Stop me if you’ve heard this before: This time of year can be kind to equities.
Stocks were still in melt-up mode midway through the first week of December, and as Goldman’s Scott Rubner reminded investors, history suggests the rally may have further to run.
“Cyber Monday deals keep getting extended and the US equity market rally is no different,” Rubner wrote, in his latest. US shares are well on their way to notching five-dozen all-time highs in 2024.
As the figure shows, the “January Effect” looms. That’s “when the largest capital in the world gets deployed into the US equity market,” Rubner said. Looking back a century, the S&P typically returns around 4% over this month and next.
Currently, there are simply “more buyers than sellers,” Rubner went on, pointing to the tsunami of inflows to US-focused equity ETFs and mutual funds.
Regular readers scarcely need to hear this again, but just in case: US stock funds just saw their largest four-week inflow on record.
At the same time, global stocks excluding the US shed $8 billion.
A lot of the influx to US funds is passive in nature, and it’s hitting the market alongside the corporate bid which, you’re reminded, is the single-largest source of US equity demand.
Corporate demand tends to be highest in November and December, and some of you will recall that Goldman’s David Kostin expects more than $1 trillion of gross buybacks in 2025.
“Are stock certificates a scarce resource?” Rubner asked, before answering: “Absolutely.”
Meanwhile, spot’s insulated — “pinned,” as it were — by dealers’ long gamma position, which “should act as a market buffer on any weakness,” Rubner said.
As for liquidity, it’s good — or “good” by post-Volpocalypse standards anyway — as you might expect given the bullish tape and ebullient mood, but as Scott went on to note, it’ll dry up into the high holidays in the West, which can actually be a blessing to the extent it magnifies the impact of “buy” flows.
Finally, Rubner said the retail set’s back in the game. “We are seeing retail activity to pick up,” he wrote, citing record call-buying. “I am back to checking Reddit every morning to see the names of the day,” he added.
So, there they are. What Scott called “the most important dynamics in the marketplace to close out 2024”: Bullish seasonals, record US-stock inflows, “daily passive index demand,” the corporate bid for another two weeks, low vol/long dealer gamma, decent liquidity and piqued retail interest.
Thanks, once again, for posting this.
If any readers still cling to the quaint old belief that earnings and profit margins matter, contrast the flows mentioned above by our Dear Leader with what US companies spoke of in the Fed’s beige book released yesterday:
“Prices rose only at a modest pace across Federal Reserve Districts. Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers. Input prices were said to be rising faster than selling prices for most businesses, resulting in declining profit margins. Although input prices rose generally, contacts in several Districts noted declines in certain raw materials and non-labor costs. In contrast, rising insurance prices were again reported widely as significant costs pressures for many businesses. Contacts indicated they expect the current pace of price growth to persist, but businesses in several Districts indicated tariffs pose a significant upside risk to inflation.”
Mmmm… good reasons to lever up further and push valuations up even higher! Wave ’em in!