The Boat is Clearly Full

What's next?

The boat is clearly full of longs judging by the action in the stock market the first week of January 2024. When a boat is full it makes squeezing in less possible, attractive and uncomfortable for the other passengers. In fact, those late comers who had been getting anxious about seeing friends in the boat suddenly are disinterested. Does this description of December versus now in the markets seem fair to you? You can see by recent hedge fund return reports for 2023 (average up 10% for DE Shaw, Citadel Equities, Millenium, Point 72) that most were forced out of single stock and ETF shorts while keeping their longs in order to reduce the lag versus the indices. CTAs are max length long stocks, full stop. Everyone hoped dumb money inflows the beginning of the year would allow them to add back shorts or sell their winners the first week of January. Lastly, perma-bulls like Dan Ives of “no skin in the game” was throwing around big round numbers like Apple should go from $3 trillion to $4 trillion in 2024.

I am almost exhausted reading and writing the first paragraph. Did that really happen and why? First, the Fed definitively did pivot. But, the US consumer is NOT celebrating inflationary pressures easing back to 0.2-0.3% per month. Nor are they feeling like rents peaking out and dropping small is some huge win. Prices overall for good and services are up 20% plus versus a few years back. Yes, wages, according to government statistics show they are outpacing inflation now, but that’s NOT how consumers feel. The market is pricing in 1.5% points of cuts in 2024 by the Fed starting in March. The Fed consensus seems to be pricing in “maybe” 25 bps in March but more likely 3-4 cuts, back end loaded, unless inflation really tanks or the economy does. So, the Fed pivot has taken the 10 year bond back to “around” levels it started 2023 at 4%. What are the implications of this for stocks?