Buckle Up for Bumpy Market Conditions Ahead
The market stage is set for what looks to be a very bumpy ride ahead as a series of fluid situations are ramping towards inflection points that could bring about some abrupt fallout and ramifications regarding the year ahead for the U.S. economy and American societal trends. We’re only half the way through January, but there is plenty to chew on.
The widening out of the war in the Middle East is interesting in that, after some 130 attacks on U.S. targets, the Biden administration finally gave the Pentagon the go-ahead to respond militarily against the Houthi rebels in Yemen. The Houthi attacks on shipping in the Red Sea risk reigniting global supply chain disruptions. One can surmise that the timing of the U.S. response at the beginning of an election year plays to the historical pattern that no U.S. incumbent president has lost an election during a war.
This past weekend, the Taiwanese elected the Democratic Progressive Party (DPP) to another four years, seizing victory in the national election where the DPP won 40% of the votes over two rival parties. The win marks a third term for the DPP and stokes the tensions between mainland China and the island nation regarding whether the use of military force by China will be the next step to gain reunification and control of Taiwan, and what the U.S. response would be in such a scenario.
The appetite for continued financial support for Ukraine is waning. The latest survey by The Associated Press and the National Opinion Research Center showed 48% of those interviewed supported providing weapons to Kyiv, 29% opposed it and 22% had no opinion. In the last survey, taken in May, 60% of Americans supported supplying weapons to Ukraine. There is a growing sentiment that the United States has done its part and that Europe and NATO need to up their commitment. At this point, Russia controls Crimea and the Donbas region, while both Russia and Ukraine experience troop attrition.
The U.S. Supreme Court says it will hear a historic case to determine whether Donald Trump can run for president. The justices agreed to take up Mr. Trump’s appeal against a decision by Colorado to remove him from the 2024 ballot in that state. The case will be heard in February and the ruling will apply nationwide. Mr. Trump is currently in the midst of three separate trials in New York, Washington D.C., and Atlanta due to financial allegations, the events of Jan. 6 and the 2020 election interference allegations.
The outcomes of all three trials are up in the air, but it stands to Constitutional reason that the Supreme Court trial will likely decide in Trump’s favor. If so, the stakes are high for another close presidential election in November. According to The Hill/Decision Desk HQ’s national polling average, Trump and Biden remain neck-and-neck in a hypothetical head-to-head general election rematch. Trump has 44.3% of support, while Biden has 43.1%.
The Federal debt continues to soar in a manner that is accelerating at a pace that has the potential bring real downside pressure to the dollar and upside pressure to the long end of the yield curve if buyers demand more yield for rising risks of creditworthiness. “The U.S. federal government posted a December deficit of $129 billion, up $44 billion, or 52%, from a year earlier, as outlays rose while receipts fell from December 2022 levels that were swelled by pandemic-deferred tax payments, the U.S. Treasury Department said on Thursday. The Treasury said that outlays for December rose 3% to $559 billion, a December record, partly as a result of higher Social Security outlays and interest on the public debt. Receipts for the month fell 6% to $429 billion.” — Reuters January 11, 2024
China’s economy is likely facing years of stagnation unless major market reforms occur, thereby weighing heavily on world output. China is currently experiencing a property crisis, weak consumer spending and high youth unemployment. “The 2024 challenge for the Chinese economy will not be GDP growth — that will likely be above 4.5%,” said Derek Scissors, senior fellow at the American Enterprise Institute, a center-right think tank. “The challenge will be that the only direction from there is down.”
Logan Wright, director of China markets research at Rhodium Group, agreed, saying: “The slowdown in China’s economy is structural, caused by the end of an unprecedented expansion in credit and investment over the past decade.” The country’s financial system simply won’t be able to generate the same levels of credit growth that it has in previous years, he said, therefore Beijing will have far less control over the direction of its economy than it has in the past. The Shanghai Composite Index is reflecting this economic deterioration as the index is about to test the pandemic lows.
Thankfully, the U.S. economy and the stock market are on solid footing, with inflation still running at 3.4% and trending lower than forecast to result in rate cuts early this year. The CME FedWatch Tool has a 77% probability of a quarter-point cut taking place at the March 20 Federal Open Market Committee (FOMC) meeting following last week’s release of the Consumer Price Index (CPI) and Producer Price Index (PPI) data. The employment market has shown itself to be resilient with the focus of investor attention squarely on fourth-quarter earnings season that is just getting under way.
At this point, only 6% of S&P 500 companies have reported fourth-quarter results. Of those companies, 76% have reported a positive earnings-per-share (EPS) surprise and 55% have reported a positive revenue surprise (www.factset.com). The big money center banks failed to impress when they reported last Friday, but the market took it in stride. Investors should brace for a choppy market going forward impacted by the above-noted situations and a slowing domestic economy where forecasting future growth is elusive. The bullish momentum will be tested when the blue-chip technology companies post their numbers and guidance. They bore the torch in 2023, and in my view, will again in 2024.
