Barron’s Weekend Summary: The year 2023 has been fabulous for the financial markets
Sat, 16 Dec 2023 14:00 PM EST
Cover:
-The year 2023 has been fabulous for the financial markets, with the S&P 500 index rising 23% and the Nasdaq Composite up 41%. This is due to a strong economy, Big Tech's artificial-intelligence ambitions, and the possibility of interest-rate cuts in 2024. The bond market also experienced a historic downturn, causing yields to reach highs not seen since the 2008-09 financial crisis. As investors prepare for 2024, they should expect another strong year with a broadening rally encompassing various issues. The year is expected to be volatile, with shifting economic and interest rate expectations, geopolitical surprises, and political surprises from the presidential election season. However, important debates about inflation and rates are expected to be resolved by year-end, leaving investors eager for more positive news in 2025.
Interview:
-No interview this week
Tech Trader:
-Tech stocks experienced a significant rally in 2023, with the Nasdaq Composite up over 40% and the Magnificent Seven companies averaging over 100% returns. The rally was driven by expectations for a Federal Reserve pivot, a new commitment to cost-cutting, and artificial intelligence. This year, generative AI became mainstream, reviving investor interest in AI-relevant companies. The market believes these factors will drive tech stocks higher again in 2024. Other AI plays include Advanced Micro Devices, Qualcomm, Broadcom, and Micron Technology, which despite a terrible year, should benefit from rising memory prices and both AI servers and PCs will require more memory than older hardware
The Trader:
-Lower interest rates benefit both consumers and businesses, with mortgage rates falling below 7% for the first time since August. This could encourage potential home buyers and businesses to reduce borrowing costs, promoting deal-making and hiring. However, the Fed's decision to cut interest rates may be driven by economic weakness or rising financial risks, potentially leading to a credit-tightening recession. Traders are pricing in up to six rate cuts in the next year, indicating a more challenging economic landing. This could result in a short-lived slowdown but a more durable bull market in 2024.
-Merger mania in the oil and gas sector began in Q4 with Exxon Mobil acquiring Pioneer Natural Resources for $60B, followed by Chevron buying Hess for $53B. Occidental Petroleum recently announced its $11B acquisition of West Texas producer CrownRock. This trend is expected to continue, as fear of missing out is a real factor. Drillers are looking to the Permian Basin, Eagle Ford Shale, and Bakken formation for prime assets. Upstream companies, such as explorers, are likely to merge, as well as midstream players and downstream refiners. This consolidation cycle cycles through the entire system, as big companies will squeeze their suppliers, requiring consolidation. Wall Street expects this trend to continue.
Features:
-The US government has introduced new rules that could boost agriculture companies and refiners that are planning to convert plants and animal fats into green jet fuel. The Treasury Department will allow several types of biofuels to qualify for tax credits worth up to $1.75 per gallon, including corn-based ethanol and soybean-based fuel. The sustainable aviation fuel industry is a potential 36B gallon industry, with only Finnish company Neste and Indianapolis-based Calumet Specialty Partners being existing clean jet fuel makers. Ag companies like ADM, which signed a deal with biofuels company Gevo in 2021, are also working on making clean jet fuel.
-DocuSign shares surged 12% after the Wall Street Journal reported that the e-signature company has hired outside advisors to explore potential sales from strategic buyers or private-equity firms. DocuSign has a market value of $12.9B and is up 14% this year, well behind the NASDAQ Composite's 42% gain. A leveraged buyout with a modest premium would be the largest tech buyout deal in many months, likely edging the $12.5B that Silver Lake and the Canada Pension Investment Board paid for market software specialist Qualtrics earlier this year. The largest tech deal announced in 2023 is Cisco's pending acquisition of Splunk for $28B.
Europe:
-The Middle East conflict is affecting global trade, with two shipping companies, Maersk and Hapag-Lloyd, halting traffic through the Red Sea following attacks on their ships. Maersk, which accounts for almost 20% of global container traffic, has instructed all vessels bound to pass through the Bab al-Mandab Strait to pause their journey until further notice. Hapag-Lloyd, another major container-shipping firm, also suspended traffic through the Red Sea until Monday following an attack on one of its ships. The Bab al-Mandab Strait is a critical gateway for ships passing through the Suez Canal to reach the Gulf of Aden and Indian Ocean. The Houthi movement in Yemen has also emerged as a threat to Red Sea shipping since the war between Israel and Hamas began in Gaza in October.
Emerging Markets:
-no update
Commodities:
-Oil futures are trading in a pattern known as "contango," where contracts expiring several months later are higher than current prices. West Texas Intermediate crude futures are currently trading for $72.11 a barrel, while those expiring in June are at $73.05 a barrel. Even November 2024 WTI futures are higher than current prices, indicating a long-term trend. While contango may appear bullish, it actually means there isn't enough demand to fill all the market supply, causing investors to store oil barrels for later sale. This oversupply could persist for a while, a negative sign for oil investors. Contango is associated with negative returns for bets on oil price rise, with an average return of negative 3.8% for bullish oil-futures positions in the following three months.
Streetwise:
-Jack Hough has a contrarian investment idea for 2024; it’s Amazon.com. Amazon.com stock is the world's most recommended stock, with 56 Wall Street forecasters recommending it to buy, while the lone Negative Ned holds it. The stock has experienced a significant run, with shares multiplying seven times in value over the past decade, including a 75% gain this year. However, it is not in the deep value bin, with 40 times this year's projected free cash flow compared to 25 times for the S&P 500. And here’s the contrarian thought: According to old investment tropes, the stock must be headed for trouble, so investors should avoid herd mentality and chase past performance. recommending Amazon at this point is conformist, making it a classic double-contrarian reverse. To see why Amazon could continue outperforming in 2024, consider recent financial estimates, as the top 10 companies in the S&P 500 recently made up 35% of the index's value, the most since the 2000 internet stock bubble.