It turns out that going ghost hunting in October is not a very good way to see one. At least so far. Going into this month, investors and market insiders generally expected action to be choppy, indecisive and fraught with potential panic. Like most consensus beliefs, this one is reasonable. This time of year usually tests nerves, especially with the election in full swing and the S&P 500 up 20% for the year. Instead, the index continues to doggedly hit new all-time highs, including 45 in 2024, even as investors walked through a dark corridor last week, opening stickers with “Consumer Prices Picking Up,” “Jobless Claims Rising.” , a closet door labeled “Bond Yields Rise.” and “Federal Reserve cuts interest rates less frequently.” All without dire consequences. The big-picture, keep-it-simple characteristic of this market moment is easy to recite like a self-help adage: Inflation continues to fall back faster than the economy is slowing. The Fed has begun cutting short-term interest rates, a rare combination, as profits for most companies are about to rise. How the market performs after the first rate cut depends entirely on whether a recession occurs within a few months and whether GDP continues to be higher than expected. There is little chance that credit markets will get stronger. Of course, these are the same pillars that underpin most investors’ bullish long-term view: Collective expectations for a post-election year-end rebound are at least as strong as thoughts of a volatile October. 21-21-21 Market Of course, there is still enough time to recoup the investment. But for now, these reassuring fundamentals, combined with the widespread belief that the economy is on the verge of a soft landing and lingering notions about seasonal risks, have created a rare 21-21-21 market: The S&P 500 is up 21% this year, its price-to-earnings ratio is above 21, and the CBOE Volatility Index is hovering near 21. presidential election year. Five consecutive months of gains (and currently five weeks in a row) reflects the durability of this upturn, which is essentially not preceded by a collapse of the real economy. As we all know, in the first half of this year, super stock glamor technology leaders dominated the index appreciation. Since June 30, the equal-weighted S&P 500 has gained 9.5%, more than three times the gain of the Nasdaq 100. Among the so-called “top seven” stocks, there has been huge divergence over the past three months, a sign that investors are becoming less monolithic and more critical. The result is a more balanced market that smooths out the surge in Big Tech stocks, while the Nasdaq 100’s long-term relative uptrend is not completely broken. While the broader market has hit record highs, the gains over the past three months have clearly flattened, with more downside tests and cheap risk rewards. One buyer, with the S&P 500 peaking at 5,667 in mid-July, quickly fell 8% in three weeks. The cumulative increase since July 16 is only 2.6%. The index’s forward price-to-earnings ratio is 21.8, which is undeniably high. Aside from the dot-com boom of 1999-2000 and the wild pandemic bull market, readings haven’t consistently risen over the past half-century. It’s hard to get around the math: For investors paying today’s prices, multi-year returns will be capped, although going beyond this valuation means little in terms of returns between now and the visible horizon. Since around 1990, valuations have risen as the indexes themselves have become less cyclical and the quality has improved, investment flows have made the public less sensitive to valuations, and the Fed has become more transparent. More directly, it suggests that stocks are reasonably priced for a soft landing, a scenario that will be both believed and doubted as it is continually tested by new evidence. Still, when corporate earnings are rising and the Fed is in easing mode, as it is now, market P/E ratios don’t usually come under severe pressure. FactSet expects third-quarter earnings to handily beat recently revised estimates and show annual growth of about 7%. After the reporting season ends, it’s inevitable that forward estimates will stretch another three months into the promising future, which is how the market can drive chain stores even from expensive starting points. An unheard of combination Considering the rest of the setup, a VIX near 21 is the most obvious anomaly. Goldman Sachs calculates that a rise of this magnitude in the VIX is essentially unheard of with the S&P 500 quietly hitting a new all-time high. As a reminder, all it says is that there will be strong demand to hedge against wild swings in the index over the next 30 days, after which VIX futures mean that volatility will immediately disappear. This reflects expectations of a close election that may take time to resolve and disappoint half of adults, with the potential for conflict in the Middle East to escalate – and we all know where October’s VIX index came from. .VIX YTD CBOE Volatility Index, YTD This should not be mistaken for widespread fear. This is not a stock market that is hated, ignored, or underowned. While it might not be entirely trustworthy, with good ownership there’s room for tactical players to aspire a little higher if they feel forced. To be sure, last week’s survey from the American Association of Individual Investors showed the smallest number of shorts since December, while Deutsche Bank’s overall investor positioning gauge closed Friday with equity exposure in the 60th percentile, just above the mid-point. sex. A standard (albeit lazy) talking point among bulls is that large balances in money market funds “on the sidelines” may impact the stock market in some way. This almost never happens unless cash holdings inflate relative to stock market value at the end of a punishing bear market. Not to mention that less than half of the $6.5 trillion in money market assets is held directly by retail investors—and these retail investors have rather limited cash allocations, strictly speaking, because the stocks they hold have appreciated so much. . Bank of America Wealth Management clients have a lower-than-average proportion of cash in their total portfolios. But that’s fine, the bull market doesn’t require a lot of cash to go into stock funds to continue. Cash still yields well above inflation, while bonds retain their value, allowing investors to take on higher equity exposure rather than rotate. More immediately, by Friday’s close, the S&P 500’s growth relative to its own trend was a bit tight (more than 4% above its 50-day moving average), although not as dramatically as at the market’s peak in July. Over the weekend, there were signs of hasty buying among some of the biggest laggards and most shorted stocks, which is typically a sign that a rally is declining in quality as it matures. These observations shouldn’t cause any real fear, but it’s best not to turn a blind eye to them.
The S&P 500 hits another new high, and there’s nothing to worry about in October | Real Time Headlines
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