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The Market May Soon Turns its Focus Back to Congress

The Market May Soon Turns its Focus Back to Congress

December 26, 2023

Moderating inflation, a dovish-sounding Fed and favorable seasonality have combined to drive stocks higher for eight straight weeks since the October low.

Despite these gains, I remain bullish toward the market in the long run despite the recent advance. That said, there is one thing that I suspect could cause investor heartburn in January: Congress.

What no one is talking about – but will be soon, I suspect – is the fact that we already have another budget fight and a possible shutdown looming.

Part of the new Speaker’s compromise in November was to fund a continuing resolution (CR) just like the one that got his predecessor, Kevin McCarthy, booted. The other part, however, had Mike Johnson promising conservatives in his own party that instead of a single omnibus bill, the House would craft the next budget via regular order, meaning 12 different funding bills – something it hasn’t done in years (and hasn’t accomplished on time in nearly 3 decades).

Building an entire federal budget by way of the regular committee process, debate, markups, etc… is there time?

About half those 12 bills are due by late January and the rest in early February, or else government funding runs out yet again.

The problem is, prior to the first CR deadline of the new year on January 19, the House is in session for only two weeks. And prior to the second deadline of February 2, which includes the military budget that will undoubtedly include the challenging topics of both Ukraine and Israel, Congress is in session for only one more legislative week!

What are the possible outcomes for the new Republican Speaker? If Johnson sticks to his guns and fights for budget cuts he has promised to conservatives in his party, the market will not like the game of chicken with democrats that will inevitably result.

If he caves to the reality that his party only controls one branch and thus passes a longer-term CR to fund government for the rest of the year, doesn’t he risk being ousted just like McCarthy?

Turning to markets, all short-term indicators reside in heavily overbought territory. Both the percent of stocks about their 10-week average and the percentage of stocks making new highs have soared above 80%, from oversold lows well below thirty just two months ago.

The longer-term indicators, it should be noted, are not overbought. One that I favor, such as the NYSE Bullish Percent (percentage of stocks on Point & Figure buy signals), has been broadening and looks increasingly healthy. This is why I wrote last week that I’m still bullish on stocks for 2024, and that perhaps a profits boom is ahead of us.

That said, no market moves in a straight line. If recent gains are to be digested, some of that process could start in coming days or weeks despite a traditionally favorable seasonal backdrop.

What to do, then, is based on one’s investment timeframe.

Although I often write about the market’s short-term trading posture, we don’t typically trade that way. With a longer-term outlook for most of our clients, our job is to help prepare them for what lies ahead -- in this case, possible turbulence in the near future. We look to charts to help develop fundamental conclusions by asking ourselves: what could stock market action be telling us?

With the longer-term in mind, I still suspect the recent market advance may be telling us that next year’s earnings estimates may be too low.

But with short-term indicators quite stretched at the moment, what might be a catalyst for a brief, uncomfortable pullback?

Remarkably, no one is talking about Congress and the nasty budget fight that might lie just ahead.

I suspect they will be. Soon.

And there’s your possible catalyst for a short-term pause in this rally.