Daily Stock Market Articles

A New Bull Market: What’s Driving It?
Posted on June 9, 2023

The S&P 500 finally closed 20% above its October 12th (2022) closing low. This puts the index in “official” bull market territory.

Of course, if you had been reading or listening to Ryan on our Facts vs Feelings podcast, you’d have heard him say that October 12th was the low. He actually wrote a piece titled “Why Stocks Likely Just Bottomed” on October 19th!

The S&P 500 Index fell 25% from its peak on January 3rd, 2022 through October 12th. The subsequent 20% gain still puts it 10% below the prior peak. This does get to “math of volatility”. The index would need to gain 33% from its low to regain that level. This is a reason why it’s always better to lose less, is because you need to gain less to get back to even.



So, what’s next? The good news is that future returns are strong. In his latest piece, Ryan wrote that out of 13 times when stocks rose 20% off a 52-week low, 10 of those times the lows were not violated. The average return 12 months later was close to 18%. The only time we didn’t see a gain was in the 2001-2002 bear market.



Digging into the return drivers
It’s interesting to look at what’s been driving returns over the past year. This can help us think about what may lie ahead. The question was prompted by our friend, Sam Ro’s latest piece on the bull market breakout. He wrote that earnings haven’t been as bad as expected. More importantly, prospects have actually been improving.

The chart below shows earnings expectations for the S&P 500 over the next 12 months. You can see how it rose in the first half of 2022, before collapsing over the second half of the year. The collapse continued into January of this year. But since then, earnings expectations have steadily risen. In fact, they’ve accelerated higher since mid-April, after the last earnings season started. Currently, they’re higher than where we started the year.



Backing up a bit: we can break apart the price return of a stock (or index) into two components:

• Earnings growth
• Valuation multiple growth

I decomposed annual S&P 500 returns from 2020 – 2023 (through June 8th) into these two components. The chart below shows how these added up to the total return for each year. It also includes:

• The bear market pullback from January 3rd, 2022, through October 12th, 2022
• And the 20% rally from the low through June 8th, 2023

You can see how multiple changes have dominated the swing in returns.

The notable exception is 2021, when the S&P 500 return was propelled by earnings growth. In contrast, the 2022 pullback was entirely attributed to multiple contraction. Earnings made a positive contribution in 2022.

Now, multiple contraction is not surprising given the rapid change in rates, as the Federal Reserve (Fed) looked to get on top of inflation. However, they are close to the end of rate hikes, and so that’s no longer a big drag on multiples.

Consequently, multiple growth has pulled the index higher this year. You can see how multiple contraction basically drove the pullback in the Index during the bear market, through the low. But since then, multiples have expanded, pretty much driving the 20% gain.

Here’s a more dynamic picture of the S&P 500’s cumulative price return action from January 3rd, 2022, through June 8th, 2023. The chart also shows the contribution from earnings and multiple growth. As you can see, earnings have been fairly steady, rising 4% over the entire period. However, the swing in multiples is what drove the price return volatility.

Multiples contracted by 14%, and when combined with 4% earnings growth, you experienced the index return of -10%.

What next?
As I pointed out above, the problem for stocks last year was multiple contraction, which was driven by a rapid surge in interest rates.

The good news is that we’re probably close to end of rate hikes. The Fed may go ahead with just one more rate hike (in July), which is not much within the context of the 5%-point increase in rates that they implemented over the past year.

Our view is that rates are likely to remain where they are for a while. But rates are unlikely to rise from 5% to 10%, or even 7%, unless we get another major inflation shock.

This means a major obstacle that hindered stocks last year is dissipating. The removal of this headwind is yet another positive factor for stocks as we look ahead into the second half of the year.

 

June’s Quad Witching Options Expiration Riddled With Volatility

The second Triple Witching Week (Quadruple Witching if you prefer) of the year brings on some volatile trading with losses frequently exceeding gains. NASDAQ has the weakest record on the first trading day of the week. Triple-Witching Friday is usually better, S&P 500 has been up 12 of the last 20 years, but down 6 of the last 8.

Full-week performance is choppy as well, littered with greater than 1% moves in both directions. The week after June’s Triple-Witching Day is horrendous. This week has experienced DJIA losses in 27 of the last 33 years with an average performance of –0.81%. S&P 500 and NASDAQ have fared better during the week after over the same 33-year span. S&P 500’s averaged –0.46%. NASDAQ has averaged +0.03%. 2022’s sizable gains during the week after improve historical average performance notably.

 

Lucky Seven for the Nasdaq
Mon, Jun 12, 2023

It wasn't by much, but the Nasdaq rallied 0.14% last week and extended its streak of weekly gains to seven. That's the longest streak of weekly gains for the index since November 2019. To find a longer streak, you have to go back to February 2018 when the Nasdaq had ten straight weeks of gains. As shown in the chart below, since the Financial Crisis lows in May 2019, there have now been seven different periods where the Nasdaq rallied for at least seven weeks in the row.



The chart below shows the performance of the Nasdaq since the start of 2009, and we have included red dots to show each time the Nasdaq was up for seven straight weeks (for each period, the dot represents the Friday of the seventh positive week). While there were two periods (2010 and 2012) where the Nasdaq clearly experienced a moderate pullback fairly quickly after its seventh positive week, following the others, it doesn't appear as though the rally was tripped up at all.



Looking at forward performance after a seven-week winning streak in more detail, the chart below shows the maximum drawdown for the S&P 500 in the three months after seven straight weeks of gains in the Nasdaq. Here again, it's easy to see the large declines that followed the 2010 and 2012 streaks, but in the four other streaks, the S&P 500 never even pulled back 4%. In two of those periods, the maximum decline never exceeded 0.41%. For reference, the average 'max drawdown' over any three-month period for the Nasdaq since the start of 2009 has been 5.33%

 

More Balanced June
Tue, Jun 13, 2023

Heading into the month of June, stock market performance this year was a clear case of the haves and the have-nots. The chart below shows the performance of S&P 500 sectors on a YTD basis through the end of May. As of 5/31, just three sectors - Technology, Communications Services, and Consumer Discretionary - were outperforming the S&P 500 YTD, and the eight other sectors were not only underperforming the S&P 500's YTD gain of 8.9%, but they were also all down on a YTD basis.



The flip of the calendar has seen the trend of uneven YTD returns flip as well. Besides the fact that every sector is up on a MTD basis, the number of sectors outperforming the S&P 500's 4.6% MTD gains are much more evenly split with five sectors outperforming and six underperforming. Surprisingly, one of those sectors lagging behind the S&P 500 is Technology! Uneven market returns have been a key complaint of bears all year. If the pattern of June continues, though, what will they blame next?

 

Solid Pre-Election June Gains As Expected

June is delivering much better than typical pre-election year strength, but NASDAQ and Russell 2000 are leading the charge as usual. R2K was up 7% for the month yesterday and NAS was up 4%, both up more today. However, June quarterly OpEx is riddled with volatility. Week after DJIA is Down 27 of the last 33 years 1990-2022. (2023 STA page 108.) S&P down 23 of 33. NASDAQ down 18/33.

So far in 2023 NASDAQ is closely tracking the pre-election pattern up 28.6% year-to-date! But remember, June ends NASDAQ’s Best 8 Months with a seasonal peak in mid-July. Enjoy this AI/Chip-driven rally for now and use it to reposition for the Worst 4 Months July-October.

The backdrop is set up for sideways action over the weak summer months, especially after mid-July into the worst two months of the year August and September. This is lining up well for our NASDAQ Best 8 Months MACD Seasonal Sell Signal that can occur anytime on or after June 1. AI (Almanac Investor) subscribers will be emailed when it triggers.

 

Why Strong Stock Returns on Friday is Bullish
Posted on June 13, 2023

One of the most hated and despised rallies continued last week, with the S&P now up nearly 12% on the year and officially up more than 20% from the October lows. If you’ve been reading or listening to what the Carson Investment Research team has been saying, then you know we’ve been in the camp we’ve been in a new bull market for quite some time now, expecting continued higher prices. None the less, with stocks now officially up 20%, we see others finally coming around. For instance, check out the cover of Barron’s over the weekend. Yeah, we sure weren’t seeing things like that in January, were we?



Sonu and I both wrote blogs last week on stocks being up 20% from the lows and you can read them here and here. Additionally, here’s a Yahoo! Finance hit I did on October 13, the exact day that stocks officially bottomed. I noted many reasons to think better times were coming and fortunately, that is exactly what has happened.

Additionally, here’s the blog I wrote a week after the October lows titled Why Stocks Likely Just Bottomed. Our bullish tilt since late last year wasn’t popular and has been widely mocked by many bears for months and months. We aren’t hearing so much chirping from them now though

One thing we’ve notice lately is buying and strength in stocks later in the week, specifically on Thursday and Friday. We love to see this, as it shows there is confidence to hold stocks over the weekend. Those of us that have done this long enough remember how volatile (and usually bearish) Friday afternoons would be during the Great Financial Crisis (GFC) or during the COVID bear market in February and March of 2020. Even last year during the bear market we saw historically weak returns on Friday.

So, to now see buying and confidence on Thursday and Friday in ’23 are significant changes from what we saw during previous bearish phases and could be another clue that this bull market is indeed healthy and likely has legs left.

This first chart shows just how much better Thursday and Friday are doing than the other days this year. Again, we like to see this late week buying as a clue things are healthy and confident. (For those wondering how we did the annualized return calculations, the average Friday return this year so far has been a gain of 0.40%, so we multiplied that by 252 (the number of trading days per year) to get an annualized return).



Let’s talk specifically about Friday, shall we? As of last week, Friday was up an incredible 101.7% on an annualized basis in ’23. This would come in as the best Friday EVER. Now, let’s be honest, the odds do favor this coming back to earth some over the remaining rest of the year, but overall we are on a great start to this year being one of the best ever for stocks on a Friday.



What does it all mean you ask? In the final table below, I looked at all years that had at least a 55% annualized return on Friday. This was the very best 12 years ever for Friday returns and sure enough, they are also some of the best years overall for stocks. In other words, some of the best years ever also saw strong performance on the last day of the week, further confirming that buying on a Friday is what you tend to see in bullish markets.

We will end on this note, stocks were higher 12 out of 12 times in these years and up a very impressive 24.8% on average, about half of this year’s 12.0% return so far. This could be a subtle clue that as good as this year has been, it could have more in the tank before all is said and done. I did discuss this Friday concept on Yahoo! Finance on Friday.

 

Why the Fed Wasn’t As Hawkish As Everyone Thinks
Posted on June 15, 2023

The Federal Reserve (Fed) didn’t raise rates in June, leaving the Federal Funds rate in the 5-5.25% range. This was the first meeting in which they held back ever since they started raising rates back in March 2022.

However, the big news was that Fed members project rates to be 0.5%-points higher than what they projected back in March. Members updated their projections for rates to hit 5.6% at the end of 2023, up from the previous estimate of 5.1%. By itself, this was viewed as a very hawkish signal, despite the pause in rate hikes.



If you recall, the last set of projections was made in March soon after the Silicon Valley Bank crisis. At the time, they said that potential credit tightening would be equivalent to rate hikes, so they left projections unchanged.

Fast forward three months and the economy looks to have weathered the banking crisis, even as core inflation (excluding food and energy) remains elevated. Hence the update to where they believe rates should be at the end of 2023.

However, the rest of the materials they released, along with Fed Chair Powell’s comments suggest more rate hikes are not a certainty.

The Fed is (finally) acknowledging the economy’s resilience
Along with interest rate projections, Fed members also updated their economic projections. This is where things got interesting. The updated projections included:

• Raising 2023 real GDP growth from 0.4% to 1%
• Dropping the 2023 unemployment rate from 4.5% to 4.1%

Despite projecting more rate hikes, they seem to believe that economic growth will be stronger than they expected back in March, and the unemployment rate lower.

At the same time, they also expect inflation as measured by the core personal consumption expenditures index (their preferred measure) to be 3.9% y the end of 2023. In March, the expectation was 3.6%. The higher projection makes sense within the context of the economic strength we’re seeing currently (we’ve written about this).

Moreover, Fed members expect core inflation to slow to 2.6% in 2024, leading them to project interest rate cuts worth about 1%. Even as the economy grows 1.1% in 2024.

Take all these projections with several grains of salt. Moreover, these projections are not forecasts – instead, they’re more like best guesses.

However, it is a sign that Fed officials finally believe that inflation can slow down without a recession. That’s a significant turnaround from what they’ve been signaling over the last year, i.e. a huge economic slowdown/recession is necessary for inflation to fall.

In fact, Powell acknowledged that the conditions are in place for inflation to slow down – economic growth has fallen below trend though activity remains strong, the labor market is less tight, and goods supply chain disruptions are easing.

Pausing in June allows them to get more information about the impact of rate hikes and the banking crisis. Now, the July Fed meeting is only 6 weeks away and there’s not enough data that will give them that information. Instead, they’re looking for at least 3 months of data to see how things evolve.

That buys time and indicates that 2 more rate hikes (each worth 0.25%) are not a sure thing. At the same time, raising the 2023 estimate ensures that investors believe they are serious about curbing inflation, and gives them the optionality to increase rates if inflation remains persistent.

Good news: inflation looks to be headed lower
Headline CPI inflation has decelerated from a peak of 9.1% year-over-year in June 2022 to 4% in May. Over the past three months, inflation is running at a 2.2% annualized pace, the slowest 3-month pace since two and half years.

The big driver of the pullback has been energy, but more recently, food prices have also started falling. Vehicle prices, which boosted inflation last year, are also moving lower – used car prices rose over the last two months, but private data indicates that it’s going to reverse soon.

What’s left? As the chart below indicates, a lot of it is shelter inflation (the dark green bar). This is the main reason why core inflation remains elevated, running at a 5% annualized pace over the last three months. That’s simply too high for the Fed.



The good news is that shelter inflation looks to be at an inflection point. We’ve discussed in the past how the official rental inflation data has a significant lag to the private market data. Private data have been showing rents to be decelerating for more than a year now. It’s taken a while, but the official data is now turning around as well. It is a bit like turning an aircraft carrier around, and so it is going to take a while. But it is just a matter of time before core inflation decelerates on the back of falling shelter inflation.



Now, the Fed has said that they need to see even services inflation excluding shelter decelerate. We received good news on that front. The Atlanta Federal Reserve calculates something called the Sticky Price CPI excluding food, energy, and shelter. It measures inflation for items whose prices typically don’t change frequently. Over the past 3 months, this measure is running at a 2.5% annualized pace, well below the peak of 7.3% we saw last year.



On top of this, the producer price index, which measures input prices for businesses and typically leads inflation, has collapsed to just 1.2% year-over-year in May. That’s well off the peak pace of 11.6% we saw in March 2022, and lower than the pre-pandemic average of 2%. Even excluding food and energy, PPI is down to 2.8% now from 9.7% 14 months ago.

All in all, there’s encouraging news on the inflation front even as the economy remains resilient. Powell’s comments reflect that. This is why we’re not quite so convinced that two more rate hikes are baked in. But expect them to leave rates higher for longer.

 

Four Things the Bulls Need to Know
Posted on June 16, 2023

“The stock market is the only place where things go on sale, yet everyone runs out of the store screaming.” -Old stock market axiom

Here are four things that have caught my attention over the past week.

First up, you might have heard by now, but the S&P 500 moved into a new bull market, up more than 20% from the October ’22 lows. We wrote about this in detail here, but investors need to know that a year after this happened, the S&P 500 was historically up 17.7% on average and higher 12 out of 13 times.



Adding to the fun, S&P 500 finally made a new 52-week high this week, the first one since early January 2022. What does this mean? Below we looked at all the times stocks went at least one year without a new 52-week high and the good news is more strength is quite likely. A year later stocks have been higher an incredible 15 out of 15 times and up more than 17% on average. Adding that to the numbers in the first table and the next year could continue to surprise to the upside.



Next up, this week marked officially eight months since the bear market ended. To think stocks would be up more than 20% by now would have been crazy to most investors if they were being honest. The quote I used above is one I always think about when stocks fall and it really does sum up investor sentiment well. Very few were saying ‘buy stocks’ last October and most didn’t say it early in 2023 either.

We did note the week of the lows why the lows were likely in (and boy did the bears hate that call), but even I’ve got to admit the strength this year has been impressive. We moved to overweight equities in our Carson House View models in mid-December and we added to equity risk in late March during the regional bank crisis. To sum it up, we’ve been in the lonely bullish camp and continue to think higher prices are coming.

What does eight months without a new 52-week low mean? It would be extremely rare for stocks to roll over and make new lows from here for starters. Also, three months later the S&P 500 was up 85% of the time, six months later 90% of the time, and a year later 80% of the time higher. The bottom line, once you get to eight months without a new 52-week low, the upward trajectory likely stays in place.



Lastly, the bear market officially started a year ago this week, as the S&P 500 moved to down 20% from the January ’22 peak on 6/13/2022. That wasn’t a fun time for investors at all, but here we are a year later, and stocks are up more than 16%. In other words, had you had the intestinal fortitude to buy when all the headlines were negative, you’d be sitting on some great gains a year later. Again, think about the quote at the top of this blog. This is what is important to always remember. Stocks go up and they go down. If you want to get some good deals, you need to buy when they are lower.



Thanks for reading and have a great weekend!

 

DJIA, S&P 500 and NASDAQ historically cooler in pre-election year Julys

July historically is the best performing month of the third quarter, however the mostly negative results in August and September tend to make the comparison easy. “Hot” Julys in 2009 and 2010 where DJIA and S&P 500 both gained greater than 6% combined with strong performances in 2013, 2018, and 2022 have boosted July’s average gains since 1950 to 1.3% and 1.3% respectively. Such strength inevitability stirs talk of a “summer rally”, but beware the hype, as it has historically been the weakest rally of all seasons (page 74, Stock Trader’s Almanac 2023).

Pre-election-year July rankings are something of a mixed bag, ranking #7 for DJIA and S&P 500, averaging gains of 1.0% and 0.9% respectively (since 1950); while NASDAQ (since 1971) and Russell 1000 (since 1979) pre-election Julys both rank #9. NASDAQ has advanced in seven of the last thirteen pre-election Julys. Russell 2000 has advanced in five of its last ten. Despite tech’s and small-cap’s meager pre-election July track record, NASDAQ and Russell 2000 have averaged gains of 1.0% and 0.3% respectively.