You're a mean one, Mr. Grinch!

I went right back to Chocolatetown, Pa. (Hershey, that is) this week for an annual presentation to community bankers from the state. Though my presentation was at a ballroom in the Hershey Lodge, I learned that you don’t want to stay there on business. Check-in was a long line, with many young children laughing and running around the lobby and among us in line. “Get back here, Joey,” one mother said. But there was no telling which one was Joey, as no one seemed to respond…. A group of children were enjoying the long hallway outside my room late at night—no morning presentation for them. Might as well watch TV, and I found National Lampoon’s “Christmas Vacation!” I wonder if my boss is watching the bonus scene. Tis the season! It’s also the season for Wall Street outlooks.  Consensus expects a “soft landing” (i.e., no recession). One year ago, the overwhelming consensus favored a recession this year, with numerous Fed rates cuts by year-end. Might the no-recession consensus for ’24 be offsides again, especially as several key indicators—prolonged yield curve inversion, prolonged declined in Conference Board leading indicators, shrinking bank deposits & Fed balance sheet—indicate otherwise? Mr. Grinch, you’re a bad banana with the greasy black peel!

I’m watching three key things next year to tell the tale—a—corporate margins, market breadth and higher-paid layoffs (more on all three in my special ’24 outlook next week). A lot of the week’s macro data (more below) suggested deceleration, and futures are placing 60% odds of a Fed cut by March and a total of five cuts by the end of ’24. Immaculate disinflation alone wouldn’t justify that, and this morning’s jobs report doesn’t support that either. Perhaps Fed policymakers will shed some light when they meet next week. The market must not read November’s rapid decline in 10-year yields as a recession warning—earnings estimates for both ’24 and ’25 rose late last week! Strategas Research is more curious about the anticipated reacceleration of sales growth in the new estimates, from 2.8% in Q4 to 4.8% in Q1 ’24 and 4.9% in Q2 ’24. How does this work when growth and inflation are moderating? It doesn’t in the view of BCA Research. It notes analysts are increasingly pessimistic about economically sensitive Materials, Industrials and Consumer Discretionary companies and believes some could print negative earnings growth in the new year. Mr. Grinch, you’re going to spoil everyone with you bad attitude!

So, whither 2024? 3.7% unemployment does not signal impending recession. But if history is any guide, interest rates should start to bite by mid ’24. Corporate profit margins surprised this year. If they hold up, market breadth should improve dramatically. If not, layoffs (especially among the $125k salary cohort). These will tell the tale. Spanish, Italian and German bourses setting new highs before the S&P 500 and Nasdaq 100, a rarity, Strategas wonders what it means for the dollar and geographic mix in ’24. It was the European economy that disappointed this year while the U.S. surprised. Might that reverse in ’24? In a similar vein, on the domestic equity front, Big Tech stocks have been the underperformers of late relative to small caps and defensives. Another reversal in the making? Wolfe Research believes part of the market’s recent run has been driven by a violent short squeeze—“the perfect storm for a year-end melt-up.” Just in time for an election year’s uncertainty. Hmm. But I don’t want to be a Grinch. And anyway, 2024 is weeks away! A toast to you as you sip on your eggnog! Does anybody drink eggnog anymore? (My longtime writer does if there’s some bourbon in it!) As for me, I’m expecting a lump of coal this year—don’t want to talk about it!!!

Positives

• Immaculate global soft landing? November’s services ISM beat expectations on broad improvement across components. Overseas, global services PMIs also ticked up in developed economies, while November’s global manufacturing PMI posted its highest reading since May, consistent with Korean and Taiwanese order books and another sign manufacturing is making a bottom.
• Productivity just might save the day It rose an upwardly revised 5.2% annualized in Q3, and over the past four quarters, has picked up to a 2.4% pace, above the pre-Covid level. AI’s transformative potential will likely determine if this recent development is trend or a blip. For now, it’s a positive for margins as unit labor costs continue decelerate—1.6% y/y in Q3 vs. 3.6% the prior quarter.
• Don’t bet against the consumer Michigan’s preliminary take on December consumer sentiment unexpectedly jumped, erasing declines of the past four months. And in November, auto and light truck sales slipped but remained at an elevated year-to-date average of 15.4 million vs. 2022’s 13.8 million.

Negatives

• Good news is bad news November nonfarm jobs surprised slightly to the upside; average hourly earnings, too. Combined with a steady quits rate, jobless claims that remain range-bound at low levels and job cuts that are running significantly below early-year levels, Fed cuts anytime soon seem off the table.
• More gray than black Fiserv credit card and Redbook store data showed modest y/y declines over Black Friday/Cyber Monday week at many brick-and-mortar stores, where seasonal hiring was the weakest in years and today’s report showed retail jobs actually falling. On the other hand, ecommerce nominal spending rose at its fastest pace in three years, according to Adobe’s panel of online retailers, and outlays for food, air travel, lodging and entertainment reached or were near record highs.
• Can China afford to use a bazooka? Moody’s downgrade of China’s credit outlook came on worries that central authorities are weighing ramping up stimulus for stressed regional governments & state-owned enterprises. With total debt-to-GDP near a record 300%, this could create further downside risk to a country struggling with a wobbly real estate sector and growing consumer discontent.

What else

Immaculate disinflation Based on falling unit labor costs, Evercore ISI estimates the underlying inflation rate already is under 2%. And year-ahead consumer inflation expectations plunged 1.4 points in Michigan’s December survey to 3.1%, the lowest since March ’21.

My daughter almost qualified Jefferies shares that the top 1% of “Swifties” listen to 6k minutes of Taylor Swift’s music every year.

Can you imagine the rubbery chicken? Next month will see the launch of the world’s largest passenger ship with max capacity of 7,600 customers, not including an additional 2,350 crew members.

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