Monday Takeaways: A Big Week for This Sector

Shah Gilani|December 18, 2023

Enjoy the rally, folks… because it’s going to last.

The Fed sent the markets soaring with its talk of rate cuts coming next year.

And not just U.S. markets. Markets around the globe loved the idea of rate cuts.

We’re seeing new all-time highs and 52-week highs in all the big indexes.

Now… we’re in the last trading week before Christmas… which is usually quiet since everyone is getting ready for the holiday.

So the trend is our friend… this rally is going to last… and it’ll take a lot to change it.

But there’s some data coming out this week… and it could really move one sector of the market.

That’s what you’ll want to watch this week.

Get the details in my Monday Takeaways video.

Click on the image below to watch it.

 

TRANSCRIPT

Good day, all. Shah Gilani here with your Monday Takeaways.

First up, the rally. Certainly not in the alley, but everywhere… across all asset classes it seems. Yeah, that’s the absolute fact. So enjoy it while it lasts… because it probably will.

So what’s going to happen this week, based on last week?

Well, first of all, last week… as good as it was, there were a few little bumps in the road. We know, you know, because everybody now knows, the Fed’s talking about pivoting. They’re no longer talking about “higher for longer.” They’re talking about rate cuts. Whether or not we get to see any next year remains to be seen, but the market nonetheless loved that.

And I’m talking not just U.S. markets. I’m talking globally. The Nasdaq 100 is at an all-time high. The Nasdaq Composite is at a 52-week high but not an all-time high. It’s still about… I think I’m going to go about close to 9% away from its all-time intraday highs, which is what I measure their highest by. So the Nasdaq Composite has a ways to go. The Nasdaq 100… as you guys know, if you trade the QQQ, that’s what that is: a reflection of the Nasdaq 100. Yeah, all-time highs. Meanwhile, the S&P 500 is at 52-week highs and only 2.12% away from all-time highs.

So a tremendous rally last week… and likely momentum to carry the markets higher this week, even though we are coming into the last trading week before the Christmas holiday.

So happy holidays, everybody. Happy Hanukkah, merry Christmas, happy everything to everyone. The markets may be a little bit on the back foot this week because folks are focused elsewhere.

So what do we have ahead?

We’ve got some interesting data points. We’ve got a lot of housing stuff this week. I’ll give it to you off the bat. We have builder sentiment today, on Monday. On Tuesday, we’ve got starts and permits. Wednesday, we’ve got existing home sales. Friday, we’ve got new home sales.

So a big week for housing. What are we looking for here? I think we’re looking for this: Are we going to see better numbers? Why might we see better numbers? Well, because interest rates have fallen as far as 30-year mortgages… and, according to Freddie Mac, have fallen from near 8% to a 6% handle last week. So if we see a quick reflection of lower mortgage rates in the stronger housing market, then I think that bodes well not only for the economy but obviously for housing assets. And I think that will be a positive taken by investors. And I think we’ll see maybe housing stocks rally… we’ll see mortgage-related companies and funds start to rally.

So the takeaway there is it’s going to be probably kind of a slow, boring week maybe. But you want to keep an eye on the housing stats all week and see how markets react to that. See how the specific sectors related to housing act relative to what the real numbers are coming out. So it’s going to be an interesting week for that.

We also have PCE (personal consumption expenditures) this week, and we have, I think, consumer spending. So we’ve got those two numbers. We also got a preliminary look… Actually, we get the last look at third quarter GDP. I don’t think we’re expecting any surprises there. So that data is probably not going to be that market-moving. But a surprise is a surprise …and based on the expectation for rate cuts in 2024, any really bad numbers could actually be bad for the market, and we could see something of a hiccup, but I don’t think so. The momentum is so strong, it’s going to be probably a fairly quiet week, even though we get these data points.

So the takeaway there is probably not a whole lot to do today and this week. Just keep an eye on the numbers and see how the market reacts. That’s really what we’re looking for this week, is just what kind of reaction we get. If we get muted action, reaction stuff, then we’re par for the course and we’re going to continue to route it. If we get some abrupt changes somehow somewhere, then all of a sudden we’ll start to scratch our heads and wonder, “Are we getting a little overbought here? Are nervous investors taking a pause here?” So that remains to be seen. That’s the kind of week we’re going to have here. Kind of uninteresting ho-hum, nothing… but who knows, out of left field maybe something.

Money market funds… Here’s what’s interesting about money market funds. It’s a double-edged sword. People are talking about the just slightly less than $6 trillion now in money market funds. And that $6 trillion is food for this rally. Food for risk on rallies. Why?

Because it’s sitting there collecting 4% or 5%, depending on when it was parked and where it was parked. And if rates are going to continue to come down, then that money is likely to come out of money market funds and go seek higher-yielding assets, whether that may be in bonds that can rally. Because the rates are coming down, bonds can rally. You can get nice appreciation in a bond market rally. Equity markets… Look, cash looked like it was pretty good most of the year – 4%, 5%. At the end of the year, we realize cash is trash because we’re looking at a market that’s up 20%. So would you rather have 5% or 20%?

Cash is not as attractive as everybody thought it was because equity markets have taken their place and will likely continue.

The thinking now is going to be, “Should I remain in cash, or do I need to move into more risk assets?”

Yes, more risk assets is going to be the way to go. So what’s going on? How can we look at that through the prism of the $6 trillion in money market funds?

We have ICI, Investment Company Institute, data up to the week ending December 13. And the interesting thing about that is… money fund assets, so money market fund assets, fell $11.55 billion over that week ending December 13.

Now, that makes sense. We see money coming out of the money market funds and going into equities. So yeah, that makes sense. But what was interesting about that… and by the way, that takes us down really to $5.89 trillion sitting in money market funds.

What’s interesting about the figure that the ICI put out was that retail saw inflows of $2.92 billion into money market funds. It was institutional money market funds that saw the big exodus – $14.7 billion exited institutional money market funds.

So the balance of the institutional money market funds is $3.62 trillion now… and retail money market funds $2.27 trillion. That’s how we get to the $5.89 trillion now on the sidelines.

Institutions aren’t wasting time. They’re coming off the sidelines and putting money into risk assets, into equities and into bonds. So that can continue. If it can continue, we can continue to see markets go higher.

The only other I would say worthwhile side of that, which makes what’s in a money market funds and the fact that money may be coming out of that a double-edged sword, is the fact that so much money has been in money market funds, parked in money market funds, has been a positive for Treasury issuance. Because that money has been buying the Treasury’s issuance. And at the same time, the Fed is doing quantitative tightening. There’s a nice offset there from the money going into money market funds that was then being parked in Treasurys and offsetting the Fed’s quantitative tightening. We’re having a nice balance there that made 2023 pretty easy. It made the issuance of Treasury debt pretty smooth. Even though it looked bumpy, overall it wasn’t bad.

Going into 2024, the takeaway here is we have to keep an eye on what’s happening with money market funds. If a lot of the cash coming out of money market funds gets puts into risk assets, what’s that going to do to Treasury issuance? If there’s less money on the sidelines that can get – and would’ve otherwise gotten – parked in Treasurys that are being issued, does that mean rates are going to start bumping up on Treasurys? Does that mean the Treasury is going to have to offer more yield to bring investors to the table?

The big question of 2024, maybe the question… certainly one of the top questions for 2024… is what’s going to happen to all that money sitting on the sidelines. And what’s it going to do to risk assets, and what’s it going to do as far as Treasury yields?

There you go. That’s what we’re going to keep a very close eye on.

But in the meantime, it’s looking like a positive, especially when the institutions are chasing. That’s another reason the market probably will be quiet this week. But it doesn’t mean we can’t get another really, I would say a head-shaking rally. We could still get, into the end of this year, a melt up. We could get a market melt up because as that money comes off the sidelines and goes in there, everybody who’s been missing out, who’s got money on the sidelines, has underperformed what equities have done this year. Institutions are going to start chasing. They’ve already been chasing.

That’s a lot of the momentum that we’ve seen as institutions whose benchmarks they’re not even close to meeting… because there’s no way the majority of institutions are putting out a 20% return this year… having been in the market fully invested in even the S&P, certainly nowhere near the 40% of Nasdaq 100… but they’re going to have to try and show that they have been participating. So they’re likely going to chase. As though they have their jobs on the line? Probably not. Some of them, maybe. But nonetheless, they all want to show some kind of performance. So they’re going to be chasing through year-end. So can we go higher? Could be a nice, smooth move higher, could be a melt up higher if more money comes off the sidelines and starts chasing performance.

So again, the takeaway here is there’s momentum. Everything’s positive. There are very few negatives out there right now. Fed fund futures… they’re now pricing in six rate cuts in 2024, 25 basis points each. Now, the Fed has eight meetings in 2024. Fed fund futures are betting that during six of those eight meetings, they’re going to cut by 25 basis points. That’s certainly bullish for equity. So 2024 is setting up early to be one heck of a year. That’s the takeaway here.

The setup at the end of 2023 is really making 2024 look like it’s going to be a stellar year. So you’ve got to go away with that.

That’s pretty much it, what I have for you today.

And this week, it’s just going to be an interesting week to see whether anything develops. But nonetheless, the trend is your friend. Stay with it.

The whole, simple takeaway, as it’s been for the last several weeks, is the trend is your friend. The takeaway on all the data is, it’s moving markets higher.

So the trend is your friend, whether bond prices are coming down… whether mortgage rates are coming down… whether money market fund assets are coming down and going into risk assets… whether it’s institutions chasing… benchmarks making new highs. The trend is your friend.

Happy holidays, everyone. Cheers.