Why a Strong Start to 2024 Is Bullish for the Rest of the Year “Just a little bit more.” -John D. Rockefeller, founder of the Standard Oil Company and one of the richest men ever, when asked about how much money it takes to make one happy. On the heels of about a 25% gain for the S&P 500 last year, stocks are up about 10% already in 2024. The logical question is, how much is too much? Well, like Rockefeller said long ago, maybe just a little bit more could be in store for the bulls. For starters, the S&P 500 is up 17 of the past 21 weeks and up 27% over that timeframe. Never in history has that happened before, so we hope you’ve enjoyed this incredible run—it might not happen again for a very long time. The good news? More gains could be coming. We found six other times stocks gained at least 25% in 21 weeks and sure enough, stocks were higher a year later each time with an average return of more than 21%. Stocks are about to gain each of the first three months of the year and we found that the rest of the year (so final nine months) were higher an incredible 19 out of 20 times after previous instances! Adding to the fun, April and Q2 tended to do even better as well. Let’s not forget stocks soared in November and December as well, so they are up five months in a row heading into the usually bullish month of April. Sure enough, stocks tended to do better in April and Q2 after such long win streaks. Lastly, the rest of the year (so the final nine months) have never been lower when there has been at least a five-month win streak heading into April. What about when Q1 gained 10% or more? Take note, 2024 isn’t there yet, but it is close with a couple of days to go. April and Q2 aren’t anything extra special, but the rest of the year was higher 10 out of 11 times, with only 1987 lower. 1987 was also up a record 20.5%, so that is a little different than the ballpark 10% in 2024. The average took a big hit those final nine months due to 1987, but the median was a rather solid 8.2%. Looking more closely at the above, what got my attention was only 1976 and 2012 were election years and the returns the rest of those years were only 4.6% and 1.3%, respectively. Lastly, we’ve seen very broad-based participation in this rally. Many large institutional research shops continue to (incorrectly, in my opinion) claim that only a few stocks are going higher and pulling the market along. I believe this isn’t true and really, never was. We’ve been pushing back against this narrative for a year now. I specifically remember in May of 2023 being on TV and the other guest said something to the tune of, ‘…only seven stocks are going up, the overall market will crack the rest of this year due to this.’ On air I quickly noted how various advance/decline lines were making new highs and it simply wasn’t true. We apparently disagreed then and we disagree now. ♂️ Looking at last week, on Thursday we saw a huge surge in S&P 500 stocks hitting new 52-week highs. In fact, 118 hit a new high, the most in three years! I found 13 other times we saw an initial surge in new highs like that and wouldn’t you know, the S&P 500 has been higher a year out 13 of 13 times (not very unlucky if you ask me) for an average return of 12.0%. That’s enough for now. We’ve been overweight equities since December 2022 and we’ve also been in the camp the economy would avoid a recession that whole time. We remain there and many of these studies do little to change my optimistic outlook. Many people are on Spring Break this week and next, so if you are taking some time off, have fun! ☀
Good Friday Boosts End Q1 But Weakens Q2 Start Over the past 34 years since 1990 the last trading day of Q1 has been plagued by end-of-quarter portfolio restructuring. DJIA is down 21 of 34 with an average loss of –0.24%. S&P is down 19 of 34 with an average loss of –0.04%. NASDAQ is up 20 of 34 with an average gain of 0.21%. Russell 2000 is up 25 of 34 with an average gain of 0.32%. When the day before the Good Friday market holiday is the last trading day of Q1 it’s a boost. DJIA is up 7 of 10, average 0.18%. S&P is up 7 of 10, average 0.29%. NASDAQ is up 6 of 8, average 0.51%. Russell 2000 is up 6 of 7, average 0.47%. First trading day of April/Q2 has a more positive history. Since 1990, DJIA is up 23 of 34 with an average gain of 0.21%. S&P is up 22 of 34 with an average gain of 0.13%. NASDAQ is up 18 of 34 with an average loss of –0.21%. Russell 2000 is up 17 of 34 with an average loss of –0.24%. Easter Sunday the day before the first trading day of April/Q1 has the reverse effect, it’s bad. DJIA is down 7 of 10, average –0.44%. S&P is down 6 of 10, average –0.48%. NASDAQ is down 7 of 8, average –0.84%. Russell 2000 is down 7 of 7, average –1.12%.
Here Comes the Usually Bullish Month of April “April is a moment of joy for those who have survived the winter.” –English writer Samuel Johnson The bull market continues and with one day to go in the first quarter, it is looking like more gains for stocks this month. The S&P 500 will also be up a very impressive five months in a row. As we turn the calendar, we are now staring at the usually bullish month of April. Here’s the high level thing to know. The S&P 500 in April has averaged 1.5%, the second best month of the year (only November is better). It is also the third best month the past 10 years and it is the fourth best month the past 20 years and in an election year. Be aware that a lot of the gains in April historically take place the first part of the month. As long-time followers know, we’ve been quite bullish on both the stock market and the economy for well over a year now. Could stocks fall in April? Sure, after the run we’ve had anything is possible, but the odds do favor more green numbers. As we mentioned in Why a Strong Start to 2024 Is Bullish for the Rest of the Year, a big start to a year tends to see continued gains the final nine months. What is interesting is in many cases, a big start to a year means April will outperform as well. For example, when stocks are up the first three months of the year, April is up 1.8% on average, better than the average April gain of 1.5%. When the S&P 500 gained 10% during the first quarter (which might happen with a late rally this week) then April didn’t do quite as well, up 1.1% on average, but still higher at least and a pretty good number if you annualize it. Turning the page from April, in the quote above from Samuel Johnson winters are portrayed as usually rough, but it has been a pure delight for investors this winter, as the S&P 500 is up five months in a row. We found the past 28 times the S&P 500 had a 5 month win streak it saw higher prices 12 months later 26 times, with above-average returns to boot. We want to wish everyone a happy Easter holiday and if you have Spring Break this week or next week, remember to wear sunscreen!
Q1 2024 Asset Class Performance + Big Winners and Losers Thu, Mar 28, 2024 The first quarter of 2024 ended with the S&P 500 (SPY) posting a total return of 10.4%. That was good enough to beat the Tech-heavy Nasdaq 100 (QQQ) and the blue-chip Dow 30 (DIA) on the large-cap front, and it also beat both mid-caps (IJH) and small-caps (IWM). The weakest of the various US index ETFs in Q1 was the small-cap value ETF (IJS), which was up just 0.06%. Looking at sectors, it was Energy (XLE), Financials (XLF), Communication Services (XLC), and Industrials (XLI) that posted double-digit percentage gains, while Real Estate (XLRE) was the only sector in the red with a decline of 0.65%. Outside of the US, there were some winners like Italy (EWI) and Japan (EWJ) and losers like Brazil (EWZ), Hong Kong (EWH), and China (MCHI). Commodity ETFs saw some big gains in Q1, although natural gas (UNG) fell sharply. While Treasury ETFs were up slightly in March, they finished Q1 slightly in the red. Below is a look at the average performance of Russell 1,000 stocks in Q1 broken out by sector. As shown, Energy stocks averaged the biggest gains in Q1 at 11.56%, followed by Industrials (10.08%) and Financials (9.61%). Notably, Tech stocks averaged a gain of just 4.86%, while Communication Services and Real Estate stocks averaged declines. Below is a look at the 30 best performing Russell 1,000 stocks in Q1. NVIDIA (NVDA) topped the list with an 82.5% gain, but surprisingly, a Utilities stock (VST) ranked second with a gain of 80.8%. AppLovin (APP), Shockwave Medical (SWAV), and Vertiv (VRT) rounded out the top five. When we crossed the list of big Q1 winners with our Bespoke AI basket, it's interesting that just three of the top thirty stocks are on our AI list: NVDA, VRT, and PSTG. There were plenty of non-AI and non-Tech stocks up big in Q1, like Williams-Sonoma (WSM), Crocs (CROX), Kellogg (KLG), Spotify (SPOT), and DoorDash (DASH). Not everything went up in Q1. Roughly a third of the Russell 1,000 finished the quarter in the red, while there were 49 stocks in the index that fell more than 20%. Below are the 30 stocks that did the worst in Q1, led by New York Community Bancorp's (NYCB) decline of 68.5%.
Three Things That Just Happened That Are Great News for Bulls “We may not know where we are going, but we better know where we stand.” –Howard Marks, Co-Founder of Oaktree Capital Management Following the huge 11.2% rally for the S&P 500 in the fourth quarter of last year, the index has given us an encore performance in the first quarter with a 10.2% gain. Big gains like this in Q1 aren’t very common. Only 11 times has the S&P 500 gained more than 10% in the first quarter. But the good news is what happened next tended to be good for s. April gained 1.1% on average following those 11 big first quarters, not quite the average 1.5% gain, but not a bad number by any means. Looking at Q2 the returns get a tad better, and the rest of the year has been higher 10 out of 11 times with a solid 8.2% median return. Yes, the one time things didn’t work out was in 1987, but note that stocks were up 40% for the year in August back then, so that was a much more stretched rubber band than now. The bottom line, a big Q1 could be a clue the bull market is alive and well. If a 10% Q1 was rare, let’s now talk about back-to-back double digit quarters. We are looking at only the eighth time that has ever happened and the first time since Q1 2012 (also an election year). The one and two quarter returns aren’t much to get excited about (but after a huge move, some type of consolidation is perfectly normal), but a year later stocks were higher six out of seven times and up 12.1% on average. Again, this is likely a positive sign of continued strength from stocks. Last and certainly not least, here’s one of my favorite indicators. This is called the December Low Indicator and it is fairly straightforward. When the S&P 500 doesn’t close beneath the December low close in the first quarter, good things have tended to happen the rest of the year. The opposite, of course, is when the December lows are violated in the first quarter. To refresh your memory, last year they didn’t break the December low and it was a great year, while a break in early 2022 was one subtle clue that the odds were elevated that the rest of the year could be dicey. Given that stocks didn’t break their December low this year, this is one less worry for sure. Interestingly, since 1950, stocks held above the December lows 37 times while they broke the lows 37 times. Talk about even-steven. Those are some pretty big sample sizes, and sure enough, the results are quite conclusive. Those 37 times the December lows held? The full year was up an incredible 35 times and up an average of 18.8%. The times it failed? The full year was down 0.2% on average and higher less than a coin flip. If you want to investigate things more closely, here are all 37 times the S&P 500 held above the December lows. I added what happened the rest of the year (so the next three quarters) as well, and once again, strong performance was quite normal. We get it, anything could happen from here. But the truth is it would be abnormal to see a massive bear market and horrible year for stocks this year. Here’s the other side to things. What happened when the December low was violated? Once again, the full year and the next three quarters’ returns were much weaker. Just a quick glance and some of the worst years ever saw the December lows broken. Years like ’73, ’74, the tech bubble, ’08, and ’22 all made this infamous list. Odds are, as you read this, I will be somewhere in wine country out in California (probably Calistoga). You caught me. I wrote this one a few days early, so I’m not overly concerned given this potentially bullish development. I’m more into enjoying a very laid-back part of the country and some of the best food from the best chefs in the world. But starting next week I’ll be focusing on all of this more closely. Or, as Howard Marks said in the quote above, we don’t know where we are going, but we do know we stand on potentially a better backdrop for stocks than most think.
April Ends Best Six Months #1 DJIA April is the final month of the “Best Six Months” for DJIA and the S&P 500. April is #1 DJIA month by average performance since 1950, 2nd best S&P 500 month and 4th best NASDAQ (since 1971). In election years, performance and rank softens slightly, 3rd best DJIA and S&P 500 month, 6th for NASDAQ, but remains bullish. April is the last month of DJIA and S&P 500 “Best Six Months.” NASDAQ’s Best Months run through June. Election Year Aprils are up 1.3% on average for S&P 500.
A Blockbuster Payroll Report Suggests the Economy Is Far From Recession We’ve been getting good news about the labor market in recent months – job growth has been strong, and the unemployment rate has been below 4% for 26 straight months (the longest streak since the late 1960s). However, there were some concerns at the edges if you looked hard enough. The March payroll report set aside a lot of these worries, as it was positive across the board. Payroll growth actually picked up in recent months. The economy created 303,000 net new jobs in March (well above expectations for a 214,000 increase), and with positive revisions to January and February, payroll growth averaged 276,000 a month in the first quarter. Payroll growth averaged 212,000 in Q4 2023, and for further perspective, it averaged 166,000 in 2019. A lot of the employment growth over the past year has come from non-cyclical sectors like health care, education, and government – but only because these sectors lagged the initial recovery in 2021-2022. However, cyclical areas are bouncing back. Payroll growth in the goods-producing sector, along with retail trade and leisure and hospitality, saw 109,000 jobs created in March. That by itself is almost enough to keep up with population growth. The unemployment rate had risen from 3.4% last April to 3.9% in February, raising concerns. The unemployment rate comes out of the Bureau of Labor Statistics’ “Household Survey”, which is smaller and more noisier than the “establishment Survey”, which is where the payroll data comes from. Employment gains had lagged in the household survey in recent months, but March saw a reversal. As a result there was a welcome pullback in the unemployment rate to 3.8%. That’s still higher than a year ago, but not by much. Moreover, higher immigration is increasing the supply of workers and there’s a lag between when new immigrants enter the workforce and how quickly they find jobs (higher immigration has also a key reason why real economic growth has exceeded expectations). In any case, I prefer to look at the “prime-age” employment-population ratio, which tells you how many people in their prime working years (25-54) are employed relative to the population. The measure is at 80.7%, exactly where it was a year ago and higher than at any point between July 2001 and February 2020. That by itself tells you how strong the labor market and economy is, with a higher proportion of prime-age adults working now than we saw over the last two expansions. But does a strong labor market raise concerns over inflation? A strong labor market would typically raise the prospect of higher inflation. The logic is that a hot labor market would result in higher wage growth, which would push demand for goods and services higher, resulting in higher inflation. However, wage growth has been easing since 2022, and the story hasn’t change despite the recent acceleration in hiring. If you look at overall income growth across all workers in the economy (a product of employment growth, hourly wage growth, and hours worked), that’s running at a 6.1% annualized pace over the last three months. That’s stronger than what we saw pre-pandemic, when aggregate income growth averaged about 4.7% annualized, but well off the red-hot levels of 10%+ in 2021-2022 (when inflation surged). Moreover, there are two notable things that pop out when looking at aggregate income. One, income growth is running ahead of inflation. After adjusting for inflation, aggregate income rose at an annualized pace of about 2% in the first quarter (assuming the Fed’s preferred inflation metric, the personal consumption expenditures index, rose at a 4.1% annualized pace in Q1). That’s positive for consumption, and the economy. Two, hours worked has been running flat recently (the green bars in the chart above). At the same time, GDP growth in the first quarter is estimated to clock in around 2.5% (using the Atlanta Fed GDP Nowcast). That means labor productivity continues to run strong, as workers are producing above-trend output while working the same amount of hours. Higher productivity was a key theme in our 2024 Outlook, and it’s encouraging to see signs of that continuing, mostly thanks to a strong labor market that is drawing more workers in (including immigration). As we’ve written in the past, productivity growth allows for strong wage growth with muted inflation. Which is positive in two ways: Some of the productivity growth is taken by firms in the form of margin growth. (Firms don’t pass all the productivity gains to workers, much as we’d all like our employers to do that.) Muted inflation even in the face of a strong labor market means the Fed can start to ease rates, which will potentially fuel investment and provide a further boost to productivity. With respect to potential interest rate cuts by the Federal Reserve, the strong labor market and economy doesn’t preclude cuts. Of course, the inflation data needs to cooperate, but we do expect inflation to pull back in March and April, reversing the firming we saw in the first two months of the year. The good news is that there’s nothing in the economic data that suggests we’re on the verge of a labor-market induced inflation surge. Yes, some commodity prices are rising amid Middle East tensions, but as we’ve seen in the recent past, these are volatile and prices can reverse just as quickly.
Best Six Months Rally Respite Underway April Tracks Election Year Seasonality It’s been a banner “Best Six Months (BSM)” (November-April) for the Dow and S&P 500. From our Seasonal MACD Buy Signal on October 9, 2023, through our April 2, 2024 Seasonal MACD Sell Signal), DJIA gained 16.6%, S&P 500 20.1% – double the historical average BSM gains. These big gains have not left much on the table until later this year. Risks are more elevated now. Sentiment continues to run high. Valuations are extended. Geopolitical tensions have not eased. And persistent inflation pressures have the Fed in no rush to cut rates. As the election campaign rhetoric heats up and the Best Six Months comes to a close, we are shifting to a more cautious stance. As you can see in the chart of April 2024 compared to election year Aprils since 1950 the market is tracking the softer election year April pattern
April Monthly Option Expiration Week - DJIA Up 33 of Last 42 April’s monthly option expiration is generally bullish across the board with respectable gains on the last day of the week, the entire week, and the week after. Since 1982, DJIA and S&P 500 have both advanced 27 times in 42 years on expiration day with average gains of 0.22% and 0.17%, respectively. Monthly expiration day was staging a comeback after four or five declines from 2014 to 2018 but took a hit in 2022’s bear market. Expiration week has a bullish track record over the past 42 years. Average weekly gains are right around 1% for S&P 500, DJIA and NASDAQ. The bullish bias of April monthly expiration also persists during the week after although average gains have not been as strong with selling pressure rising recently (since 2014).
Rates Are Higher, Just Like Everyone Expected “If everyone is thinking alike, then somebody isn’t thinking.” -General Patton The quote above is one that I’ve used more in my career than probably any other quote. Markets are all about what is priced in and what isn’t, suggesting that the big opportunities can be found by going against the crowd in some instances. I’m not saying be a contrarian for the sake of being a contrarian, but when things line up against the crowd and you have reasons to go against the herd, that is where huge opportunities can be found. Last year is the perfect example of this. To start the year all we heard about was the near certain bear market and recession that was coming. It was the most anticipated recession we’ve ever had, even though it hadn’t happened yet. This of course meant the market had priced a recession in and the opportunity was in going against the crowd. The Carson Investment Research team shared data daily on why we didn’t see a recession ahead and expected stocks to do quite well. In fact, we’ve been overweight stocks since December 2022 and remain there today. This year we’ve seen another example of the crowd all agreeing and the total opposite taking place. I’m a big fan of the Bank of America Global Fund Manager Survey. It comes out monthly and shows how real money managers are positioned. At the start of the year, it was widely anticipated the Federal Reserve Bank (Fed) would cut short-term rates and as many as seven cuts were expected just a few months ago. As a result, 91% of those surveyed expected rates to go lower over the coming year, the highest and most consensus view ever for this survey. Granted, we still may have lower short-term rates at the end of the year, but with record expectations the potential for extreme positioning was there. Sure enough, with everyone on one side of the boat, the opportunity was on the other side, as rate cut expectations have come down drastically the past two months, while yields as a result moved higher, not lower. Here’s a nice chart that shows only two cuts (of 0.25% each) are now expected this year, from the peak of seven three months ago. Even when most expected six or seven cuts, we always said it would be closer to three. Our main reason was we believed the economy would remain stronger than expected and there just wasn’t a need for that many cuts. That many cuts could mean an economic slowdown, while a few cuts could simply be recalibrating as inflation came under control, with no need for rates up over 5% anymore. As a result, we came into this year with an underweight on bonds, with very little exposure to longer-term Treasuries. Many were in the camp that you should load up on bonds and buy longer duration bonds (think Treasuries), but we faded the consensus once again. As a result, bonds are having another rough year as rates jump. Why are yields higher? There are two reasons: the economy is strong and recent inflation data has been a tad higher than expected. Look at recent consumer data like retail sales—the consumer isn’t slowing down. We also are seeing improvements in manufacturing sentiment, which could be a clue strength is coming there as well. Oh, and we are creating 200,000 to 300,000 jobs each month, not something you see in a slowing economy. Regarding fears that inflation will continue to be sticky or is about to surge, we think there’s room for skepticism. We still see many reasons to expect overall inflation to continue to trend lower and the recent blip is just that, a blip after massive improvements over the past year. Sonu Varghese, our VP, Global Macro Strategist, wrote about this last week in Is It Time to Worry About Inflation Again?, so I won’t say much more on the subject. As a result, we went from hearing about six to seven cuts, to potentially none being floated! Some economists in bowties are even saying we need rate hikes. What did the Carson Investment Research team do as a result? For the first time in a very long time we added some bond exposure on the longer end of the curve in the tactically-oriented models we run for our Carson Partners. We are still overweight stocks relative to bonds, but the pendulum swayed too far the other direction the past few months, creating an opportunity to again go against the crowd, as we still expect inflation to improve and as a result, we’re likely see at least two rate cuts. Let’s sum it up. If you have an average portfolio, you will have average results. There is nothing wrong with that, but our job is to take the big swings when it makes sense. Being overweight equities has made sense and worked very well; now we think fading the masses talking about no cuts (or even a hike) could be quite successful.
Big Election Year Q1s Dip April-May Before Gains Last 7 Months 2024’s great start was the third best Election Year Q1 since 1950. Looks like we’re tracking Top Q1 Election Years more pronounced April-May dip. Chop continues in July and August and these years have marked time until the election in November, gaining about 2.5% on from April to October. Regardless of the election outcome S&P 500 suffered only two losses in the last seven months of election years since 1950, 2000 and 2008 (2024 STA page 80).
