Stocks edged higher amid little new economic or corporate news. Bond yields edged lower. Wall Street, at least for now, seems to be concluding that the first-rate cut will happen after March. Overall, momentum remains in favor of the bulls. More investors are trying not to be left behind amid a backdrop of lessening recession fears. That, of course, could change quickly, but there is little data to suggest that a recession is near at hand. With that said, money supply continues to shrink, applying some economic pressure.
Markets were surprised last week with the sudden collapse in price of New York Community Bank’s stock. It has fallen by more than 50% over the past two sessions as commercial property’s poor loan quality has raised its ugly head. So far, there haven’t been a flood of deposits exiting the bank, but it’s only been two days; it wouldn’t be surprising to see deposit outflows accelerate in coming days. Is this another regional bank canary in the coal mine? It’s simply too early to tell. Commercial problem loans tend to be concentrated in certain urban geographies, including New York. Ironically, New York Community Bank’s problems accelerated with its purchase of Signature Bank assets. Signature was one of the banks that failed last year. The purchase increased the size of New York Community Bank’s assets to over $100 billion, putting it into a more severe level of oversight and regulation. Will it survive? Will others soon report similar problems? That’s a story that may still be in its early chapters.
Elsewhere, there are pockets of good and bad news. Chinese stocks, led by Internet-related issues had the best trading session in recent memory. Could the gloom surrounding China be overdone? Right now, it’s hard to buy that assumption, but the rally sparked some optimism as a few key Chinese companies prepare to report earnings. After the close, ESPN, Fox, and HBO announced an agreement to establish a new network to consolidate the sports offerings of all three. While details weren’t clear, the new entity would be equally owned by the three parties who would retain the right to broadcast the same sporting events on their own individual networks. While no pricing was offered, the ability to watch everything from NCAA basketball to NFL football to a multitude of other sports with one subscription fee is an enticing thought. Perhaps most significantly, it is another step toward the consolidation of streaming offerings to the hopeful benefit of both the streamers themselves and existing customers. Given that only Netflix makes any money streaming any form of video today, gaining scale in any manner possible is an obvious path for those trying to achieve any level of long-term success.
We are now about five weeks into 2024. Stocks are modestly higher almost entirely due to the same tech and growth stocks that led markets higher in 2023. Equal weighted S&P averages are virtually flat. That is consistent with weak fourth quarter earnings and lukewarm prospects entering 2024. The reality is that a few dozen stocks can’t drag prices higher alone forever. If stocks are going to advance from here, breadth has to widen. To be sure, there are small pockets of strength within the market. Insurance stocks are off to a good start to the year, as are old line ethical pharmaceutical companies. Some REITs are also showing signs of life after a disappointing 2023. But for most companies, modest revenue growth in the U.S. is offset by weak results overseas, the impact of a strong dollar, and a loss of pricing power. Furthermore, there are few pockets outside of technology that show any signs of acceleration.
Washington offers little help. Immigration legislation is caught in the same gridlock as everything else along with aid to overseas allies. 2024 is likely to be hostage to political considerations more than anything else. Don’t look to Washington for help. If there is to be any solace, it will have to come from the Fed. Before the year is over, short-term rates will stop coming down and the pace of decline in the size of the Fed’s balance sheet will moderate. Markets will debate when and how much. While politics will dominate the front page, the Fed will still control the business pages. After several years of high inflation, QE, QT, and spikes up and down in interest rates, expect far less from the Fed in 2024. Modest gains in profits and equity prices would be a good outcome.
Today, Ashton Kutcher is 46. Chris Rock turns 59 while Garth Brooks is 62.
James M. Meyer, CFA 610-260-2220