There was new data out of the U.K. on Wednesday morning, showing prices falling more than expected, further evidence that a global disinflationary trend is under way.
How far and how long inflation will last are the key questions now for a stock market that has thrived in 2023, with the S&P 500 SPX surging 24%.
Analysts at 22V Research led by Dennis DeBusschere have set out a playbook on how the market will react. They note that the Fed expects core PCE — 3.5% year over year as of October, with new data out Friday — will fall to 2.4% by the end of 2024.
In the first scenario, growth remains above the 2% trend, wages take longer to disinflate and core PCE tracks a bit over 2.4%, but not above 2.75%.
In that setup, the Fed would still cut rates, perhaps not by three or four times, though, says 22V. That would favor deeper cyclicals — energy, materials, industrials — “or make them tougher shorts,” and also make it tough to short the U.S. dollar or bet on U.S. Treasury yields declining, they say.
A second scenario would see core inflation tracking above 3% — Treasury yields and the U.S. dollar DXY would move higher, and risk-off factors would benefit, they predict.
Under a third scenario, inflation would head to 2.4% well before the end of 2024. That would mean four to five Fed rate cuts, more downside risks to the dollar and Treasury yields and further easing in financial conditions.
“Stocks do very well assuming we move below 2.4% on core PCE WITHOUT an increase in the unemployment rate,” they say.
22V’s broader message though is that the companies that have lagged, like small caps, should continue to catch up.
“Into year end we are not concerned about a sharp pullback, but with the VIX VIX sub-13, credit spreads in their 18th %tile (very tight), the S&P [price/earnings] over 19.5 times, and investors sentiment (AAII) in its 98th percentile, the scope for further S&P gains is narrowing. Internals rotations remain a better way to play for gains into year end,” said DeBusschere and the team.
Read: This is a good time to invest in a bond fund. One manager has an advantage over his largest competitors.
The markets
Stock futures ES00, -0.21% YM00, -0.20% NQ00, -0.27% are drifting south, with bond yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y dropping and tracking U.K. yields BX:TMBMKGB-10Y after a sharper-than-forecast fall in inflation for that country. The pound GBPUSD, -0.67% is taking a hit on that. Brent crude BRN00, +0.78% is back above $ 80 a barrel, with traders monitoring Red Sea disruptions.
| Key asset performance | Last | 5d | 1m | YTD | 1y |
| S&P 500 | 4,768.37 | 2.68% | 5.07% | 24.19% | 24.77% |
| Nasdaq Composite | 15,003.22 | 3.23% | 5.66% | 43.35% | 42.25% |
| 10 year Treasury | 3.911 | -11.43 | -50.14 | 3.11 | 23.75 |
| Gold | 2,053.40 | 0.50% | 3.11% | 12.20% | 12.57% |
| Oil | 74.43 | 6.53% | -3.11% | -7.55% | -5.09% |
| Data: MarketWatch. Treasury yields change expressed in basis points. | |||||
The buzz
FedEx stock FDX, -0.68% is dropping after the package-delivery giant cut its full-year sales forecast over worries about subdued demand for holiday shipping.
General Mills stock GIS, +0.56% is down on a revenue miss and lowered outlook for the consumer-foods company.
Tesla TSLA, +2.04% has reportedly told some employees it will not grant merit stock awards this year.
Read: Investor who called year-end stock rally says ‘Magnificent 7’ may continue to lead in 2024
Alibaba BABA, +2.13% CEO Eddie Wu will take over the Chinese internet group’s e-commerce business.
The NYSE is suspending Farfetch shares FTCH over a liquidation warning.
U.S. current account data for the third quarter is due at 8:30 a.m., existing home sales and consumer confidence are expected at 10 a.m.
A divided Colorado Supreme Court barred former President Donald Trump from the state’s presidential primary ballot citing an insurrection clause. Trump’s attorneys say they will appeal.
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The chart
Three years on, with lots of commodity prices at decade highs, the commodity bull supercycle appears to have slowed, but Wells Fargo Investment Institute’s head of global real asset strategy John LaForge says investors should not give up on the asset class.
He provides the below chart:
“These long cycles have typically experienced periods of consolidation as persistently rising prices have led to added supply or slow demand, and they are often followed by a reassertion of the bull super-cycle,” LaForge tells clients. Any pullback is a buying opportunity, and while he likes energy and precious metals, suggests investors stay diversified and not stick to just one part of the space.
Top tickers
These were the top-searched stock market tickers on MarketWatch as of 6 a.m.:
| Ticker | Security name |
| TSLA, +2.04% | Tesla |
| NVDA, -0.94% | Nvidia |
| NIO, +5.63% | Nio |
| GME, -0.78% | GameStop |
| AMC, | AMC Entertainment |
| MARA, +10.51% | Marathon Digital |
| BABA, +2.13% | Alibaba |
| AAPL, +0.54% | Apple |
| PLTR, +0.62% | Palantir |
| COIN, +5.04% | Coinbase Global |
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