Trump meets with oil execs to talk Venezuela, plus stocks rise following December jobs report

Key Concepts

• Basis Points: A unit equal to one-hundredth of one percent, used in finance to describe percentage changes in interest rates or yields.
• Non-Farm Payrolls: A key economic indicator representing the number of jobs added in the US economy excluding the farming industry.
• Intraday High: The highest price reached by an asset during a single trading day.
• Equal Weighted S&P 500: An S&P 500 index where each company has the same weight, unlike the traditional market-cap weighted index.
• Ten-Year Treasury Yield (10-Year Tino): The yield on a 10-year US Treasury bond, a benchmark for long-term interest rates.
• Basis: In options trading, the difference between the futures contract price and the spot price of the underlying asset.
• Reschedule (Cannabis): The process of moving cannabis from a more restrictive to a less restrictive schedule under the Controlled Substances Act, potentially easing regulations.
• EBID: Earnings Before Interest, Depreciation, and Amortization – a measure of a company’s financial performance.
• Carveout: An exception or exemption from a general rule or regulation.

Market Overview – December 22, 2023

The market closed with significant gains on December 22, 2023, with the Dow, S&P 500, and Russell 2000 reaching record highs. This positive momentum was largely attributed to a “relief rally” following the release of the December jobs report.

Market Performance – Specifics

• Dow Jones Industrial Average: Up 238 points (approximately 0.55%), nearing the 50,000 mark.
• S&P 500: Up approximately 0.75%, with both the standard and equal-weighted versions hitting record highs.
• NASDAQ Composite: Up almost 1%, close to its daily high, recovering from an initial dip.
• Russell 2000: Reached a new record intraday high, up about 0.7%.
• Micro Caps: Also achieved a record high.
• Dow Transports: Reached a record high.
• Bond Market: Relatively stable; 10-year Treasury yield down 1 basis point to 4.17%, and the 30-year down 4 basis points to 4.82%.
• US Dollar Index: Up slightly.

Sector Performance

• Leading Sectors: Technology (up 1-1.5%), Materials (up 1-1.5%), Utilities, Industrials, Consumer Discretionary, and Staples (all up over 1%).
• Underperforming Sectors: Healthcare and Finance.
• Notable Deals: A significant deal between Meta, Ollo, and Vistra impacted the Utilities sector.

NASDAQ 100 & Semiconductor Performance

The NASDAQ 100 showed strong gains, particularly within the semiconductor sector.

• Applied Digital (APLD): Experienced a substantial increase of 14% for the day and is up 54% year-to-date.
• Semiconductors: Outperformed other sectors within the NASDAQ 100.
• Software: Showed more moderate gains compared to semiconductors.

Economic Data & Federal Reserve Outlook

The December jobs report, while showing a weaker headline number, provided relief to investors.

• Headline Job Creation: Below 100,000, but not significantly concerning.
• Unemployment Rate: Ticked down to 3.7%.
• Wage Growth: Increased by 3.8% year-over-year.
• Economist Thomas Simons (US Bank): Emphasized the need to look beyond headline numbers, noting subdued job growth but an arrest in the accumulation of slack in the labor market. He suggested the Fed doesn’t need to act with “great urgency” to lower rates.
• Investment Strategist Rob Hworth (US Bank Wealth Management): Highlighted the report’s positive implications for consumer spending and suggested the Fed might remain on hold, awaiting further data, particularly the upcoming CPI report.
• Rate Cut Expectations: Both Simons and Hworth suggested a base case of two rate cuts in 2024, contingent on economic conditions. Simons proposed cuts in March and June, while Hworth acknowledged a wider range of potential outcomes.

Specific Stock & Company Analysis

Retail Sector Impact of Tariffs

The delay in the Supreme Court ruling on Trump-era tariffs negatively impacted retail stocks.

• Affected Companies: Kohl's, American Eagle, Under Armour, and Lululemon.
• Impact on Gross Margins: Companies cited a projected decline in gross margins due to tariff costs (e.g., Under Armour: 310-330 basis point decline; Lululemon: 580 basis point decline in Q4).
• Investor Sentiment: Investors seek clarity on the long-term impact of tariffs on consumer prices and company margins.

Cannabis – Tillray Brands

Tillray Brands reported strong second-quarter results, exceeding Wall Street estimates.

• Key Driver: Performance of the cannabis and distribution business.
• CEO Statement: Expressed optimism regarding the potential rescheduling of cannabis by President Trump, viewing it as a “consequential regulatory shift.”
• Stock Performance: Seeking momentum after a significant decline since its IPO (down approximately 96%).

Mattel Downgrade

Goldman Sachs downgraded Mattel from “Buy” to “Neutral.”

• Reasoning: Valuation concerns and a potentially tougher consumer backdrop.
• Toyotic Films: Recent film releases haven’t had the same revenue impact as the “Barbie” movie.
• Street Sentiment: Remains largely positive (9 Buys, 6 Holds, 0 Sells), with an average target price above the current stock price.

Venezuela Oil Deal & Energy Sector

The White House meeting between President Trump and oil executives regarding Venezuela’s oil reserves generated significant discussion.

• Potential Oil Supply: Approximately 30 million barrels of oil (valued at $4 billion) is potentially available.
• Trump’s Plan: To select oil companies to operate in Venezuela and negotiate deals, potentially involving $100 billion in investment.
• Challenges for Oil Companies: Security concerns, contract enforceability, and long-term investment timelines.
• Chevron’s Position: Currently the only US operator in Venezuela, operating under a Treasury Department carveout.
• Potential Supply Increase: Analysts estimate a potential increase of up to 1.5 million barrels per day over the next 12-24 months, contingent on successful implementation. Reaching the previous level of 3 million barrels per day could take 5-15 years and require over $100 billion in investment.

Upcoming Events & Data Releases

• Supreme Court Tariff Ruling: Expected on Wednesday, December 27th.
• Earnings Season: Begins with major bank reports (JP Morgan Chase, Bank of America, Goldman Sachs, etc.) on Tuesday. Also includes Delta Air Lines and Taiwan Semiconductor.
• Inflation Data: Consumer Price Index (CPI) and Producer Price Index (PPI) releases.
• Federal Reserve Commentary: Over a dozen Fed speeches throughout the week.
• Crypto Legislation: Markup sessions on crypto market structure legislation on Thursday.

Conclusion

The market demonstrated strong performance on December 22nd, driven by positive economic data and a “relief rally.” Key themes include the ongoing impact of tariffs, the potential for cannabis industry growth, and the evolving situation in Venezuela’s oil sector. Investors will be closely monitoring upcoming economic data, earnings reports, and the Supreme Court’s tariff ruling for further direction.