US Stocks Near Record Highs, Tesla's Outlook, and Global Economic Trends | Daily Market Analysis

Key events:

• USA - 5-Year Note Auction
• USA - API Weekly Crude Oil Stock

On Tuesday night, US stocks displayed minimal changes as investors closely monitored the benchmark index's trajectory toward a record high.

In the regular session on Tuesday, both the Dow and S&P 500 recorded a 0.4% increase, bringing the latter within 0.5% of its closing high, a record established in January 2022. The tech-heavy Nasdaq Composite advanced by 0.5%, while the more focused Nasdaq 100 rose by 0.6%, achieving a new all-time high and a record closing level at 16,878.46.

These gains add to the already robust performance of the stock market in the current year. With only three trading sessions remaining in 2023, the Dow and S&P 500 are poised to conclude the year with gains of 13% and 24%, respectively. The Nasdaq Composite has experienced a substantial surge of 44%, outperforming due to the resurgence of mega-cap technology and the increasing popularity of artificial intelligence.

Currently, the stock market is in the midst of the so-called "Santa Claus rally," encompassing the last five trading days of the outgoing year and the first two of the new year. Historical data from the Stock Trader’s Almanac, dating back to 1950, indicates that the S&P 500 has seen an average increase of about 1.3% during this period.

Meanwhile, Morgan Stanley has reiterated its Overweight rating on Tesla Inc. (NASDAQ: TSLA) and maintains a 12-month price target of $380.00 for the stock, anticipating another potentially volatile year for the electric automaker.

Despite forecasting challenges for Tesla in 2024, with the potential for the gross auto margin to reach 10% and the core operating margin temporarily turning negative, Morgan Stanley expresses optimism. The investment firm acknowledges Tesla's diverse portfolio, emphasizing that it is not merely an auto company but also an AI company.

Even amidst a challenging 2023, marked by a 2-million-unit safety recall and negative revision risks, Morgan Stanley remains bullish on Tesla. A substantial 77% of Morgan Stanley’s valuation of the stock is attributed to Network Services, Mobility, 3rd-party battery/FSD licensing, Energy, and Insurance, highlighting the broader aspects of Tesla's business beyond its core automotive operations.

Japan’s Nikkei 225 emerged as one of the leading gainers for the day, posting a notable increase of 1.1%. The index received a boost from the summary of opinions from the Bank of Japan’s December meeting, revealing a consensus among central bank members for the maintenance of ultra-loose monetary policy in the foreseeable future.

The dovish stance of the Bank of Japan, coupled with indications of resilience in the Japanese economy, propelled local stocks to a remarkable rally throughout the year. The Nikkei stood out as the best-performing stock index in Asia for 2023, registering a substantial 30% increase and outpacing many of its global counterparts. By comparison, the S&P 500 recorded a gain of approximately 24% for the same period.

However, the question of whether the Nikkei could sustain its outperformance in 2024 remained uncertain, particularly as the Bank of Japan signaled its intention to eventually initiate policy tightening in the coming year. Moreover, Japan's economy faces growing challenges from a slowdown in its major export markets, primarily China.

The Dollar Index dipped to 101.45 from 101.70, marking its lowest finish since July 27.

Conversely, the USD/JPY pair edged higher to 142.45 (from 142.35) after Japan’s November Jobless Rate remained unchanged at 2.5%. The Dollar reached an overnight high at 142.67 JPY before easing.

The Australian Dollar (AUD/USD) broke above the 0.68 cent resistance level, closing at 0.6822 in New York trade. Meanwhile, New Zealand’s Kiwi (NZD/USD) extended its climb above 0.63 cents, concluding at 0.6330 (from 0.6285).

As 2023 draws to a close, many investors see it as a concluded chapter, while those still engaged find little in the tea leaves to offer a compelling sell signal.

Despite the looming concentration risk in Mega Tech, and with yields maintaining a downward trajectory, bears face a formidable challenge in mustering enough momentum to take on the bullish market sentiment. The endurance of the positive outlook, particularly regarding potential Federal Reserve rate cuts in the new year, remains an unresolved question that may find clarity with the early 2024 reading on US Non-Farm Payrolls.

Certainly, 2023 has proven to be a positive year for the stock market, challenging the negative recession forecasts of some skeptics on Wall Street. An unexpected turn of events defied predictions, highlighting the potential impact of artificial intelligence as a significant force counteracting the effects of aggressive monetary tightening.

In stark contrast to the previous year, 2023 underwent a remarkable transformation. The pivotal role played by the November/December "everything rally" became evident, marking a period in which various assets achieved notable gains. This achievement is particularly noteworthy, given that cash emerged as one of the favored asset classes.

As we approach 2024, a critical question for market participants revolves around the destiny of the $5-6 trillion currently held in money market funds. The decision on how this substantial sum will be utilized or invested represents a multi-trillion-dollar query that will shape the dynamics of the stock market, potentially paving the way for a record-setting opening for the S&P 500 in the new year, unless achieved this week.