2023-12-29 16:00:50 ET
Summary
- S&P 500 and small caps had a strong performance in November and December 2023.
- Global bonds experienced historic back-to-back monthly gains to finish off a volatile year.
- Sell-side strategists are lukewarm on what 2024 may bring, but bond traders have aggressively priced in upward of 6 quarter-point rate cuts over the next 12 months.
- The iShares Global 100 ETF has strong technical indicators and potential for further upside in 2024, though I see its valuation as stretched given a high weight US large caps.
It was a December to remember for the world of equities. The S&P 500 (SPY) rose more than 4% during the final month of 2023 while small caps ( IWM ) shone once again, rallying 13% following a 9% November gain. The Magnificent Seven tech-related stocks performed fine, helping the Nasdaq 100 (QQQ) to its best year since 1999 and a December advance of 6%.
Outside of the U.S., foreign equities rose, too. The Vanguard FTSE All-World ex-US ETF (VEU) jumped 5% as the US Dollar ETF (UUP) retreated about 2%. In the fixed-income market, the iShares Core U.S. Aggregate Bond ETF (AGG) capped off a remarkable 2-month rally with a 4% total return in December. Global bonds, in fact, recorded their best two-month stretch in decades.
S&P 500 Melts Up Nearly 5% in December, Small Caps Stun the Bears
Global Bonds Post Historic Back-to-Back Monthly Gains
At the sector level, it was Real Estate again leading the S&P 500, only this time the Information Technology sector merely performed about in line with the SPX (those two areas rose the most in November). Energy was about flat, as WTI oil (COMP.IND) had its fits and starts amid some renewed geopolitical unease in the Middle East.
Defensive areas, such as Utilities and Consumer Staples, lagged amid a risk-on environment. As such, Industrials and Consumer Discretionary, along with Financials, outperformed. In all, there is a high amount of optimism looking ahead to 2024 among the retail crowd.
December S&P 500 Sector Returns: Real Estate Soars Amid Falling Interest Rates
Perhaps that hope is built upon a further move lower in interest rates. The chart below shows various Treasury maturities over the final three months of the year. Yields peaked in mid-October and have since plunged as inflation data verified consistently better than economists had been expecting.
The bond bulls took it into overdrive in December following a dovish FOMC meeting and Powell press conference. The Fed now expects three rate cuts in 2023, something experts were not calling for ahead of the two-day policy meeting two weeks ago. Weaker CPI, PPI, and PCE data support a more dovish central bank.
Remarkably, Treasury yields ended the year about where they started.
Treasury Yields Fall Sharply From their October Highs
As it stands, Core PCE, the Fed’s preferred inflation gauge, is now at the 2% target level. Thus, a Fed Funds rate of 5.33% will quickly become too restrictive given falling real yields in the marketplace. The 10-year real interest rate has dropped from about 2.5% at its Q4 high to near 1.7% by the close of 2023.
Much will depend on the inflation trajectory over the next few months – too high, and the Fed will be forced to keep its easing cycle slow. Too low, and recessionary deflation risks enter the equation. Policymakers will indeed have a delicate balancing act to pull off in 2024. Oh, by the way, there’s a general election to consider, too.
Behold! Immaculate Disinflation
Right now, traders price in almost six quarter-point rate increases. I should remind readers that the Fed Funds futures market is a hedging market, meaning that traders generally bet on lower rates to hedge against a market/economic crisis.
I assert that the more plausible scenario is to see maybe four cuts, but the first could come as soon as March if we keep seeing soft inflation prints. Moreover, it will be interesting to see what companies report on their top lines in the upcoming Q4 earnings period amid a sharply disinflationary environment.
Nearly 6 Quarter-Point Cuts Priced Into 2024
In terms of where the market may go following a gangbuster final two months of the year, sell-side strategists are hardly bullish. The average year-end 2024 target is 4861, just 2% above where we finished the year. These are moving targets, though, and the group of forecasters were horribly wrong in their collective 2023 predictions which called for about flat returns, not a 25% market rally.
Sell-side Lukewarm on 2024
Following a stellar year, particularly in the final 9 weeks of the year, let’s home in on global large caps via the iShares Global 100 ETF (IOO). According to the issuer , IOO offers investors exposure to a broad range of international corporations across developed and emerging markets. It tracks an index comprised of 100 large-cap global equities in a single fund. IOO has evolved to be much more of a U.S. ETF.
IOO: US Stocks Dominate Mega-Cap Global Equities
As of December 28, 2023, more than 75% of its assets are considered domestic, as five of the Magnificent Seven mega-cap U.S. names command about 40% of the fund. As such, IOO’s price-to-earnings ratio is on the high side at 21.2, per iShares.
Moreover, the ETF is focused in the Information Technology sector with 38% in that slice of the market – well above the S&P 500’s percentage and significantly higher compared to the I.T. sector's positioning in the All-Country World Index. So, looking into 2024, I would be more inclined to own an index fund with broader sector exposure given IOO’s high valuation and concentration risk. Where the fund shines, however, is with its technical situation, which I will detail later.
IOO: Holdings & Dividend Information
Readers know that I have turned a bit more cautious of broad ETFs in the last few weeks. While the Santa Claus Rally is real, the following two-plus months tend to be dicey for the global markets. The below chart from Equity Clock illustrates that early January through mid-March has historically featured weak returns and bouts of volatility. So, this piece of evidence suggests caution ahead.
IOO: Neutral Q1 Trends
The Technical Take
Heading into 2024, IOO has several technical features working in its favor. Notice in the chart below that the ETF put in a bullish cup and handle pattern that had key resistance at the $79 mark. That is where the fund peaked in early 2022 and where sellers came about in the summer of this past year. After a material correction of more than 10%, and a breach of its rising 200-day moving average just to shake out the weak hands, the IOO has soared to fresh all-time highs. “The bigger the base, the higher the space,” they say, and we can calculate a measured move price objective to $100 based on the height of the cup and handle pattern, added on top of the breakout point.
I do see, however, a gap just above $76 that looms under the current price, so there’s always the risk that it could be filled during the first quarter of the new year when seasonality turns less favorable. Still, with a rising 200dma and a hefty amount of volume by price in the $70s, there should be ample demand for shares on pullbacks. Also take a look at the RSI momentum indicator at the top of the chart – it's hanging onto a bullish zone without much let-up – that is an encouraging sign, seeing momentum confirming price action.
Overall, the momentum and technicals on IOO look strong heading into 2024.
IOO: Bullish Cup and Handle Breakout in December
The Bottom Line
I have a buy rating on iShares Global 100 ETF. I see more upside ahead despite a stretched valuation following an extraordinarily strong 2023. The technicals appear sound in the face of some bearish seasonal trends ahead.
For further details see:
A December To Remember: Global Stocks Rally To Cap Off A Strong 2023