The S&P has largely gone flat this week though we do have some upside action starting today. The high for 2023 (4600) is just above current levels. 4600 should be significant resistance and would be a logical place for this rally to pause. A small pullback as we get close to this resistance would not be unexpected. A 1-3% decline would provide an excellent entry point for any cash you have left on the sidelines. Note that such decline would take the index back to the 4400-4500 level. Coincidentally there is an unfilled gap in that area that makes such a revisit more likely. We continue to believe that pullbacks should be bought but upside to current levels may be limited in the large caps.
This chart shows the relative performance of value to growth. For much of this year, growth stocks have outperformed their value counterparts.. That may be changing as value has outperformed growth over the last 7 weeks. It isn’t enough to indicate a sea change at this point but bears watching. Value outperforming growth is not usually what is seen at the onset of a new bull market.
Our Point
This week we got the first revision to 3rd quarter GDP numbers. The change was a healthy upward revision that has the US economy growing at a pace of 5.2%. It is a remarkable number as many Americans aren’t feeling the effects of such a healthy economy. A look below the surface may show a different number. Gross Domestic Income (GDI) is another measure of economic output. Usually, GDP and GDI approximate each other. However, for the third quarter, GDI rose at an annualized 1.5% rate. Over the last year, GDI has fallen .16% versus a gain in GDP of 3%. Something is amiss. Over the coming months, these numbers should converge. The question is whether GDP falls or GDI rises. The answer to that question will likely show whether or not we are heading towards a recession or not. Inflation talk has been replaced by Fed rate cuts. While the inflation we have endured over the last two years remains, the pace of increase has moderated. The Fed still says it wants to see a 2% inflation rate (we are currently just north of 3.5%). There are mixed messages coming from the Fed as a number of Fed officials have sounded relatively dovish over the last week while this morning Chairman Powell raised the possibility of further hikes. The market ignored Powell’s comments and, in fact, have rallied this morning on them. The market clearly believes that Chairman Powell is posturing and that the rate hikes are over. Assuming we get the soft landing many pundits are now predicting, we could be at the start of a new bull market. We have our reservations and think the coming months will be choppy. That said, we are optimistic in the near term. Many, if not most, missed much of the gains this year as they were concentrated in only a select few stocks (the magnificent 7). Accordingly, there are many that will chase this market as we near the end of the year. Because of this, any pullbacks will likely be mild, and we should continue to see buying pressure into year end. Santa looks to be right on schedule. Over the next 2-3 weeks, mutual funds will be making their annual distributions. The result can be added volatility and significant daily declines to fund prices. The distributions have no effect on the value of your mutual fund shares as owners receive dividends (paid in cash or additional shares) that approximate the declines. Be wary of large unexpected declines in your mutual fund holdings this time of year. We made no changes to our holdings this week and hold a small amount of cash that we are waiting to deploy on any pullback. Small caps remain intriguing and will likely see some allocation over the coming week or two. 24 shopping days until Christmas so get out their and do your part to spur this economy higher. Have a great weekend!
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bills Asset Management (“BAM”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BAM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BAM is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BAM’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.billsasset.com.
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About Bo Bills
Founder and Chief Investment Officer at Bills Asset Management. With over 30 years of experience in managed risk investing, Bo has helped countless clients achieve their financial goals while preserving capital.
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