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A Goldilocks Economy and a Santa Claus Rally Before the End of 2023? Can it Be?: Market Commentary from Cabana’s CEO – December 19, 2023  

5 months ago

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Stocks and bonds have been able to hold and even continue the rally that began in November. This has been true across a variety of sectors in the stock market as well as in fixed income of all duration. This is not just focused on big tech – and to me, that is the best news of all. Small caps, real estate, cyclicals and financials are leading the way after being left behind all year. The equal-weight S&P 500 (RSP) is outperforming its market-cap weighted brethren (SPY), and that is evidence of a rally with broad participation (see chart below). A broad-based rally is typically more resilient than a narrow rally.  

All of this comes on the back of a belief that the Federal Reserve (“the Fed”) is at the end of its rate hikes and will begin to cut rates next year as inflation continues to fall. What this should mean is that stocks and bonds will benefit from the Fed’s actions after two years of bonds and large swaths of the stock market being pummeled by it. Very good news indeed if this comes to fruition. The risk to this “Goldilocks Scenario” includes renewed inflation and a recession. To me, these are polar opposites. Inflation would rise if the economy remained “too hot”, and a recession would occur if the interest rate hikes to date have not been fully felt and the economy slumps. We have seen “experts” declare with certainty that one or the other was inevitable, but to date, it looks like we have somehow threaded the needle and the elusive soft-landing may be upon us (inflation moderated back to the 2% target without a recession).  

History suggests stocks and bonds do well in the year following a peak in interest rates and as the Fed begins to loosen policy. Add in a Presidential election year and the evidence is even more compelling. For those of you interested in these types of statistics, the Stock Trader’s Almanac is an incredible resource for historical data and has been published for many decades by the Hirsh family.  

Finally, another potential reason for holiday cheer is that we are in the middle of the month of December and a “Santa Claus Rally” is always a potential heading into a new year.  

At Cabana, we have transitioned from our Transitional Bearish Scene to our Transitional Bullish Scene and have reallocated accordingly.  

Key terms:  
A Goldilocks economy is not too hot or too cold but just right—to steal a line from the popular children’s story Goldilocks and the Three Bears. The term describes an ideal state for an economic system. (Source: Invetopedia.com)  
A Santa Claus rally is the tendency for the stock market to increase during the Christmas season. (Source: Investopedia.com)  

RSP v. SPY from 11/15/2023 – 12/18/2023 (Source: stockcharts.com): 

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq