The weather is finally getting cold up here in the northeast and already I am thinking about Springtime next year. The markets are also considering the potential for many changes in regard to international trade and government spending policies. The artificial intelligence trade is showing up in software companies that are seeing increased revenue and cash flow as they help corporate America utilize this technology.
This means that there has been a lot of churn in the markets as the magnificent seven may be less of an impact on the major indices next year. Also, there could be increased M&A activity so the investment banks will be busy marrying the right companies together and raising capital where needed especially if bank regulations become less onerous. There is a good deal of optimism in the markets right now but it is seems to based less on hubris and more on substantive changes in technology with a repurposing of a regulatory network that has gained a heavy hand over corporate America.
No Recession…..Yet…
Most economists agree that the economy is chugging along just fine with GDP at 2.8% and a solid jobs report on Friday with 227k added for the month of November. Also, the previous two months that were impacted by a Boeing strike and two hurricanes were revised higher by a combined 56k. The unemployment rate rose slightly to 4.2% from 4.1% but this is still a low number and not much to worry about until we see it rise above 5%.
Many had predicted the Fed was going to cause a contraction in the economy with all the interest rate hikes post COVID. However, economies around the world have been getting back to business so we may have threaded the needle for a soft landing. But many remain skeptical.
The S&P 500
The S&P 500 is chugging along in the trend channel (white lines) that I have in the chart below. It is a choppy advance with waning momentum so the technicals may be foreshadowing a pullback soon – maybe to the $600 area on a re-test. We can now use this $600 area as a key support level so that if it breaks, we know there is potential for a larger drawdown. Until then, the indices look to have more upside.
Checking In on the 10Yr Treasury Yield
The 10Yr peaked just over one year ago and the retreat from the high at 4.99% is likely headed to 3.24% sometime next year. I get this from the Elliott wave price structure which is a way to model out advances and corrections. If my projection is correct, we should return to the previous 4th yellow wave which also lines up nicely with the 38.2% Fibonacci retracement.
If none of that made sense to you, just know it is likely that yields will fall into next year. Most likely due to investors expectations on inflation and lower federal government spending deficits. If true, the markets will like this especially the commercial and residential real estate markets. Of course, yields could fall if something bad happens in the economy but I am not seeing that right now. Stay tuned for 2025 as it should get interesting.
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Paul J McCarthy III CFA
President, Kisco Capital
