XOM : Answer To Weak December Rally ?
In my Tuesday post, I have shared that US market rally might have started already (click here ! to read, repost to share ok).
Arrived at the conclusion by:
-
Tracing the S&P 500 index for the past 5 years.
-
Focus on 3 months period - November to January.
Apart from 01 Nov 2021 to 31 Jan 2022, where the S&P 500 trended lower, the other 4 periods were upwards trending.
Today, I came across an insightful post about past S&P 500 rallies and the impending one or the extend of it.
Sharing it here for everyone’s hindsight & benefit. Let’s go !
Currently, investors have a challenge in betting on the usual stock market rally that will usually arrive after a presidential election.
To date, the S&P 500 index is on track for one of its best starts ever (see above) and history might not be a reliable reference this time.
Why ?
Buying US stocks into year-end following a vote is the classic trading playbook.
According to data compiled by $Deutsche Bank AG(DB)$ :
-
Historically, the S&P 500 has posted a median return of +5% from election day (in November) to the end of the year.
-
Even the riskiest pockets like small-capitalization companies will catch a bid in the rising tide.
However, 2024 cannot be regarded as a “classic” election year.
It’s because
-
The S&P 500 index is already up +25% in 2024 so far.
-
Not forgetting that it has leapt +24% in 2023 as well.
This puts the index on pace for its first back-to-back years with more than +20% gains since the late 1990s.
With sky high indexes, it’s only natural that stock prices are very high too.
After all, the S&P 500 is trading at more than 22x projected 12-months earnings compared with (historic) average reading of 18 in the last decade. (see above)
Positioning data also reveals that traders are already heavily invested in stocks.
Reading in between the lines, it implies that there might be a limit on how much more investors are (a) able and/or (b) willing to throw into stocks.
US 10-years Treasury - from 2018 onwards
Core PCE rose in September 2024
Familiar foes from the past, like (a) rising bond yields and (b) threat of persistent inflation (see above), loom in the background, setting up the stock market for a potentially quiet holiday season, when compared to the excitement often seen in past election years.
Steward Partners, Executive MD, Eric Beiley shared his take on the S&P 500 index :
-
With elevated valuations and the S&P 500 just breached the 6,000 level, US market will creep higher, from here.
-
A big year-end rally is not on the card.
-
It’s because rising yields keep investors at bay.
Interest Cut ?
The Fed has lowered interest rates twice in September and November 2024 respectively.
Recently, central bankers indicated that they are not in a hurry to go further. (see below)
After Donald Trump won the presidential election, US Treasury yields hit multi-month highs.
His ‘promise’ of economic actions (a) to levy huge tariffs and (b) mass deport of low-wage undocumented workers could increase inflation and slow growth.
If and when exercised, it would reduce the Fed’s scope to cut interest rates.
This is why Wall Street strategists have dialed back their rate reduction expectations since Trump’s election victory.
This is a real book, available for purchase at Amazon
According to Stock Trader’s Almanac:
-
The 6 months from November to April are historically the best part of the year for US equities.
-
This is because companies and pension plans tend to increase their stock buying starting from November.
-
However, those year-end rallies typically are not as robust, when the S&P 500 has already risen at least 20%.
According to data compiled by Bloomberg, since the 1970s the average return from now (November) to 31 December, has been roughly 1.0%.
Back to present.
Current bull-market rally has gone far beyond these levels.
The S&P 500 is up almost +70% since bottoming in October 2022.
According to $Bank of America(BAC)$, Hd of US equity & quantitative strategy, Savita Subramanian:
-
This will curb gains into late December.
-
Sentiment and positioning based on at least 5 indicators have grown dangerously bullish, leaving less room for positive surprises, she wrote in a note to clients on 15 Nov 2024.
Heavy Hedging
Some of the riskiest parts of the market are showing signs of weakness already.
Small-cap stocks, for instance, have erased most of their post-election rally as concern grows about the Fed’s interest rate path.
Uncertainty over higher borrowing costs is prompting investors to hedge against sharp declines.
According to 22V Research’s Kevin Brocks:
-
Demand for far out-of-the-money put options on (1) the S&P 500, (2) technology-heavy Nasdaq 100 Index and (3) small-cap Russell 2000 Index, has risen to levels last seen during the heavy volatility ahead of the election.
That said, the rally is not necessarily in jeopardy just because there’s growing speculation that the market has run too far.
HSBC Bank, Chief multi-asset strategist, Max Kettner commented:
-
Valuations and investor sentiment can stay frothy for weeks, even months before stocks suffer a significant drop.
-
There are very few reasons to suggest a year-end rally has already been front-loaded.
Citing EPFR Global data, Bank of America has noted that:
-
Investors have been funneling money into stocks.
-
They have pumped $16.4 billion into US equities in the week through 20 Nov 2024.
-
Marking the 7th consecutive weekly inflow.
The optimism isn’t entirely surprising. (see below)
According to Birinyi Associates:
-
Historically, the S&P 500’s advance over the past 2 years is not even half of the +143% average gain in the 16 prior bull runs since 1945,
Plan B ?
In the face of a possible muted December rally, what is the Plan B?
On stock picks, it would be “logical” to refer to President Trump’s campaign themes.
One that stood out was his stance to (a) boost fossil fuel production and (b) reverse climate policies & regulations aimed at reducing US carbon emissions. (see above)
Below were Mr Trump’s pledges to Americans during his campaign:
-
Starting on Day 1, he will approve new drilling, new pipelines, new refiners, new power plants, new reactors, and we will slash the red tape.
-
To further defeat inflation, he plans to terminate the Green New Deal, which he calls the Green New Scam.
-
We are going to make sure that (offshore wind) ends on day one. he is going write it out in an executive order.
Focus for energy sector that is cyclical in nature will be restored immediately.
$Exxon Mobil(XOM)$ will benefit from the spotlight shining overhead:
-
As one of the largest integrated energy companies in the world, Exxon Mobil benefits from a diversified portfolio of assets across upstream, downstream, and chemical segments.
-
Its strong financial position and consistent dividend payouts make it a reliable choice.
On many occasions, Mr Buffett have mentioned that share prices do not always rationally reflect the value of a business.
To know a company’s “value”, one approach is to study the interaction between a company’s share price and its earnings per share (EPS).
Exxon Mobil - Share Price / Earnings per share
In the case of Exxon, during 3 years of share price growth, Exxon Mobil moved from a loss to profitability. (see above)
That would generally be considered positive and share price is expected to rise.
Stock Price.
-
Exxon share price has risen +90% over three years, well in excess of the market return.
-
However, returns have not been quite so good recently, with shareholders up just 20%, including dividends.
-
As with other oil stocks, Exxon will rise and fall with crude oil prices.
-
While Exxon looks good based on fundamentals, crude oil prices may suddenly plunge, taking ExxonMobil stock down, too.
-
Similarly, a rise in oil prices may help lift the stock.
I have two concerns. What if OPEC decides to lift the self-imposed oil production cut and resumed full capacity output in 2025 ? What if the Chinese economy does not recover by 2025 ?
Must Read: Click on below titles to access. Repost to share, Like as encouragement ok. Thanks.
-
Do you think the coming Christmas rally will be vibrant or dull & lacklustre ?
-
Do you think XOM stock price will fall if both US & OPEC increased oil production ?
If you find this post interesting, give it wings! ️ Repost and share the insights ?
Do consider “Follow me” and get firsthand read of my daily new post. Thank you.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
Thank you for sharing. I happen to be interested in buying this book recently
Pls "Re-post" so that more get to know. Tks! Rating is important (to me).
Consider "Follow me" and get first hand read of my Daily new posts? Thanks!). Tks!!
Great article, would you like to share it?