Tag: Investing/Securities

After Bitcoin ETFs, watch for the next most popular crypto to go the same route

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After long-awaited spot bitcoin exchange-traded funds made their debut this week, investors are now weighing the prospects of eventual approval of similar ether ETFs.

The U.S. Securities and Exchange Commission on Wednesday greenlighted 11 spot bitcoin
BTCUSD,
-1.58%
ETFs for the first time. The products, which made its debut trading on Thursday, logged a relatively strong first day.

However, bitcoin fell 6.8% on Friday, leaving it with a 3.2% gain over the past seven days, according to CoinDesk data. It underperformed ether
ETHUSD,
+1.82%,
which rose 17.6% over the past seven days while it declined 1.2% on Friday.

The news about bitcoin ETFs was mostly priced in, while investors are now looking past it to a potential approval of ether ETFs, analysts said.

“I see value in having an ETH ETF,” Larry Fink, chief executive at the world’s largest asset manager BlackRock, told CNBC’s Squawk Box on Friday. BlackRock, which just launched its iShares bitcoin Trust
IBIT,
in November filed an application for a spot ether ETF.

“It’s hard to know exactly what the U.S. regulators would do” about ether ETF applications, said Alonso de Gortari, chief economist at Mysten Labs, an internet infrastructure company.

However, “I would expect that once you open the door, it becomes easier and I think the industry is very excited about it,” de Gortari said. If bitcoin ETFs see an impressive institutional inflow in the coming months, it could make such products more established and set a good precedent for other crypto ETF applications, he said.

Read: Vanguard’s decision to shun bitcoin ETFs triggers backlash — with some customers moving to crypto-friendly competitors like Fidelity

Also see: Why the debut of bitcoin ETFs could be bad news for crypto stocks, futures ETFs

The enormous competition and huge inflows into bitcoin ETFs will only boost investors’ interests in an ether ETF, according to Paul Brody, EY’s global blockchain leader. “There’s no doubt that ETH is the next big market and has immediately become a priority for financial services companies,” Brody said in emailed comments.

Compared with bitcoin, the Ethereum blockchain offers more utility and has unique advantages, noted Fadi Aboualfa, head of research at digital assets custodian Copper.

Sandy Kaul, head of digital asset and industry advisory services at Franklin Templeton, said she eventually expects the arrival of ETFs that track a basket of cryptocurrencies. Such products, instead of those based on single crypto, would dominate the space if they are approved, she said.

“Just like the S&P 500 has 500 stocks in it, right? You don’t have just one stock.” Kaul said in a phone interview. The arrival of a bitcoin ETF, is just a “baby step into really beginning to think about the future market structure of crypto,” Kaul added.

However, not everyone is that optimistic. Will McDonough, founder and chairman of Corestone Capital, said the approval of an Ethereum ETF has “a long way to go.”

SEC chairman Gary Gensler previously said bitcoin was the only cryptocurrency he was prepared to publicly label a commodity, rather than a security.

The agency also went after companies that offered crypto staking, which allows investors to earn yields by locking their coins to secure blockchains such as Ethereum. The SEC shut down crypto exchange Kraken’s staking business in the U.S. last year.

One possibility is that “companies will be able to offer an ETH ETF, but they will not be allowed to stake that ETH and earn yield,” noted EY’s Brody.

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January 12, 2024
Vanguard Won’t Offer Spot Bitcoin ETFs on Its Platform

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Updated Jan. 11, 2024 3:06 pm ET

Bitcoin’s trip to Main Street just took a detour.

Vanguard said Thursday it won’t offer the new spot bitcoin exchange-traded funds on its brokerage platform.

Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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January 11, 2024
Bitcoin ETFs finally approved after a chaotic, ‘embarrassing’ 24 hours for SEC

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On Wednesday, the U.S. Securities and Exchange Commission for the first time greenlighted several exchange-traded funds investing directly in bitcoin.

But the 24 hours leading up to that approval were chaotic, to say the least.

The SEC approved the launch of 11 bitcoin
BTCUSD,
+0.09%
ETFs, according to a filing posted on the regulatory agency’s website. The ETFs are due to start trading on Thursday.

On Tuesday, however, the SEC’s official account on X, formerly known as Twitter, published what the agency described as an “unauthorized” post indicating that it had approved the spot bitcoin ETFs. In reality, the regulator had not approved any such ETFs as of Tuesday and its X account had been “compromised,” SEC Chair Gary Gensler said on the social-media platform. The SEC subsequently deleted the unauthorized post.

The agency found “there was unauthorized access to and activity on” the its X account by “an unknown party,” an SEC spokesperson said on Tuesday, adding that the “unauthorized access has been terminated” and that the SEC would work with law enforcement to investigate the matter.

Bitcoin’s price briefly shot 2% higher after the unauthorized tweet went out on Tuesday before soon pulling back.

Then on Wednesday, shortly before the U.S. stock market closed for the day, the SEC posted an actual approval order of bitcoin ETFs on its website — but the link was soon broken, leading to an “error 404” page. The same filing was later reposted by the SEC.

It is unclear why the first link was broken. A SEC spokesperson did not respond to an email seeking comment on the matter.

The events of the past 24 hours have proven “a bit embarrassing” for the SEC, especially as the agency has stressed that cryptocurrencies are exceptionally risky and vulnerable to market manipulation, according to Greg Magadini, director of derivatives at Amberdata.

Despite those warnings, Magadini said he doesn’t expect investors to be deterred from investing in the bitcoin ETFs.

Bitcoin has actually seen lower volatility on Tuesday and Wednesday than options traders had priced in, Magadini said. The crypto was up about 0.4% over the past 24 hours to around $46,400 on Wednesday evening, according to CoinDesk data.

Investors have been pricing in $1 to $2 billion of initial flows into the bitcoin ETFs.

Read: Bitcoin in spotlight as SEC approves new ETFs, ether rallies. Here’s why.

Steven Lubka, head of private clients and family offices at Swan Bitcoin, echoed Magadini’s point, noting that the hiccups on the way to SEC approval are unlikely to impact investor interest in the funds.

“Ultimately, the SEC is not the one that launches the ETFs,” Lubka said in a call. “If anything, it shows how much attention is on these ETF products.”

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January 10, 2024
SEC Approves Bitcoin ETFs for Everyday Investors

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Updated Jan. 10, 2024 5:56 pm ET

The U.S. Securities and Exchange Commission voted Wednesday to allow mainstream investors to buy and sell bitcoin as easily as stocks and mutual funds, a decision hailed by the industry as a game changer.

The SEC decision clears the way for the first U.S. exchange-traded funds that hold bitcoin to be sold to the public. Expectations of U.S. regulatory approval for such funds drove the price of bitcoin to the highest level in about two years. The digital currency fell to just below $46,000 late Wednesday, up from $17,000 in January 2023.

Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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January 10, 2024
Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024

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Stock investors have gotten off to a wobbly start to the new year, hobbled by shifting expectations on the timing and extent of Federal Reserve interest-rate cuts in 2024.

All three major U.S. stock indexes snapped a nine-week winning streak on Friday, after unexpectedly strong December job gains prompted traders to briefly pull back on the chances of a March rate cut. The S&P 500
SPX
and Nasdaq Composite
COMP
also failed to stage a Santa Claus Rally from the five final trading days of 2023 through the first two sessions of 2024, as questions grew about the market’s multiple rate-cuts view.

It all adds up to a glimpse of what might be in store for investors in the year ahead. Already, the so-called “January effect,” or theory that stocks tend to rise by more now than any other month, could be put to the test by headwinds that include stalling progress on inflation. Inflation’s downward trend in recent months had given traders and investors hope that as many as six or seven quarter-percentage-point rate cuts from the Federal Reserve could be delivered in 2024, starting in March.

Over the first handful of days in the new year, however, reality has started to sink in. For one thing, multiple rate cuts tend to be more commonly associated with recessions and not soft landings for the economy.

Moreover, the idea that the Fed could follow through with as many rate cuts as envisioned by traders would significantly increase the probability that policymakers lose their battle against inflation, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets. That’s because six or more rate cuts would loosen financial conditions by too much, and boost the risk of another bout of inflation that forces officials to hike again, he said.

Minutes of the Fed’s Dec. 12-13 meeting show that policymakers were uncertain about their forecasts for rate cuts this year and failed to rule out the possibility of further rate hikes. Nonetheless, fed funds futures traders continued to cling to expectations for a big decline in borrowing costs, with the greatest likelihood now coalescing around five or six quarter-point rate cuts that total 125 or 150 basis points of easing by year-end. That’s roughly twice as much as what policymakers penciled in last month, when they voted to keep interest rates at a 22-year high of 5.25% to 5.5%.

Source: CME FedWatch Tool, as of Jan. 5.

Uncertainty over the path of U.S. interest rates could leave investors flat-footed once again, and damp the optimism that sent all three major stock indexes in 2023 to their best annual performances of the prior two to three years. In November, analysts at Deutsche Bank AG
DB,
+0.81%
counted seven times since 2021 in which markets expected the Fed to make a dovish pivot, only to be wrong.

Sources: Bloomberg, Deutsche Bank. Chart is as of Nov. 20, 2023.

Financial markets have been operating with “sky-high expectations” for 2024 rate cuts, but the only way to substantiate six cuts this year is with an “abrupt and sharp downturn in the economy,” said Todd Thompson, managing director and portfolio co-manager at Reams Asset Management in Indianapolis, which oversees $27 billion.

Heading into 2024, euphoria over the prospect of lower borrowing costs produced what Thompson calls “an alarming, everything rally,” which he says leaves equities and high-yield corporate debt vulnerable to pullbacks between now and the next six months. Beyond that period, however, “the trend is likely to be lower rates as the economy finally succumbs to tightening conditions at the same time inflation continues to recede.”

The coming week brings the next major U.S. inflation update, with December’s consumer price index report released on Thursday. The annual headline rate of inflation from CPI has slowed to 3.1% in November from a peak of 9.1% in June 2022. In addition, the core rate from the Fed’s favorite inflation gauge, known as the PCE, has eased to 3.2% year-on-year in November from a 4.2% annual rate in July.

The Fed needs to keep interest rates higher because of all the uncertainty around inflation’s most likely path forward, and the U.S. labor market “won’t degrade fast enough in the first quarter to justify a first rate cut in March,” according to Sanders of Madison Investments.

Rate-cut expectations are “going to be the issue for 2024, and a lot of it is going to be revolving around inflation getting back to that 2% target,” Sanders said via phone. “We think somewhere between 75 and 125 basis points of rate cuts make sense, and that the first move is more of a June-type of event. We don’t think it makes sense to have a March rate cut unless the labor market falls off a cliff.”

History shows that Treasury yields tend to fall in the months leading up to the first rate cut of a Fed easing cycle. However, that isn’t happening right now. Yields on government debt have been on an upward trend since the end of December, with 2-
BX:TMUBMUSD02Y,
10-
BX:TMUBMUSD10Y,
and 30-year yields
BX:TMUBMUSD30Y
ending Friday at their highest levels in more than two to three weeks.

See also: What history says about stocks and the bond market ahead of a first Fed rate cut

While financial markets generally tend to be efficient processors of information, they “haven’t been very accurate in terms of pricing in rate cuts” this time, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial. He said the big risk for 2024 is if financial conditions ease too much and the Fed declares victory on inflation too soon, which could reignite price pressures in a manner reminiscent of the 1970s period under former Fed Chairman Arthur Burns.

“We think rate-cut expectations have gone too far too fast, and that the backup in yields we are seeing right now is the market acknowledging that maybe rate cuts are not going to be as aggressive as what was priced in,” Gillum said via phone.

December’s CPI report on Thursday is the data highlight of the week ahead.

On Monday, consumer-credit data for November is set to be released, followed the next day by trade-deficit figures for the same month.

Wednesday brings the wholesale-inventories report for November and remarks by New York Fed President John Williams.

Initial weekly jobless claims are released on Thursday. On Friday, the producer price index for December comes out.

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January 7, 2024
Medical Properties Trust Stock Is Crashing

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Shares of Medical Properties Trust plummeted after the real estate investment trust said it is ramping up efforts to recover uncollected rent and outstanding loans from its largest tenant.

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January 5, 2024

The Russell 2000 Index has soared, but you might be better off looking elsewhere for quality small-cap stocks

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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.

Watch for a “head fake”

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.

The long-term case for quality

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.

Looking ahead for quality… or not

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, +4.47%	88%	$10.06	$32.00	218%
Arcus Biosciences Inc.	RCUS, +3.04%	82%	$19.10	$41.00	115%
Xencor Inc.	XNCR, +6.03%	92%	$21.23	$39.83	88%
Dynavax Technologies Corp.	DVAX, +2.86%	100%	$13.98	$24.80	77%
ModivCare Inc.	MODV, +0.95%	100%	$43.99	$75.50	72%
Xperi Inc	XPER, +1.81%	80%	$11.02	$18.20	65%
Thryv Holdings Inc.	THRY,	100%	$20.35	$32.75	61%
Ligand Pharmaceuticals Inc.	LGND, +1.25%	100%	$71.42	$114.80	61%
Green Plains Inc.	GPRE, -1.67%	80%	$25.22	$40.30	60%
Patterson-UTI Energy Inc.	PTEN, +0.28%	75%	$10.80	$17.00	57%
Ironwood Pharmaceuticals Inc. Class A	IRWD, +8.48%	83%	$11.44	$17.83	56%
Catalyst Pharmaceuticals Inc.	CPRX, +1.78%	100%	$16.81	$26.20	56%
Payoneer Global Inc.	PAYO, -3.45%	100%	$5.21	$8.00	54%
Helix Energy Solutions Group Inc.	HLX, -2.63%	83%	$10.28	$15.00	46%
Arlo Technologies Inc.	ARLO, -3.05%	100%	$9.52	$13.80	45%
Pacira Biosciences Inc.	PCRX, -5.16%	100%	$33.74	$48.40	43%
Privia Health Group Inc.	PRVA, +2.95%	100%	$23.03	$32.53	41%
Semtech Corp.	SMTC, -1.23%	92%	$21.91	$30.90	41%
Talos Energy Inc.	TALO, +1.19%	78%	$14.23	$20.00	41%
Digi International Inc.	DGII, -1.21%	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.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

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, +4.18%	75%	$0.87	$6.00	594%
Rallybio Corp.	RLYB, +0.42%	100%	$2.39	$16.50	590%
Vor Biopharma Inc.	VOR, -0.89%	100%	$2.25	$15.44	586%
Tenaya Therapeutics Inc.	TNYA, -0.62%	100%	$3.24	$19.14	491%
Compass Therapeutics Inc.	CMPX, -5.13%	86%	$1.56	$9.17	488%
Vigil Neuroscience Inc.	VIGL, +2.66%	88%	$3.38	$18.75	455%
Trevi Therapeutics Inc.	TRVI, -2.99%	100%	$1.34	$7.33	447%
Inozyme Pharma Inc.	INZY, +1.64%	100%	$4.26	$21.00	393%
Gritstone bio Inc.	GRTS, +6.86%	100%	$2.04	$10.00	390%
Actinium Pharmaceuticals Inc.	ATNM, +4.72%	83%	$5.08	$23.36	360%
Lineage Cell Therapeutics Inc.	LCTX,	86%	$1.09	$4.83	343%
Century Therapeutics Inc.	IPSC, +9.64%	86%	$3.32	$14.67	342%
Acrivon Therapeutics Inc.	ACRV, +1.83%	100%	$4.92	$21.13	329%
Avidity Biosciences Inc.	RNA, +1.22%	100%	$9.05	$37.50	314%
Longboard Pharmaceuticals Inc.	LBPH, +316.25%	100%	$6.03	$24.17	301%
Omega Therapeutics Inc.	OMGA, -1.33%	100%	$3.01	$12.00	299%
Allogene Therapeutics Inc.	ALLO, +12.77%	82%	$3.21	$12.79	298%
X4 Pharmaceuticals Inc.	XFOR, +5.21%	86%	$0.84	$3.26	289%
Caribou Biosciences Inc.	CRBU, -2.79%	89%	$5.73	$22.25	288%
Stoke Therapeutics Inc.	STOK, +11.41%	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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January 2, 2024

So much for 'the January effect': Here are five things that could interrupt the U.S. stock market rally in early 2024.

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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.

U.S. stocks are already overbought

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.

FACTSET

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.”

Sentiment has swung from extremely bearish to extremely bullish

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.

RAYMOND JAMES

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.

The VIX is extremely low

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.

Progress on inflation could stall in January

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.

Earnings season could disappoint

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.

And that’s not all…

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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December 31, 2023
60-40 mix of stocks, bonds on verge of historic gains ‘after being written off'

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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.

BESPOKE INVESTMENT GROUP NOTE EMAILED DEC. 28, 2023

“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.”

Bonds surge

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.”

Read: ‘Cash is a trap,’ warns JPMorgan’s David Kelly. Here’s how a traditional mix of stocks and bonds may pay off.

Also see: Sitting on cash? Stocks, bonds pay off more when Fed on ‘pause’ than in ‘easing periods,’ BlackRock says

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.

Read: Case for traditional 60-40 mix of stocks and bonds strengthens amid higher rates, according to Vanguard’s 2024 outlook

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December 28, 2023
The Magnificent 7 dominated 2023. Will the rest of the stock market soar in 2024?

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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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December 24, 2023
Why this Treasury market trade continues to draw scrutiny

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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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December 22, 2023
'Santa Claus' rally time for stock market? Why investors should dial back their expectations for this seasonal year-end gift.

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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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December 22, 2023
Why the 60-40 portfolio is poised to make a comeback in 2024

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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.”

See: Case for traditional 60-40 mix of stocks and bonds strengthens amid higher rates, according to Vanguard’s 2024 outlook

Does 60-40 still make sense?

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.

DEUTSCHE BANK

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.

A window of opportunity

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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December 20, 2023
How Fed rate moves could impact different sectors of the stock market in 2024

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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.

SOURCE: FACTSET, DATATREK RESEARCH

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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December 18, 2023
Fed could be the Grinch who 'stole' cash earning 5%. What a Powell pivot means for investors.

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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.

Swift pace of Fed cuts

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.

Rates on 3-month Treasury bills dropped suddenly in past Fed rate-cutting cycles

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.”

Pivoting on the pivot

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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December 17, 2023
'Smidcap' companies are becoming a big deal. Here's a look at some of the best.

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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,
+0.79%,
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,
-0.92%
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,
+2.62%,
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,
+0.17%
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,
-5.73%
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,
+0.10%,
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,
-1.69%.
The company is posting mid-single digit sale growth, expanding market share and paying down debt. Energy drinks company Monster
MNST,
-0.85%
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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December 17, 2023
This is what we can expect to see from meme stocks in 2024

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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,
-0.89%.
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,
+13.54%,
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,
-7.20%
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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December 15, 2023
Chaotic 'triple witching' set for Friday, as $5.3 trillion in options expire

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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.

ASYM50

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.”

ASYM50

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,
+4.91%
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.

GOLDMAN SACHS

“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,
+0.08%
and Alphabet Inc.
GOOG,
-0.57%

GOOGL,
-0.48%.
At the same time, Amazon.com Inc.
AMZN,
-0.95%,
which is also part of the Mag 7, will see its weighting increased. Meanwhile, three companies will join the index, including Uber Inc.
UBER,
+0.86%,
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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December 14, 2023
Powell surprises with dovish turn; economists mull how many Fed rate cuts in '24

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Federal Reserve Chairman Jerome Powell startled economists with a press conference Wednesday that was viewed as much more dovish than expected.

It was “12 doves a-leaping,” said Michael Feroli, U.S. economist at JPMorgan Chase.

“The Fed can’t believe its luck. The data is going their way,” said Krishna Guha, vice chairman of Evercore ISI.

The first dovish signals came in the Fed’s statement and economic forecasts at 2 p.m. Eastern. First, the Fed penciled in three rate cuts in 2024 instead of two that were projected in September. The Fed also softened its tightening bias by saying they were mulling the need for “any” more hikes.

Then, half an hour later at his press conference, “Chair Powell did nothing to undo the impression of those signals,” said Feroli, in a note to clients. Powell said Fed officials were starting to discuss when to cut rates.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at out meeting today,” Powell said. Fed officials think the Fed is “likely at or near the peak rate for this cycle.”

While Powell didn’t take rate cuts “off the table,” they are “collecting dust,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

Markets reacted with the 10-year Treasury yield
BX:TMUBMUSD10Y
falling to 4.025%.

Traders in derivative markets now see an 80% chance of the first rate cut in March, and now see five quarter-point cuts next year.

Matt Luzzetti, chief U.S. economist at Deutsche Bank, said the main thing learned from Wednesday’s press conference was that Fed Gov. Chris Waller’s dovish comments a few weeks ago were a reflection of the mainstream view at the central bank, rather than a dovish outsider.

In a speech late last month, Waller raised the possibility of a rate cut by spring if inflation keeps slowing.

Some economists think that March is too soon for a rate cut.

“We still judge rate cuts will commence later rather than sooner, still by the end of the third quarter of 2024,” Gregory of BMO Capital Markets said.

Feroli said he now sees the first rate cut in June, instead of his prior forecast of July, and predicted that the Fed will cut five times by the end of 2024.

Luzzetti of Deutsche Bank sees six rate cuts next year, but not beginning until June as the economy falls into a mild recession.

The Fed doesn’t forecast a recession. Its rate cuts are purely a story of weakening inflation. If there is a recession, the Fed will cut very fast, Luzzetti said.

Diane Swonk, chief economist at KPMG, said the odds of a recession are lower now that the Fed has signaled it will actively take steps to try to avoid one.

The Fed wants the economy to cruise at a lower altitude, and no longer wants a landing, Swonk said in an interview.

That is a 180-degree turn from Powell’s speech in Jackson Hole, Wyo., in the summer of 2022 when he spoke for less than 10 minutes but warned of “pain” and the unfortunate costs of fighting inflation. That speech, “a bucket of ice water,” Swonk said, sent the stock market reeling at the time.

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December 13, 2023
S&P 500's year-end rally lifts 51 stocks to a record close

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It has been a record day for 10% of the S&P 500.

A group of 51 stocks in the benchmark equity index swept to record finishes on Tuesday, the most since April 20, 2022, according to a tally from Dow Jones Market Data.

It was a record day for 51 stocks in the S&P 500.

Dow Jones Market Data

Stocks that logged a record close on Tuesday included Allstate Corp
ALL,
+0.90%,
Costco Wholesale
COST,
+0.90%,
D.R. Horton, Inc.
DHI,
+0.65%,
Mastercard
MA,
+1.21%,
T-Mobile US Inc.,
TMUS,
+1.00%
Visa Inc.
V,
+1.19%
and Waste Management Inc.,
WM,
+1.85%
among others.

Equities have been in a year-end rally mode, driven higher by tumbling benchmark yields that finance much of the U.S. economy and expectations of coming interest-rate cuts.

The 10-year Treasury rate
BX:TMUBMUSD10Y
fell to 4.2% on Tuesday from a high of about 5% in October.

The Dow Jones Industrial Average
DJIA
on Tuesday ended at its third-highest level on record, while the S&P 500 index
SPX
and Nasdaq Composite Index
COMP
added to a string of new closing highs for 2023. The Dow finished 0.6% away from its record close logged almost two years ago, while the S&P 500 was only 3.2% below its close from the same period, according to Dow Jones Market Data.

The push higher for stocks followed inflation data for November that showed price pressures continued to ease from peak levels, but still were above the Fed’s 2% annual target.

The consumer-price index pegged the annual rate of inflation at 3.1%, down from 3.2% in October, with the “last mile” of inflation expected to be the hardest part to tame.

Investors now will be focused on Wednesday’s Federal Reserve decision. Short-term interest rates are expected to remain unchanged at a 22-year high, but the central bank is expected to update its “dot plot” forecast of rates over a longer time horizon.

“Although the market will focus on the timing of rate cuts, we suspect Chair Powell will be keen to strike notes of caution to avoid financial conditions easing too much further to ensure the Fed continues to see encouraging progress on inflation,” said Emin Hajiyev, senior economist at Insight Investment, in emailed comments.

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December 12, 2023