by Jason Bodner
December 10, 2024
The twelfth month of the year brings about holiday cheer. It was, however, originally only our tenth month, in the Roman calendar. “Ten” is embedded in its name, December, since “Deci” means ten.
December became the 12th month when Ianaurius (January, for the Roman god Janus) and Februarius (for Februm, or purification) came along, adding those odd combinations of 31- and 28-day months.
These days, December tends to make us fat with too many holiday parties, and giddy with gifts, but December is also a great time of year for stocks. We just left November, the seasonally strongest month, but December is no slouch. According to data collected since 1990, December is #2 in the small-cap Russell 2000, #3 in the NASDAQ Composite and relatively strong (#5 of 12) in the Dow and S&P 500.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
December was up a majority of years, rising 72.4% of the time, better than five of each seven years.
This bodes well for stock investors as we finish 2024. But don’t think that’s it, because looking at the table above, we see that January through May is also positive, sporting a lot of green ahead of us.
Our data also shows a healthy amount of unusually large buying behind this seasonal market strength. We’ll dive into that in a moment, but first let’s look at the bullish backdrop driving the current mood.
As discussed, December is historically strong. Part of the reason is that money managers perform “year-end window dressing,” a phenomenon of goosing their portfolio performance to be as strong as possible. Money managers get paid on performance, so the better their performance, the more money they make.
December also winds down the third-quarter earnings announcement season, and the last reports coming in continue to be strong. According to FactSet Earnings Insight for last Friday, December 6, 2024, for Q3 2024 (with 99% of S&P 500 companies reporting results), 75% of the S&P 500 companies beat EPS estimates and 62% beat revenue estimates. The blended (year-over-year) earnings growth rate for the S&P 500 is 5.8%, marking the fifth straight quarter of year-over-year earnings growth for the index.
One point of concern might be market valuation. The forward 12-month P/E ratio for the S&P 500 is 22.0, which is well above the 5-year average (19.6) and 10-year average (18.1). This causes some bears to say share prices must come down to “revert to the mean.” However, P/E ratios can fall in one of two ways:
- Prices can fall, reducing the numerator, or
- Earnings can rise faster than prices, expanding the denominator.
The more likely outcome is that earnings continue to rise, and the biggest earnings “surprise” of all is that earnings analysts keep getting surprised. They are not particularly accurate when making estimates. In fact, they underestimate earnings 75% of the time – and have been doing so for the last 10 years, at least!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Also, both long and short-term interest rates are falling. The effective Fed funds rate has fallen from 5.33% to 4.64%, with more cuts anticipated. This effectively acts as fuel for stocks. This is especially true for small-caps, as they typically use more debt to fuel growth. The ability to refinance at lower rates reduces debt-service costs, which expands bottom lines – both theoretically and in practice.
All of these facts, along with strong economic data, put stock investors in a strong position. Along with a Republican sweep set to take over in January and stocks have blue skies ahead. The incoming team has already demonstrated themselves to be pro-small business, anti-tax, and against higher interest rates.
Add this together, and we have a great backdrop for stocks. I notice that most big professional investors are showing they believe this, too. We can see this in the Big Money Index (BMI), which is rising. The BMI is a 25-day moving average of all unusually large buying and selling (netted out). When it rises, that means money is flooding into the market. Here, we see that it has been rising since November 22nd:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is driven not only by some notable buying of both stocks and ETFs, but also by the fact that the volume of selling has all but vanished for both (see thin red lines by the yellow arrows):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, as for what size stocks Big Money is buying, we can see clearly that since the BMI started rising November 22nd, 82% of all unusually larger buying has been concentrated in small and mid-cap stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Sector-wise, I am excited to see strength in the kinds of sectors that are typically the engines of a bull market. Financials are leading the pack, because with falling rates and the nature of the incoming administration, falling rates bode well for more M&A activity and lending. But, financials stocks are not the typical bull market drivers, historically speaking. For that, we look to technology and discretionary stocks. We also like to see industrials in the mix, as infrastructure improvement is a solid economic driver.
Sure enough, financials, technology, discretionary and industrials comprise the top four in sector ranking now:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is echoed with what we see in terms of unusually large buying and selling within individual sectors. Those same four sectors have been seeing strong buying coupled with little to no selling.
It’s also interesting to note that nine of the 11 S&P sectors are at or just off their six-month highs.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is all excellent news for continued strength in stocks, but there is one last big component that could push stocks higher over the next few years. Rates continue to fall to match inflation, as we can see here:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Falling interest rates would be a potential death knell for investors who park their cash in money market funds. There is still a record amount of cash sitting in money markets collecting high rates, but this high level of income is quickly shrinking. Looking at the Federal reserve banks tracking of money market assets, we can see over $6.5 trillion in cash sitting in money markets with rapidly shrinking yields:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Put it all together and this array of fundamentals is strong for continued vigor in stocks, and I am particularly interested in the potential for small and mid-caps as they continue to out-perform.
We may want to have complete control over our portfolios and the market, but that is unrealistic. The best thing we can do is identify a method for picking investments that maximize our potential for gain. My recipe seeks companies with growing sales, earnings, and expanding profits seeing unusual buying.
Or, as the Buddha put it, “You can only lose what you cling to.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
As Europe and Asia Struggle, the American Economy Keeps Growing
Income Mail by Bryan Perry
Cash Remains at Record Highs, Despite Rallying Stocks and Falling Rates
Growth Mail by Gary Alexander
Happy 250th Birthday, America! To Keep Growing, Have More Kids!
Global Mail by Ivan Martchev
The Stock Market Glass Looks Half Full
Sector Spotlight by Jason Bodner
‘Tis the Season for Stocks to Rise
View Full Archive
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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