Bob’s Journal for 1/4

The Year-End Rally Was Global

U.S. stocks finished 2023 with a powerful rally that garnered a lot of attention. But most other markets around the world did as well or better.

The S&P 500 gained 11.64% in the last three months and 3.95% over the last month of the year.

The MSCI World Index, excluding the United States, was up 10.14% over three months and 4.07% in the last four weeks.

Latin American markets rose 17.15% in the last three months and 5.48% in the last month. The FTSE Pacific Index was up 9.71% in the last three months and 4.64% in the last month.

Even Europe did well. The FTSE Europe Index gained 12.11% in the last three months and 4.40% in the last month. The iShares Europe ETF (IEV) rose 11.52% in the last three months and 4.12% in the last four weeks.

I could go on to list the returns of more regional and country ETFs and indexes. The point is that many other markets generated higher returns than the major U.S. indexes.

That could indicate global markets reached a long-awaited turning point at the end of 2023.

For years, U.S. stocks, especially large company growth stocks, had the highest returns in the global markets. Now, those stocks and U.S. stocks in general might be stretched. They might not be able to sustain their outperformance.

That’s normal. Historically, a country or sector that led the global markets over the last 10 years usually underperforms in the following 10 years.

Investors around the world seem to be identifying opportunities outside the United States and moving their money into other markets. Retirement Watch readers know we identified Japan as a top opportunity in mid-2023, and I expect its outperformance to continue for a while.

U.S. stocks now make up about 60% of the global capitalization-weighted indexes because of their outperformance of recent years. That’s about what Japan’s global index weight was at its peak in the late 1980s.

U.S. investors are likely to improve their returns the next few years by moving some of their stock allocations outside the United States.

But don’t be in a hurry to jump in. Technical measures of the markets indicate that most market indexes were overbought or extremely overbought at the end of 2023.

Who Remembers Peak Oil?

Peak Oil was a popular investment and economic thesis in the 1990s and early 2000s. It created the intellectual basis for projections that the price of oil would rise steadily.

The essential elements of Peak Oil theory were that the world had discovered all the major deposits of crude oil and was rapidly using those reserves. Annual increases in oil consumption would cause the reserves to decline each year.

I wasn’t a supporter of Peak Oil theory. It didn’t allow for changes in technology that made it possible to find and recover more oil and enable more efficient use of resources over time. Peak Oil theory also didn’t recognize that substitutions would be available and be more attractive as the price of oil increased.

Over time, the internal combustion engine has become more efficient. Many buses and trucks were converted to natural gas, and use of electric vehicles increased substantially. Of course, the development of fracking technology increased the supply of oil. The United States went from a net importer of oil and gas to a net exporter.

The supply of oil increased faster than demand the last few years, despite wars involving Russia and the Mideast and a cut in supply from OPEC. The United States and Mexico increased supply at greater rates than expected in 2023. Demand also fell, largely because of disappointing economic growth in China.

Not long ago, proponents of Peak Oil theory believed the floor on the price of oil would be about $150 per barrel. But the price of oil in 2023 was lower than in 2022. Energy company stocks were the market laggards in 2023 after being the market leaders in the first half of 2022.

The Banking Crisis Isn’t Over

The forces that caused some major regional bank failures in early 2023 continue to put pressure on many smaller banks.

Silicon Valley Bank and a couple of others made headlines in the spring of 2023 when they suffered online bank runs and had to be absorbed by larger banks.

The banks largely were the victims of the Federal Reserve’s policy changes. When interest rates and inflation were low, deposits were abundant, and there was little demand for loans, so the banks bought a lot of long-term treasury bonds.

They weren’t prepared when the Fed quickly raised interest rates in 2022 and early 2023. Their bonds lost a lot of value, and they had to begin paying higher interest rates on customer deposits.

Though the crisis involving a few big names was resolved quickly, a large number of banks quietly remain in crisis. Hundreds of small community banks around the country continue to suffer capital impairment from bond losses, according to a survey by The Wall Street Journal.

Regulators are paying closer attention to the banks. The banks are exploring options, such as mergers, selling deposits, and shrinking their balance sheets.

The quiet crisis in small banks might explain why, over the last six months, the Fed has increased the monetary base. That action is contrary to its stated policy of maintaining a tight monetary policy to contain inflation.

The surge in the monetary base probably helped reduce market interest rates in the last few months of 2023. The drop in interest rates raised the value of bonds, and that improved the balance sheets of many of the small banks still holding a lot of treasury bonds.

The Data

The ISM Manufacturing Index was 47.4 in December, an improvement from 46.7 in November, but still indicating the sector is contracting. The index has been below 50, indicating a contraction, for each of the last 12 months.

The PMI Manufacturing Index for December was 47.9, down from 49.4 at the end of November and 48.2 in mid-December. In 2023, the index was below 50 every month, except April.

The Chicago PMI fell to 46.9 in December from 55.8 in November. December is the first time in 15 months the index has been below 50, which indicates the sector is contracting.

Pending home sales were unchanged in November after dropping 1.2% in October. Over 12 months, pending home sales are down 5.2% through October, an improvement from being down 8.2% through October.

The number of job openings declined in November, according to the JOLTS (Job Openings and Labor Turnover Survey) report, to its lowest level since March 2021.

The number of people quitting jobs fell to its lowest level since February 2021. And the quits rate, the percentage of job holders who voluntarily left their jobs, declined to its lowest level since September 2020.

New unemployment claims increased by 12,000 to 218,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.875 million from 1.861 million.

The Markets

The S&P 500 lost 0.63% for the week ended with Tuesday’s close. The Dow Jones Industrial Average rose 0.46%. The Russell 2000 fell 2.24%. The All-Country World Index (excluding U.S. stocks) decreased 0.63%. Emerging market equities gained 0.13%.

Long-term treasuries lost 0.46% for the week. Investment-grade bonds dropped 0.38%. Treasury Inflation-Protected Securities (TIPS) fell 0.13%. High-yield bonds declined 0.63%.

On the currency front, the U.S. dollar gained 0.85%.

Energy-based commodities lost 3.73%. Broader-based commodities fell 2.33%. Gold declined 0.51%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.