lows, according to FactSet data.
To be sure, it isn’t just S&P 500 options and contracts tied to popular stocks like Tesla Inc.
TSLA,
seeing explosive volume: Calls tied to the iShares Russell 2000 ETF
IWM,
which tracks the small-cap Russell 2000, hit 1.35 million contracts, the third-highest ever, according to Goldman. Activity in options contracts linked to small-cap stock indexes has surged since late October.
Heavy call buying has pushed the put-call skew for S&P 500 options to its lowest level in a year, according to data from Goldman Sachs Group.
This shows that investors have been scrambling to buy bullish contracts, while largely shunning bearish ones, as stocks marched higher. Goldman analysts described Friday as “the last major liquidity event of the year” in a note to clients obtained by MarketWatch.
“Triple Witching” days happen once a quarter. They are thusly named because options tied to single stocks, ETFs and indexes will expire, alongside index-tracking futures contracts. Options-market experts say they are typically associated with more intraday swings and higher trading volume.
Making things even more interesting is the fact that the quarterly rebalancing of the S&P 500 and Nasdaq-100 is due to take effect after markets close on Friday.
Normally routine, this quarter’s rebalancing is drawing outsize attention following an extremely rare ad hoc rebalancing over the summer to rein in the influence of megacap stocks in the Nasdaq-100.
Earlier this month, Standard & Poor’s announced its rebalancing plans, which included reducing the weighting of two Magnificent Seven stocks, Apple Inc.
AAPL,
and Alphabet Inc.
GOOG,
GOOGL,
At the same time, Amazon.com Inc.
AMZN,
which is also part of the Mag 7, will see its weighting increased. Meanwhile, three companies will join the index, including Uber Inc.
UBER,
while shares of three other companies depart.
Kochuba believes Friday’s expiration could remove the last barrier holding stocks back from rocketing to record highs before the end of the year.
“After OpEx, markets will be able to move more freely,” Kochuba said.
Garrett DeSimone of OptionMetrics cautioned that investors shouldn’t place too much weight on options-market activity and other technical factors.
“At the end of the day, macro trumps everything,” he said during an interview with MarketWatch.
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Risk comes in many forms. And companies in the financial services sector face it to a higher degree—and on more fronts—than the average business, whether they’re making investment decisions, complying with regulations, thwarting cyberattacks, or preventing fraud. With the growing complexity of customer data and interactions, managing risk is a constantly evolving challenge.
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Modern financial services companies face risk from more compliance and regulatory requirements than ever. In order to meet these requirements, teams are managing increased workloads while looking for ways to reduce spending. That’s one area where cloud technology can be particularly important.
Secure cloud solutions can help lower costs while simplifying the compliance process. By moving operations from a capital expenditure model to an operational expenditure model, businesses can reduce their total cost of ownership for technology. Leaning on the cloud offers additional benefits as well, such as increased scalability, Zero Trust data privacy guardrails, and up-to-the-minute access to AI.
AI is already a powerful tool in financial services, but keeping pace with changing regulations and technology can be daunting. That’s where teaming up with a partner can help. Neudesic, a 2023 Microsoft Partner of the Year, is transforming the financial sector by applying the power of AI to risk management in IT operations. Using responsible AI and its own Intelligent Ops program, Neudesic helps businesses identify and automatically remediate system threats and vulnerabilities to avoid noncompliance or a data breach. A ChatGPT-like interface simplifies compliance audits as well.
Financial services teams also bear the responsibility of protecting customers—and customer data—from the risk of possible employee misconduct. But manually monitoring all employee communications across all communication channels for signs of market manipulation and client abuse places a large burden on analysts.
New innovations in technology can help lighten that load. With the help of AI, analysts can make faster and more accurate decisions regarding employee risk. Companies can take tools like risk visualization and clarified decisioning and use them to detect and assess employee conduct risks before they become a problem.
NICE Actimize is a Microsoft partner working with businesses to reduce financial crime. Its Compliancentral, an innovative end-to-end compliance recording and trade surveillance solution, uses the latest in AI technology and analytics to get the job done. “With AI-powered case management,” explains Chris DeNigris, Director of Product Marketing and Compliance at NICE, “you get a single, comprehensive view of employee risk that speeds up investigations and increases efficiency.”
Embedded services for on-the-go access help the financial sector offer clients an individualized experience. But these services come at the risk of keeping customer data safe while still accessible across the organization.
Separating and limiting access to data can offer some protection, but it’s impractical. Employees need accurate and timely information to provide the best customer experience. Wealth managers also rely on precise information to assess matters like how well a particular product has performed or whether a service still brings value to the company.
Decisions that take into account the whole picture of a customer carry less risk. SAS is an analytics and solutions business helping companies move toward an architecture that can deliver differentiated experiences to their customers. “Holistic decisions across risk, fraud, and marketing can set one organization apart from the next,” explains Terisa Roberts, Global Solution Lead for Risk Modeling and Decisioning at SAS. “This concept not only enhances the customer experience, but also rationalizes complex IT infrastructure, reduces costs, and provides the agility required to address new risks and competitive pressures.”
Whether you’re managing risk in compliance, employee conduct, or fraud prevention, modernizing your data infrastructure with the latest in AI and analytics can help cut costs and increase efficiency to keep you competitive. There’s no time like the present to take your business to the next level.
Learn more from Microsoft partners Neudesic, NICE, and SAS in the Modernizing Risk Management for Financial Institutions webinar series.
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Ryan Blakely
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