Stocks near record highs with just 1 trading day left in 2023 12/28/23

0:01more good thank you very much in live from the sasdaq market side in the heart of new york city's times square This is Fast Money, and here is what's on tap tonight. Striking distance, the S &P 500 just over a dozen points from an all-time high. The Dow closing at a record high. And the Nasdaq, while down slightly, still up 44 % this year. Can the market keep its mojo? We'll debate that one. Plus, all aboard. The transport's having a red-hot December up 13 % so far this month, 25 % for the year. But can you still jump on the train trade? Of course, the transports are much more than just that. And later, is the rebound in financials for real?

0:42The options action on Apple. And is Tesla about to get yet another competitor from China? Good afternoon, everybody. I'm Tyler Matheson, in for Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, Steve Grasso, Courtney Garcia, Mike Coe, and our guest trader for the hour, Chris Harvey from Wells Fargo Securities. welcome one and all. And we begin with stocks clawing their way to all-time highs ahead of the year's final trading day tomorrow. The Dow closing at another record level. The S &P just points from a record. And the Nasdaq sort of essentially flat on the session.

1:18Small cap stocks among December's biggest winners so far. And there's just one day left. The Russell 2000 jumping almost 14 percent for the month to date. Real estate also driving big gains, rallying more than 9%. It is the month's top S &P sector, by the way. So is now a good time, folks, to pop the champagne and celebrate? Or should investors worry that a hangover is ahead? Courtney, I'm going to begin with you. Then I'm going to go to Chris because I know Chris has some thoughts here. But why don't you take it away? Yeah. And I think this rotation that you're seeing in the markets has really started in early October.

1:53I think that's going to continue. As we're ending the year and we look into 2024, for. You've missed a lot of upside by not being in some of these rotation trades. But I don't think you've missed out on all of this. I do think if you're not in, it's still a good time to get in. You want to make sure that you're invested on not just those top seven companies right now, because those very well might slow down next year. And there's a lot of room to run and things like small cap and real estate and all those interest rate sensitive things that you mentioned. You want to make sure you're diversified right now to take advantage of that next year.

2:18The market is healthier for this broadening out that has been taking place in various sectors. Some have been unorphaned and left behind, but many have not. Absolutely. And I think that's where you need to make sure that you are invested in these things, right? Because, you know, when the markets are looking forward, they're probably over anticipating the rate cuts next year. I mean, they're expecting anywhere from four to six cuts next year. And I don't know if that's going to happen. But in all likelihood, we're seeing a peak in rates. Rates are at some point, if not, just say the same, come down at some point.

2:49And that's only going to continue to benefit things. The economy is still on good footing. So I think you want to make sure that you're forward looking We're going to talk about rate cuts in just a minute, folks, and whether as many as the market expects is what you guys expect. But, Chris, I want to turn to you because we were talking earlier, and you anticipate some sloppiness in the market as we turn the page to 2024. Why and where is it and how is it going to show up? I think that's right. So everything is price term. Perfection is not the right word. But when we look, we have a 250 number for 25, and we're at 19 times at this point.

3:23That's pretty healthy. We do think the underlying fundamentals are okay. But as we go from the macro to the micro, which is what we're going to do when we turn the calendar, some of the micro is not as pretty as expected. And if you look at the reports from FedEx, from Nike, even from General Mills, the market wasn't really appreciating some of the micro and some of the guidance. And as we look at guidance, we think that people really have to bring down guidance. Or typically what you see is the beginning of the year. People want to moderate that guidance. And with equity markets this high, we think there's going to be a little bit of choppiness, a little bit of sloppiness next year.

3:58You want to you probably can buy that. But but be careful and don't be too bullish entering the year. That's too bullish entering the year. But we just put up Wells Fargo's year in 2024 price target, which I assume you still stand by. It is below where the market is today. So that would suggest that it's not just the beginning of the year. that might be choppy and troublesome, but maybe by the end of the year, there it is, 46.25. That's right. So one thing is we put that target together back before the Fed came out and did what it did, and that changed things a significant amount. The cost of capital has come down a lot, and we'll look at that and we'll take into account earnings and so on and so forth.

4:37We do think the first half is going to be more difficult when you had the VIX down at 12.13, when everything is priced really well. There's a lot of optimism there, but we think if you get that pull back, you can buy that pull back, but it could be 5%, could be upwards of 10 % in the first half of the year. So just be careful. A lot of optimism out there. A lot of people came into last year, excuse me, ended last year really negative. We had a great year this year, and now we're seeing the exact opposite. Yeah, a lot of people pretty positive, and let's see what happens next year. Though generally, when the market is higher by 20 % or more in a year, the ensuing year is also a positive year two out of three times.

5:18It is. And can you imagine having to make a price target or a number for the S &P in January from 12 months out? So I think there's a lot of, to Chris's point, the Fed didn't do what they did when he made his target. Right. That goes in right off the bat. So you've got to give him this probably a 5 % air to the upside on that. I don't want to put words in this out, but I just did. I just got him in trouble with compliance. So but when you look at the comments that we've heard, so the safe haven was the seven mega cap stocks, because that's where non dwarfs, the seven non dwarfs. So that's where we saw the regional banks get into a problem.

5:58So with all that money migrated even more so into where they had cash flow and where they had fortress like balance sheets. Now it's coming out saying, OK, let's broaden up because we're not going to see maybe we're not going to see a recession. I'm of the belief we've already seen a recession at the back half of 2022. So you could throw that in the mix. So if we're going to see a soft landing, no recession, easier funding for the Russell 2000. Russell 2000, 40 % of Russell 2000 is unprofitable. So immediately when you look at these companies, if you give them better access to money, they're going to run money.

6:34They're going to have an easier shot at profitability. A hundred percent. Or they're going to survive, right? So forget about being profitable. They're more likely to survive. So that index can trade higher. And that's what we've seen. Mike, you've been listening patiently out there wherever you are on the West Coast. What do you think? Yeah, I mean, obviously, I think that some of the names that really have seen the best gains this year, they could be vulnerable, I think, early in the new year. I sort of think back to the beginning of 2022 when we hit that January 4th peak and then sort of rolled over.

7:07You know, some of the best performing names in the Russell 1000, and I mentioned the Russell 1000 instead of the S &P 500 when I'm talking about sort of the large cap companies, because there are some names in there that have really done exceptionally well that wouldn't necessarily be eligible for S &P 500 inclusion. And I'll include in names like Affirm in there. We talked yesterday about Coinbase, I think. These are the types of names where the companies are not profitable and where I think that if sort of the bloom comes off the rose, they're the most vulnerable for sure. But there are also some mega cap companies that even now, if you were looking at them with fresh eyes, you would say these are still reasonably valued.

7:45I think the most notable example of the best performing stocks we've seen this year in that category would be Meta, because at the tail end of 2022, the reason everybody hated Meta was largely because we thought that Mark Zuckerberg, with his controlling vote in Meta, was just going to focus on his own pet projects and was spending billions of dollars. When that turned around, the company now is cheap and it's growing, let's call it 15 % to 20 % on the bottom line in trading at a market multiple or cheaper. So I still think there are some decent names. And kind of as Courtney was pointing out, she said early October is when we really saw some broadening out of this rally.

8:20And the way to see that, if you're looking at this at home, is just take a look at RSP, which is the ETF that tracks the equal weight S &P 500 versus SPI. It's actually outperformed so far in Q4 by about 30 to 40 basis points. Yeah. And there you see it up almost year to date, up 12 percent, 7 percent for the month. All right. Let's talk interest rates and the Fed's policy on rates, a key topic in the CNBC Delivering Alpha survey that we released today. We polled about 300 strategists and money managers, and more than half of them, as you see there, 54 % plus 19%, more than half of them believe that the Fed will begin cutting rates in at least by the second quarter.

9:02A minority seeing it happen in the final half of 2024. Chris, your reaction to this, to the majority of Swamis saying, hey, it's good, they're going to start cutting before the end of the first half of the year. And they're also discounting a lot of interest rate cuts. All true. So what we have. What if it doesn't happen? If it doesn't happen, then we've got a little bit of a problem. Then we're going to have a repricing of risk and we're going to have a pretty aggressive repricing of risk. Right. And a lot of people are saying, oh, well, listen to all the Fed governors and they're coming out and they're saying, well, calm down.

9:36And what I say is if your mom and dad say you can have ice cream and your older brother says you can't, you can still have ice cream. So in all likelihood, those cuts are coming. They're probably going to come sooner than the market originally thought. But if we get some economic data or whether inflation data that kind of pushes it back, then we will have a bit of a problem. And the other problem we have is the Fed is now lowering rates. You're going to light up the housing market. You're going to that has a big multiplier in the economy that has a big multiplier on the job picture and also on wages.

10:07So inflation may not be over and we may be dealing with in the second half of next year, which could slow things down. Courtney, react to that. And also to the the market seems to be anticipating 150 or more basis points of cuts next year, something like which suggests six quarter point cuts or maybe they do 50. But my more broad baseline question is, why is the Fed going to cut interest rates next year? Why? Well, I think the economy is good. Right. And the economy is good. But if inflation is, in fact, coming back to their targets and a lot of things are working itself out, like supply chain issues, which we're keeping inflation high.

10:47So if inflation is coming down, they can start to bring rates down in order to match that. But I think that's the big question, right, is if rates are coming to the extent that the markets expect them to. Is that just because inflation is coming down or because the economy is softening or there's some sort of recession? And that's why I think there's probably less cuts than the market is currently anticipating. But there's really two reasons why the markets can do well next year. Number one is rates coming down, which is going to be beneficial, like Steve's point specifically to small caps. But also as profits accelerate next year and earnings improve, which is expected to as we're seeing this earnings recession likely ending here, that also is going to be a really good thing for the economy.

11:24And so I think these are two things that can work together. But I think those earnings and profitability are likely going to do well next year. And that's that's going to boost the market. So, Steve, does the Fed cut rates partly as insurance so that the economy does not go into a recession? Is that partly what would drive the cuts? Well, they're in restrictive status right now, which is what Jay Powell has said. So the reason why. So I've heard that pushback of why are we going to cut rates? What would the economy is going to be in such poor shape. That's the reason why they're cutting rates.

11:54No, it's to Courtney's point. Inflation has fell precipitously because this was a supply issue. It's a supply chain issue that was basically self-created. So he was right when he said it was transitory. He just had to expand on what transitory actually meant. But if you have a PCE at 2%, there's no need to have rates where they are right now. So you don't have to be crashing in the economy if milk, eggs, cheese, gasoline, if everything continues to fall in a dramatic fashion, then he is too restrictive. He's got to cut rates. That has nothing to do with the economy falling out of bed. All righty.

12:32Our next guest thinks the broadening of today's rally or the rally we've been seeing over the past couple of months could carry over into the new year. BMO's chief investment strategist, Young Yu Ma, joins us now with his 2024 outlook. We'll get to that outlook in just a moment. But in the credit where credit is due department, you were soft landing before soft landing was cool. You still feel that way? We do feel that way. The pieces have come together. We talked about that a year ago, that we thought the elements were in place to have a soft landing, that the stable and healthy labor market, really unprecedented job openings provided such a buffer that we could weather the higher interest rate.

13:11So that's really come together. And we think it's still playing out. And we're in the latter innings of that soft landing now. What does that imply then for returns on equities and fixed income assets? We think both will be healthy in 2024. We'll probably return to more normal ranges, both for fixed income and equities. We don't expect a gangbuster year. We do think that it's a year for a balanced approach to risk. But we definitely think that there's a positive backdrop for risk into 2024. So you're looking for returns in equities that would be more along the historical average of seven to nine percent, something like that, or what?

13:50Looking for a bit more than that, sort of maybe high single digits, but more likely low double digits. We think that's achievable given the broadening of the rally and still what should be a strong mega cap sector in 2024. We think that the rally will continue to be broad based as it's been over the last couple of months here. Steve. So when you when you look at the path of the market this year and everyone talks about the performance was doubled pretty much from a handful of stocks, when you have to convince people of your thesis right now, what's the major pushback that you're not going to see the mega cap deliver the earnings punch that they did before?

14:33Or is it that the lower tier stocks are going to outperform? You know, I think some of the pushback is just a bit of reluctance or incredulity that the mega caps have run so far so fast and they continue to do well in 2024 and hold up the markets. We don't think they're going to have the outperformance that they had in 2023, but we still think they'll do well and provide some leadership in the market. So I think that's the biggest point. And I don't think investors have caught on quite as much as we believe will be the case in 2024, that the rally will continue to be broad. I think investors have been burned for many, many years over small caps and over value.

15:15And there's still a little bit of reluctance to jump into these areas. And I think that 2024 will be the year that shows strength in these areas as well. Broad rally by size, by sector, and so forth. Courtney? Now, I'm curious what your take are on bonds right now, which actually I see that you had noted a little bit about here. Because really what we've seen with investors is they're seeing really good yields on money markets. They're seeing an inverted yield curve, and they're not wanting to touch bonds, which have done really well the last two months. I think people aren't necessarily seeing that when the equity markets are also doing as well, if not better.

15:46I'm curious what your thoughts are looking into 2024 on the bond market. Well, we actually extended duration a couple months ago at a good time when 10-year yields were around 5%. We think they're actually below equilibrium now. We think as we get into the second half of 2024, we're going to see the 10-year yield back above 4%. So we're not excited about extending duration here. We do think bonds will probably return mid-single-digit range, sort of investment-grade bonds for 2024. But we think there'll be better entry points if people are looking to extend duration probably in the second half of the year as growth resumes and we think earnings accelerate and the economy stabilizes.

16:27Chris, why don't you try out your thesis for 2024 on Young You? So I have a couple of questions for you before we get to our thesis. M &A has been pretty lackluster this year. Now we have lower rates. We have good valuation. We have an economy that's kind of muddling along. seems like a great time for M &A. And if we do have M &A, do we have a lot more speculation in around that M &A cycle? We do think M &A is going to be a big story for 2024, probably the second half more than the first half. But we do think M &A activity is going to pick up overall. And we think that's going to boost some of the sectors, particularly probably biotech, where we expect to see a fair amount of M &A activity.

17:08Both interest rates coming down the second half of the year. A lot of companies sitting on big cash piles, a lot of private equity firms sitting on cash piles as well. We think M &A is going to be a big story of the second half of the year. So who does that benefit? Of course, biotech, but it also benefits some of the investment banks that are heavy in M &A as well. Young, why don't I get you to respond to what Chris began by saying, and that is that he sees maybe the first half of next year being a a little sloppy, maybe because of how far we've come and other factors. I don't mean to put words in your mouth, but that's what I do best.

17:42Anyhow, how do you react to that, to the idea that the first half of the year may be, quote, a little sloppy? Well, we do think there will be a bit of a slowdown in consumer spending, and we don't think that Q4 earnings are going to be gangbuster. I think a lot of it depends on how much inflation stays down. We get these consistently low readings and whether the 10-year yield stays below 4%. If we get all those in place, I think we kind of muddle along in the first few months until we see better growth prospects in the second half and until the Fed starts cutting rates. In terms of being sloppy, I think let's see what happens on the pullbacks.

18:21If breath stays pretty healthy on the pullbacks and small caps hang in there, I think I would get more optimistic. If breath starts to break down on the pullbacks, I think that would be a little bit of cause for concern. Maybe not that our thesis is no longer holds, but maybe that it might be pushed off a little bit. And some of that sloppiness that Chris talked about could be in order for a couple of months. All right. Young you, Ma, thank you so much for being with us tonight. Have a happy New Year, sir. We appreciate it. Young you, Ma of BMO. Mike, any thoughts how to trade what we just talked about?

18:55Yeah, I mean, you know, one of the things that's interesting about Young you, Ma's forecast for the coming years is that he's anticipating, you know, fewer rate cuts, I think, than the market is baking into the cake. And I think that the market could ultimately, in this instance, be a victim of its own success. I mean, just a little thought experiment. If we catch another 5 % in the S &P from here, get us up to around 50, 250-ish or so, whatever, get into those kinds of numbers, it's hard to imagine that you're going to see the kind of rate cuts that everybody's anticipating. So that might be part of what he's forecasting is that if the whole picture is a little bit better than people think, then you're just not going to get those rate cuts.

19:33And then you could end up getting the sloppiness that Chris is forecasting a little bit later. Steve, button it off for us. Yeah. So I think you could look at it a number of different ways. The path is definitely lower in rates. It depends on when it's going to happen. But when you look at where the market is, I don't think the Fed is taking the cues from the market anymore, nor would they say that they ever did. They're taking the cues from inflation. And I think you're going to see if the market does have a sloppy setup in the first month or two, what will people do? They'll sell the small caps and they'll go right into the safe havens.

20:07I think ultimately maybe a test in January, but ultimately the market's moving higher. All righty. Coming up, will there be more Microsoft magic in 2024? Shares up big in 23. But can the climb continue into the new year? The latest price target hike out of Wall Street next. plus transport stocks having a very merry holiday season. The group climbing nearly 8 % in December. So which names can keep this trade trucking higher? We will debate that when Fast Money returns in two minutes. You're watching Fast Money here on CNBC. We'll be right back.

20:51Welcome back to... Oh, no, now I can talk. Welcome back to Fast Money, everybody. Time for our call of the day. It is on Microsoft. The stock on a tear this year, up 60 percent. And one analyst says it could just keep on climbing. Wedbush's Dan Ives says Microsoft is having its iPhone moment with its AI monetization. Ives raising his price target to 450 from four and a quarter and maintaining his outperform rating on Microsoft, predicting that its AI tool co-pilot could add another$25 billion to the top line by 2025. What do you make of the call, Courtney? So I think with Microsoft, I think there's really three things that it can continue to do well.

21:33Number one is they're very likely one of the best who can benefit from AI, which is clearly why this price increase is happening. But also with the Activision acquisition, you're going to likely see some additional opportunities in gaming. And also when it comes to PCs, everybody bought their PCs during COVID. There's about a three-year cycle. That's coming up again, and I think that's likely going to benefit Microsoft as well. So I think there's a lot of reasons that they can do well. All of that being said, though, it's not something I'm overly waiting right now because it is one of those companies that has done so well this year.

22:01I absolutely want to own it, but I still think there's a lot of other opportunities. I don't want to kind of beat a dead horse. I know we've talked a lot about our small caps and our real estate. There's other areas I would add money to, but I definitely still want to own Microsoft. Mike, let me turn to you and note that in our Delivering Alpha survey that we referenced just in the last segment, 39 percent say Microsoft is the best big cap tech stock to invest in for AI. And 44 percent, two out of five, say Microsoft will be the best performer in the market out of that magnificent seven in 2024.

22:33Your thoughts? Yeah, I mean, kind of to Courtney's point, I think at 30 times, that's the only challenge. I mean, it's usually going to trade at a significant premium to the market. It does right now at about 30 times versus, let's call it 20. But this is also a company that has nearly doubled EPS over the course of the last five years, cash flow generation, huge moat, and a great way to leverage AI across their platform. You know, I think it's often very difficult in situations like this. You know, this is a great company. Is it a great price? No. Is it a fair price? Yes. And I think that's a good enough reason to stay in it if you own it.

23:09or to consider buying it if you don't. We talked, Mike, last night about sort of core holdings, stocks that ought to be in most diversified portfolios. Is Microsoft one of those in your book? Yes. Yeah. And I think the short, sweet answer to that is yes. I think that is. I think Alphabet is. And Meta, speaking right now on the tech side, we're obviously going to be getting a lot of financial earnings coming up. I mean, that's really going to be the news over the course of the next couple weeks, I think. And that is actually kind of underperforming this year. And I think it's possible that if we're going to start to see an area to rotate into, that's one that you could take a look at.

23:45So that would include names like JP Morgan and things like that. Chris, quick thought either on Microsoft or on big cap tech generally. Yeah, big cap. What we like is we like software. We think software is going to outperform hardware. You have a lot of stability. You have great fundamentals. Believe it or not, Microsoft is still under-owned by a lot of institutions. and so you could see some upward pressure because of that. And overall, we think it's a good call. But really, that software versus hardware, the stability, and the fact that it's just not a crowded trade, believe it or not. And they are software.