Market 12/18: Stock market surges with high concentration risk

Dow Jones and S&P 500 hit new highs in 2023

Investors became excited last week after Fed expected to implement 3 rate cuts in 2024, amid declining inflation.

Dow Jones has continuously hit new all-time highs for 11 years, surpassing the 1989-2000 period.

Over 60% of S&P 500 stocks hit new highs in 20 days.

Nearly 47% of stocks in the S&P 500 index have RSI above 70, the highest in 32 years according to Goldman Sachs.

RSI (Relative Strength Index - Relative Strength Index) measures the magnitude of a stock's price changes.
→ RSI > 70 = signal that stocks are “overbought” (overbought), driving their values high.

FYI: Hedge funds shift to short USD positions for the first time since September due to belief that Fed will pivot soon.

However, the US stock market has quite high concentration risk when:
- The 7 largest companies account for 30% of the S&P500 index value:
- Stock investment returns from company groups as follows:
  - Magnificent 7 group: +75%
  - S&P 500: +23%
  - S&P 493 (excluding Mag 7): +12%

Chicago Fed President Goolsbee: “Confused about the market's reaction”.

Chicago Fed President Goolsbee: “Still too early to declare victory over inflation”.

Goolsbee optimistic about soft-landing but emphasizes “2% inflation target”.
On Friday, Williams said a rate cut in March is “too early” but Goolsbee does not rule out this possibility (per WSJ).

Former FDIC Chair Sheila Bair also says the market is too optimistic ahead of Fed statements.

Read more: market-guiding role in statements by Fed members.

30-year mortgage rate drops below 7% for the first time after 4 months

Home purchase mortgage costs have fallen for 7 consecutive weeks as investors expect Fed rate cuts.

However, the current average monthly home payment cost still hits record high at 3,322 USD/month (~40,000/year).

Average rent cost 2,184 USD/month, equivalent to ~ 43% average after-tax income.

→ Home buying for Americans has never been this difficult.

With mortgage rates easing, housing supply is expected to recover quickly.

However, current housing supply is lower 37% than the long-term average.

Supply scarcity is the main factor driving up home prices alongside high interest rates.

But currently the Fed is only expected to cut rates 3 times in 2024. → High interest rates may continue to challenge the real estate market....

Red Sea Tensions: Oil Prices Surge as Shipping Routes Suspended

On 12/09, Yemen's Houthi rebels threatened to attack any ships passing through the Red Sea heading to Israel.

Houthi declared they will continue attacks until Israel stops attacking Gaza.

Oil prices rise back above 77 USD/barrel (after previous price declines) due to major shipping routes through the Red Sea being suspended.

Most of the Red Sea is closed, a key route transporting about 8.8 million barrels of oil/day and nearly 380 million tons of goods.

International shipping is rerouting around the Cape of Good Hope => increasing about 40% shipping costs and distances.
War risk insurance premiums are also rising sharply: The London insurance market has expanded the scope of high-risk areas following recent attacks.

46 containers have now rerouted around the Cape of Good Hope instead of through the Red Sea.

All futures contracts on the Shanghai Containerized Freight Index rose the maximum 10% today (Monday 12/18).

High-demand jobs seeing wage increases up to 24%

Despite signs of cooling in the labor market, wage growth remains attractive in some sectors:

Customer service director assistant (24%).
Hairstylist (22%).
Professional plumber (21%).
Auto mechanic (21%).
Career coach (Job coach) (21%).

However, there is a slight change in the wage growth structure compared to the previous period:

Wage growth for job-hoppers (blue) is declining faster than for those staying in jobs (orange) -Atlanta Fed.

Other news:

Broadcom enters top 10 largest US companies after stock surges in 2023.

SenseTime stock drops sharply 14% after co-founder of this AI company suddenly passes away.

Bankruptcy filings surge since Fed began raising interest rates, with 700 cases in November.

China: In the past 2 months, the government has injected the largest amount of liquidity into the market since 2016 — to boost economic recovery.

North Korea launches a ballistic missile (ICBM) after condemning the US's 'provocative' move (when the US sent a warship to North Korea).

Adobe and Figma cancel $20 billion merger deal after regulatory scrutiny.

Events this week:

November Building Permits - Tuesday
Consumer Confidence Index - Wednesday
Existing Home Sales - Wednesday
Q3/2023 GDP - Thursday
November PCE Inflation - Friday
New Home Sales - Friday