The bull market entered the fourth quarter with everything going according to plan
The bull market continues to gain respect. Most investors are now accepting it, some more reluctantly than others. Starting with the S&P 500’s 20% gain for the year, which averaged more than one record high per week, the index remained unscathed through most of what was expected to be a scary month of September. Then there’s the growth progress made in the third quarter without the mega-cap tech leading the way — the equally weighted S&P 500 is up nearly 9% since June 30, and the Nasdaq 100 is up yet to 2%. And note how the tape immediately treats the Federal Reserve’s half-percentage-point cut this month as a de facto anti-aging treatment for what’s widely seen as an expansion. of the elderly. In the eight trading sessions since then, the market has refused to withdraw that assessment. Since the Fed’s decision, data on jobless claims and consumer confidence have reassured consumers, while data revisions have lifted previous estimates for GDP, personal income and household savings rates in previous quarters, suggest the economy has never been closer to its current stagnant pace. trusted by everyone. Long-term Treasury yields have increased significantly since the Fed’s move, with the 10-year Treasury yield rising from 3.62% to 3.75%, both consistent with the pattern history after interest rate cuts and reflects the easing of macroeconomic worries. Friday’s benign PCE report supported the market’s conclusion that inflation was under control while backing the Fed’s “peacetime rate cuts” rationale. .SPX YTD mountain S&P 500 YTD Oh, and then the Chinese government rolled out a series of stimulus measures last week that took the skeptical trading community by surprise, giving Chinese stocks and equities a blow China’s leverage soared and outlined a new reality in which fiscal policy and monetary authorities in the world’s two largest economies are actively promoting growth. This is a time when the credit market is developing strongly and corporate profits are on the rise. Citi market strategist Scott Chronert summarizes: “Markets have clearly responded positively to the Fed’s policy readjustment aimed at reducing inflation… However, near-term upside risks exist.” could come from a misalignment in the Fed’s guidance and the S&P 500 fundamentals. This year will likely be in the high single to double digits, which is usually consistent with the Fed keeping growth steady With the Fed’s funding path previously helping to put a higher floor on stocks, it’s usually not too onerous.” That’s where this aggressive positivity inevitably leads to the possibility that the market has largely figured all of this out and is fully and fairly priced in for the soft landing that the Fed is working to preserve. Overpriced? The burden of proof is squarely on the bears, and they will most likely build their case on the argument that current valuations leave no room for unattractive news, increasing vulnerability. the market’s vulnerability to another “growth scare” or whatever else may happen. arrive. The new money pouring into the S&P 500 today is paying 21.6 times expected earnings over the next 12 months, below the 21.8 multiple at the previous market peak in mid-July, giving way to some sharp drops and a bumpy turnaround. among large-cap technology leaders. The notion that the overvaluations all belong to the giant Magnificent Seven is not entirely true, the remaining 493 stocks in the group are all above a multiple of 18. Certainly, valuations don’t say much about fortunes. market par for many months or more in the future, and multiple compressions tend not to hit too hard as the Fed eases and earnings move higher. However, the starting price can say something about long-term returns and the market’s ability to absorb unwanted news. Goldman Sachs here plots the forward P/E of the S&P 500 at the time of each initial rate cut in a cycle. We are now well above the 2000 cut. That case only has reference value if the investment bubble bursts and a recession is imminent. Note that the brightest precedent – the perfect soft landing of 1995, which is still considered a version of the best result from here – has the stock quite cheap at a multiple of 12. That doesn’t mean the market can’t continue to progress from here, although it’s difficult to match the 24% annualized returns that investors earned in the five years after the ’95 cut. The bears could further point to this being the first week in the past two months when those growth concerns flared, surrounding weak ISM manufacturing data and below-average employment data. Both of those data series are expected next week. But will the market accept a similar move for the third month in a row with such a mini-panic, as selling into them doesn’t seem smart in retrospect and even after the Fed’s move? First easing move? Is it time to breathe? Certainly, a pause would make sense for the broader market, as the S&P 500 is up 11 of the past 15 days. While sentiment was not too enthusiastic, retail investors were fully interested in the stock and bullish call volume began to dominate the flow again. Internal fluctuations mostly send a macro-friendly message – cyclical consumer indexes, banks and industrials are all doing well. However, Nvidia’s erratic action, including three consecutive months of lower highs since peaking in June, and a general lack of leadership on continued growth could cause the tape to turn sour. a bit more fickle and prone to risk. The fact that the CBOE S&P 500 Volatility Index rose 1.6 points to 17 on Friday while the S&P 500 was flat and most stocks rose may reflect widespread or real geopolitical unrest is that the US election is dragging the VIX 30- day preview window. In either case, it’s a notable deviation from the story of tepid strength told by the S&P 500 itself. John Kolovos, chief technical market strategist at Macro Risk Advisors, remains persistent in calling for the S&P 500 to move higher to the 6000 level, up 4-5% from here, although the warning overlay also attracts attention. his idea. “The biggest worry here is that there is still a sense of anxiety about stopping the escape velocity,” he said. “Bitcoin below $70,000 is an example of quiet risk appetite. The historical trend of volatility rising to extreme levels around elections is causing many headaches. Fundamentally , volatility needs to collapse to get people to release their hunting dogs.” It’s not that muted expectations and bound risk appetite are entirely negative for the market’s trajectory. The average target set by Wall Street strategists for the S&P 500 is currently well below the index’s current level, which is not typically what one sees at eventual market peaks.
