Typical March Performance: Second Half Better Over the recent 21 years March has been a decent performing month for the market. Average gains over the period range from a low of 0.78% by DJIA to a respectable 1.40% by NASDAQ. March typically opens positively but selling pressure and weakness tend to follow quickly thereafter with choppy trading until around mid-month. From here on the market generally rallied to finish out the month. End-of-Q1 portfolio adjustments have contributed to additional choppy trading during the last three or four trading days of March. Election year average performance is influenced by across-the-board double-digit losses in 2020, but March’s pattern is similar with weakness in the first half and modestly improved trading in the second half.
March Quarterly Options Expiration Week: S&P 500 and NASDAQ Up 12 of Last 16 March Quarterly Option Expiration Weeks have been quite bullish. S&P 500 has been up 27 times in the last 41 years while NASDAQ has advanced 25 times. More recently, S&P 500 and NASDAQ have both advanced 12 times in the last 16 weeks. But the week after is the exact opposite, S&P down 27 of the last 41 years—and frequently down sharply. In 2018, S&P fell –5.95% and NASDAQ dropped 6.54%. Notable gains during the week after for S&P of 4.30% in 2000, 3.54% in 2007, 6.17% in 2009, and 10.26% in 2020 appear to be rare exceptions to this historically poorly performing week.
Ides, Schmides – March Drawdowns <2% Rather Bullish While our 2024 outlook has remained decidedly bullish since our December “2024 Forecast: More New All-Time Highs Anticipated,” we’ve warned to “Beware the Ides of March.” That this overbought market is due for a pullback. That stuff happens in March, especially in election years (think 1980 Hunt Bros, 2000 Dotcom Bubble Pop and 2020 Covid Crash). But what does it mean if this AI-driven bull powers ahead through March without a hitch? Well, it’s bullish, that’s what. Gains beget gains and when macro forces overpower weak seasonality, those forces often gather momentum when the seasonal period ends. While there is still time left for March’s history of volatility to kick in, especially during notoriously treacherous week after Triple Witching, should the market escape the usual March retreat that would support continued robust bullish market action for the rest of 2024. When March’s drawdown is <2% the Best Six Months November-April are up 95.7% of the time, average gain 11.4%; Worst Six Months are not bad, up 69.6% of the time, 3.5% average; rest of the year is up 87% of the time, average 9.3%; and the full year is up 91.3% of the time with an average gain of 15.7%.
Homebuilder Sentiment Back to Expansion Mon, Mar 18, 2024 Earlier today, the National Association of Home Builders published its March reading on homebuilder sentiment. The headline index rose back above 50 and into expansionary territory. Albeit back in expansion, the index is only at the highest level since last July, and that is well below much of the past decade's range. The only sub-index of note was for future sales. This reading has risen month-over-month in four consecutive releases, which brings it up to match the June 2023 high. On a regional basis, homebuilder sentiment is showing as much healthier in the Northeast and in the Midwest. While in the Northeast the index pulled back from a nearly two year high, the Midwest leaped 11 points month over month to the highest level since July 2022. That one month jump is tied for the fifth largest one month increase on record. The only larger recent increases were in June and July of 2020. As for the West and South, homebuilder sentiment rose and fell, respectively. As homebuilder sentiment improves, the chart of the homebuilders, proxied by the iShares US Home Construction ETF (ITB), remains in its long term uptrend. Currently, the group remains overbought in spite of recently pulling back from its highs. Finally, we would note that although homebuilders have been mostly headed higher, on a relative basis versus the S&P 500 (SPY), ITB has weakened a bit. Taking the ratio of ITB versus SPY, the homebuilders have been on an impressive string of outperformance over the past few years. However, that ratio has made a couple of lower highs since the end of 2023. While that is not to say the longer term trend is reversing, it has at least pumped the brakes so far this year.
Why Stocks Aren’t in a Bubble “Please, God, just one more bubble.” Popular Silicon Valley bumper sticker after the tech bubble burst With stocks back at all-time highs, many are of the opinion that stocks must be in a bubble. Take note, many of these bubble callers were the same bears that fought this bull market all the way up. Now they are taking a different angle on their incorrect calls and blaming things on being in a bubble, because it can’t possibly be their fault. It must be a bubble. We disagree, as this is not a bubble. Could there be parts that feel a little over the top? Sure, the excitement toward the Mag 7 at the start of this year was maybe a bubble in how much everyone talked about these names and sure enough, we’ve seen both Apple and Tesla drastically underperform lately. But a bubble overall? We’d say no way. Let’s start at the beginning. What is a bubble? I found this definition in a Forbes article and liked it: A stock market bubble—also known as an asset bubble or a speculative bubble—is when prices for a stock or an asset rise exponentially over a period of time, well in excess of its intrinsic value. Eventually, prices hit a wall and then fall very far, very fast, as the bubble “pops.” Bubbles can occur to all kinds of assets in addition to stocks, from real estate and collectibles, to commodities and cryptocurrencies. Famous bubbles include tulips in Holland in the 1600s, the South Sea bubble in London in 1720, railways bubbles of the 1840s, the roaring ‘20s and crash of 1929, the Japanese real estate and stock market bubble of the 1980s, the tech bubble in the US of the 1990s, and the housing bubble that burst in 2008. There were many others, like baseball cards, beanie babies, and even Wordle if you ask me. Bubbles can be anything that is popular, sees tons of excitement, then the hype is simply too much and the excitement falls, likely along with prices. The other thing about bubbles is in some cases the prices drop in excess of 90% (or more) and rarely recover or can take decades to recover. It took Japan’s Nikkei 40 years to get back to new highs, while many tech bubble stocks will never recover their losses. Is the Mag 7 a bubble? Many really smart people are saying this, but let’s not forget that these companies are making money, a lot of money. How many companies in the late 1990s soared simply because they added “dot com” to their names? Trust me, it was a lot. More recently the meme stock craze of 2021 stands out as a bubble. Many of those stocks had very little value, poor earnings potential, weak future growth along with headwinds to growth, yet traders pushed them up to astronomical levels. Sure enough, many of them have come all the way back to earth. Here’s AMC for a perfect example. Back to the Mag 7 for a second. Amazon now sends you medicine and Apple is practically a bank with Apple Pay. In the past, a railroad stock was just a railroad stock, but that really isn’t the case anymore with these large companies. I will end it with a look at how much money these companies are making. They make a lot of money. A LOT OF MONEY. Here are price/earnings (p/e) ratios on the Mag 7. I’m old enough to remember the late 1990s and how p/e ratios in the 100s were normal, at least until they weren’t. P/E ratios in the 30s, 40s, and 50s are indeed pricey, but, in my opinion, to say this is a bubble is a bit much. Is the stock market over in a bubble? Some pockets are quite pricey, but overall we don’t see signs of a bubble. Small caps aren’t even at all-time highs (and are historically cheap relative to large caps) and the Nasdaq is practically flat since November of 2021. That doesn’t exactly scream stocks have gone too far, does it? We’ve been overweight equities since December of 2021 and we comfortably remain there. One of the main reasons is earnings are really strong. In fact, forward 12 month S&P 500 earnings hit another record recently. Incredibly, earnings estimates have jumped 2% the past six weeks. Yes, stock have soared the past six weeks, but with earnings improving we think this helps to justify things. Speaking of earnings, the trailing 12-month p/e ratio for the S&P 500 is about 26 versus the five year average of 23 and 10 year average of 21. Yes, stocks are a bit pricey, but by no means historically out of line. Then if you remove tech stocks from the equation, it is estimated those numbers drop another 3 points approximately, putting most stocks right in line with historical averages. One of the big reasons many claim this is a bubble is because earnings last year were barely positive, while stocks soared, implying it was all multiple expansion. As American football analyst Lee Corso would say, “not so fast my friends.” Going back to the end of 2019 though last week, the S&P 500 gained 71%. Not bad given two bear markets took place over this time. But where did those 71 points come from? Before I go there, returns can come from three places, earnings growth, multiple growth, and dividends. Breaking things down like this we found the 71% gain was: 47% earnings growth 15% multiple expansion 9% dividends In other words, that bubble came from mainly earnings and dividends. Not quite the story that loud guy on X told you, huh? I will leave you with this. Here are two recent studies that suggest the continued path for stocks is indeed higher. The past 20 weeks the S&P 500 was up 24%, which is one of the best 20-week rallies in history. I found 22 other times stocks gained more than 20% in 20 weeks and a year later stocks were higher 21 times. in other words, this strength off of the late October lows is actually consistent with the beginning of longer-term market strength, not the end of bull markets. Lastly, it has been a great start to 2024, with the S&P 500 up 8.3% as of the 50th trading day of the year (which was last Wednesday). We found 25 other times stocks were up at least 5% on day 50 and the rest of the year (so about 200 trading days) was up an incredible 24 times and up 12.6% on average the rest of the year versus the average return of 7.6%.
A Dovish Fed Signals Rate Cuts Amid a Strong Economy – That’s Bullish The Federal Reserve (Fed) left rates unchanged at their March meeting, but the headline was that the median official continues to project three interest rate cuts in 2024, each worth 0.25%-points. Going into this meeting, a big question was whether Fed members would lower that projection to just two cuts in their summary of economic projections (the “dot plot”). Keep in mind that even two cuts for an economy that’s running strong is a nice tailwind for growth. But there was concern that the Fed would signal a big shift in their thinking, spooked by two months of relatively hot inflation data. However, Fed Chair Powell pointed out that they’re not “overreacting” to recent data, just as they didn’t overreact to the soft inflation data over the prior six months. He stressed that the overall story remains the same: inflation is trending down along a bumpy path. I recently wrote about how the underlying inflation data points to more disinflation, and it’s positive that the Fed is viewing it the same way. Bullish on the Economy, But Not Worried About Inflation The details within the Fed’s dot plot were even more bullish. Fed officials upgraded their economic growth projections for 2024 from 1.4% to 2.1% (real GDP growth). That’s a big jump, and acknowledgement that the economy is strong. Their nominal GDP growth forecast for 2024 (real GDP growth + inflation) increased from 3.8% to 4.5%. Nominal GDP growth is where company profits come from, and by itself that’s positive as far as markets are concerned. Even more interesting: they increased their core inflation (core PCE) forecast for 2024 from 2.4% to 2.6%. All this to say, the Fed’s still projecting 3 cuts in 2024 – taking the federal funds rate down from 5.4% to 4.6% by the end of the year – even as they upgraded their view on the economy, and projected core inflation to remain above their target of 2%. It’s one thing to project rate cuts in the face of a slowing economy and lower inflation. But they did the opposite, and that’s a big deal. In fact, the scenario of strong growth with easing inflation that allows the Fed to ease rates is exactly what we laid out in our 2024 outlook. We’d like to think the Fed read Carson Investment Research Team’s 2024 outlook. Interest Rate Cuts Will Be a Tailwind for the Economy Powell did say that the projected interest rate of 4.6% at the end of 2024 would be higher than their long-run estimate of the “neutral rate” of 2.6%, implying that monetary policy would remain restrictive. However, the economy managed to avoid a recession in 2022-2023 despite rates at 5.4%. Even better, the economy grew 3.1% in 2023 (inflation-adjusted), well above the 2010-2019 trend of 2.4%. The labor market has been the backbone of the economy, with rising employment and strong wage growth coupled with easing inflation boosting consumption. Another positive from the Fed meeting is that Powell said they’re aware of the risks of doing too little, i.e. cutting rates too little and too late, and causing “unnecessary harm” to the labor market. They clearly want to hold on to the strong employment gains we’ve seen over the last two years. Up until last year, they were willing to risk higher unemployment if that’s what it took to quell inflation. That’s no longer the case. With inflation heading the right way (down), the Fed likely has the back of the labor market once again. At the same time, interest rate sensitive areas of the economy, notably housing and equipment investing, have been a drag on growth since 2022. You can see this in the chart below, which shows the main components of our proprietary leading economic indicator (LEI) for the US. Consumption more than offset the drag from other areas of the economy and kept the economy humming. Well, there’s reason for optimism as former headwinds turn into tailwinds. Investors, consumers, and businesses sense that interest rates have likely peaked this cycle, and cuts are coming. Or LEI indicates that the economy continues to grow along trend, if not slightly above it (zero implies trend growth in the chart below). Take housing as an example. Single-family housing activity makes up the bulk of residential investment within GDP, and that crashed in 2022 as the Fed raised rates. Housing dragged on GDP growth for nine straight quarters (through the second quarter of 2023). That shouldn’t be a surprise because housing is perhaps the most interest rate sensitive sector of the economy, and mortgage rates surged from around 4% to 8%. The good news is that single-family activity has been trending higher since late last year, as rates pull back in anticipation of rate cuts by the Fed. As of February, starts are up 35% from the prior year, and are now 27% above the 2019 average. Permits, which are a sign of future supply, are up 30% year over year and 19% higher than the 2019 average. In short, housing is likely to add to GDP growth this year. Similarly, a pullback in rates will likely boost the manufacturing sector, as businesses start to invest more in equipment and machinery. Parts of the manufacturing sector, especially defense and hi-tech equipment, are already running strong, but it’ll be positive to see broader strength. Ultimately, what matters for stocks is profits. And if the economy is strong, profits will continue to grow. The icing on the cake is that we could potentially see rate cuts boosting the most cyclical areas of the economy.
Best Six Months Ends in April After 5 months of solid gains, are markets ready for a pause? Bullish Presidential Cycle Sitting President Pattern flattens out the mid-February to late-March seasonal retreat considerably without 2020 in the average. April is the final month of the “Best Six Months” for DJIA and the S&P 500. From our Seasonal MACD Buy Signal on October 9, 2023, through (March 21, 2024), DJIA is up 18.4% and S&P 500 is up 20.9%. Fueled by interest rate cut expectations and AI speculation, these gains are approximately double the historical average already and could continue to increase before the “Best Months” come to an end. This AI-fueled bull market has enjoyed solid gains since last October and will likely continue to push higher in the near-term, but momentum does appear to be waning with the pace of gains slowing. With April and the end of DJIA’s and S&P 500’s “Best Six Months” quickly approaching we are going to begin shifting to a more cautious stance. We maintain our bullish stance for 2024, but that does not preclude the possibility of some weakness during spring and summer.
5-Month Streak Looks Like A Secular Bull Market Not only is it bullish for April and the rest of the year. When November, December, January, February and March are up stocks have been in a secular bull market that extended to at least the next year. Note a touch of weakness in Q2-Q3 in the Worst Six Months and some huge Q4 rallies. Last 9 months of the year up all 11 times, average gain 11.9%,
Market Historically Strong Ahead of Good Friday Good Friday is the one NYSE holiday with a clear positive bias before and negativity the day after (Stock Trader’s Almanac 2024, page 100). DJIA, S&P 500, NASDAQ, and Russell 2000 all have solid average gains on the three days and full week (shortened) before Good Friday. NASDAQ has been notably strong, up 21 of the last 23 days before Good Friday with an average gain of 0.79%. NASDAQ declines occurred in 2017 (–0.53%) and 2022 (–2.14%). However, the day after Easter has a weak longer-term post-holiday record. The S&P 500 was down 16 of 20 years from 1984-2003 on the day after Easter while it has been up 13 of the last 20 years. Post-Easter weakness has been generally short-lived with solid average gains 2- and 3-days after.
