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December Market Multiples

Rule #7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. -Bob Farrell

The Ivory Hill RiskSIGNAL™ remains green since December 5th. Our short-mid-term signals are firmly green and are a bit stretched right now. We are favoring more risk and higher beta stocks as volatility is still suppressed (for now).

The market outlook has notably improved in the last six weeks, as seen in the December Market Expectations Table below.

This rally is purely based on Fed speak and falling Treasury yields, the market is now trading at a higher multiple, between 17.5X and 18.5X, raising the S&P 500's fair value since November.

To justify the current levels, we need to see both:

  1. Confirmation of a soft landing (which has not happened)

  2. Inflation bear near 2% (which also has not happened)

At current valuation levels, the market is pricing in an absurdly optimistic version of a macro-economic utopia and if that doesn't become reality soon (history tells us it usually doesn't) then we could easily see the S&P 500 take a 5-7% nosedive and no one should be surprised.

This overextension suggests vulnerability in stocks and bonds for early 2024. Risks include economic downturns, unexpected inflation, yield rebounds, or Fed actions against rate cut expectations (they are already backpaddling on Powell’s statements).

In essence, the December multiples shows that while some stock and bond gains are justified by fundamental improvements, current valuations are too optimistic. If this ideal scenario doesn't play out soon, a quick 5-7% market pullback in the short-term should not surprise anyone.

Current situation:

The Fed signals 2024 rate cuts, stable economic growth, Treasury yields continue to fall, and inflation drifts lower towards 2.00%. This reflects a better Fed outlook and lower yields, but economic growth uncertainty and slow inflation decline remain.

Conditions Improve If:

The Fed confirms multiple 2024 rate cuts (more than three), economic growth remains solid (doesn’t have to be outstanding), lower Treasury yields, and inflation heading towards 2%. This would signal a balanced phase of stable growth and declining inflation, reducing recession risks and supporting the recent rally. This situation would be considered a perfect scenario for stocks, providing significant support for the recent market rally.

Conditions Deteriorate If:

The Fed resists early 2024 rate cuts, economic growth continues to decline, Treasury yields rise above 4%, and inflation rebounds. This would undermine the current rally's basis, leading to significant stock declines, potentially pushing the S&P 500 below 4,000, indicating stagflation and prolonged high interest rates.

Small-Caps are Crucial

As I have been saying for weeks, small-caps are crucial. They have experienced a significant surge since late October. However, it's crucial to note that they are only reaching the peak levels observed repeatedly over the past 18 months (yellow down arrows).

If small-caps can sustainably break out above their upper bound, then we can start to have a conversation about a broadening bull market.

For now, it looks like they are getting rejected (again). If they fail to surpass these levels and retreat, it would simply be a continuation of the sideways trend observed for several quarters.

Until small-caps sustainable breakthrough this level we are not in a broadening bull market as small-caps are typically last to rally after a true bottom and tend to outperform the larger more capitalized indexes once they start to take off.

Remember Bob Farrell’s rule number seven from above?

Rule #7 Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Translation: A rally driven by only a few stocks suggests limited market participation, increasing the likelihood of its failure. For a rally to be sustainable and credible, it's not enough for just the large-cap stocks (the 'generals') to perform well. Small- and mid-cap stocks (the 'troops') also need to participate actively. A rally that lifts all boats demonstrates strength and increases the chances of further gains.

With 71% of stocks underperforming the S&P 500 this year and small-caps still in a full cycle crash, it's clear that we are not in a healthy bull market.

And remember - The one fact pertaining to all conditions is that they will change.

Feel free to use me as a sounding board.

Best regards,


Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President


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