CWS Market Review – December 3, 2024

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Before I get into today’s email, I have to apologize for some snafu that prevented last week’s premium issue from being emailed out. Perhaps I had too much turkey. In any event, paid subscribers can see that issue here.

The S&P 500 continues to have a great year. This looks to be Wall Street’s best year since 2021. It’s odd how many people get upset by a rising market. As I’ve often said, “nothing gets people angry quite like good economic news.” That’s even my pinned tweet on X.

Citigroup said that things are getting so bad for the bears (meaning good), that many hot shot short sellers are finally throwing in the towel. The more they’ve held out against the bulls, the worse they’ve done.

European stocks, in particular, have lagged badly versus the U.S. Wait, let me rephrase that—they’re lagging horribly versus the U.S.

Valuations in the U.S. are far higher than what we see across the pond. To be fair, this is like comparing apples to Müeslix. The U.S. markets are much more heavily weighted toward tech stocks, so perhaps they should command higher valuations.

Although it’s just started, the last month of 2024 is proving to be a very good one for growth stocks. On Monday, growth creamed value: +0.79% to -0.76%. The gap between high beta and low vol was even greater: +1.87% to -0.96%. Growth beat value again today.

In plain English, this means that investors are willing to shoulder great risk in search of greater returns. This kind of market typically aligns with rising interest rates. Or in this case, rates that may not be going lower as rapidly as expected.

This is a part of a growing gap between what the Federal Reserve has said and what the markets expect. The Fed has consistently said that it’s looking to bring down rates, or in their view, take back the previous rate hikes.

Wall Street doesn’t buy it. Traders think the Fed will cut rates again when it meets in two weeks. That’s not that controversial. The murky part is what comes next. For all of next year, Wall Street only expects two 0.25% cuts from the Fed.

Here’s a cool chart.

This shows the where the Fed is in blue, and the market’s take on the two-year Treasury in red. I like this chart because you can see how the red line anticipates the blue line. It’s like the red is the blue line, just faster.

Notice how the red line has been moving up recently. That shows you how Wall Street is growing less confident in the Fed’s rate-cutting agenda. That’s also what’s driving the sector rotation I described earlier.

Whom to believe? When in doubt, I side with the market’s expectations rather than a roomful of economists. Still, you never know.

What Happened to the Recession We Were Promised?

I feel as if I was promised a recession for this year, and we’re not going to get one. That news is far more upsetting to some folks than I would have expected.

We still have one more month left of this year and of Q4. Goldman Sachs currently pegs Q4 GDP growth at 2.4%. The Atlanta Fed’s model is at 2.7%.

Yesterday we got the ISM Manufacturing Index for November. I tend to like this report because it comes out quickly, usually on the first business day of the month. The GDP reports are great, but they tend to come out long after the fact.

For November, the ISM was 48.4. That’s up from 46.5 for October. Any number below 50 means the factory sector of the economy is shrinking. This was the eighth month in a row that the ISM came in below 50, and it was the 24th time in the last 25 months that it was under 50.

This Friday, we’ll get the November jobs report. Last month, the report for October said that only 12,000 jobs were added to the economy. That number was probably distorted by the storms down south. For Friday, Wall Street is expecting a gain of 214,000 new jobs.

This morning, the Labor Department released its JOLTS report (Job Openings and Labor Turnover Survey) and it said that job openings rose in October by 372,000 to 7.744 million.

There are now 1.11 job openings for each unemployed person. That’s up from 1.08 jobs for September. While that’s nice to see an increase, job openings are still down over the past year by 1.3 million.

Economists polled by Reuters had forecast 7.475 million vacancies. The increase in job openings was led by the professional and business services sector, with 209,000 unfilled positions. Vacancies rose by 162,000 in the accommodation and food services industry and climbed by 87,000 in the information sector.

But there were 26,000 fewer open positions in the federal government. The job openings rate increased to 4.6% from 4.4% in September.

The number of quits also increased. That’s a good metric to follow because a rising number often signals confidence in the economy. Layoffs fell to 1.6 million. That’s the largest drop in layoffs in 18 months.

Stankey’s Bold Turnaround at AT&T

I wanted to comment on the recent success of AT&T (T). The stock has done very well this year, and it’s due to a very simple strategy. The company got rid of its entertainment holdings.

I’m not sure why, but too many companies decide that they need to buy up other firms in order to make their own firms unnecessarily complicated. I remember that Peter Lynch warned of the dangers of holding too much cash on a firm’s balance sheet. They’re liable to spend it unwisely. Lynch referred to this as the Bladder Theory of corporate finance. I see it in action all the time.

AT&T has moved in the other direction. CEO John Stankey got rid of AT&T’s Warner Brothers unit and also its satellite-TV company DirecTV. What was the point of owning them? Stankey also improved the company’s balance sheet by getting rid of tons of debt. The biggest issue was resolving AT&T’s terrible move of merging with Time Warner.

This morning, the company said it is aiming, over the next three years, to return $40 billion to shareholders via dividends and share buybacks. It wasn’t that long ago that Stankey had to cut AT&T’s dividend, and he sold WarnerMedia to Discovery Communications.

Since getting rid of Warner, AT&T is up 50% including dividends while Warner hasn’t done much. AT&T is smaller now, but it’s focused on telecom which is what it does best. AT&T still holds a dominant position in fiber-optic broadband subscribers. Investors love recuring revenue and that’s what AT&T provides with its monthly cellphone bills.

The company’s major challenge now is to upgrade its fiber lines to better compete with companies like Verizon. There’s a lot of work ahead for AT&T and I’m afraid the company will have to shrink its workforce, but this is a good example of a company taking the right steps to make itself more competitive.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on December 3rd, 2024 at 6:21 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.