S&P 4,999.89 Doesn't Quite Have the Same Ring...

 

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Stocks have rallied sharply the last 3-4 months. In fact, the S&P 500 hit a new record of 4,999.89 in Wednesday trading – a mere 0.0002% away from the 5000 level. Directionally, we think the market has this right, with the recent rally powered by expectations for the Fed to pivot toward looser monetary policy, which has historically been a tailwind for market returns. That said, the market was prone to overreactions over the last year, with pullbacks last February and August-October coming as the market adjusted its expectations.

While a shift toward less restrictive Fed policy this year is broadly favorable for financial markets, it won't come without hiccups. Looking back at initial Fed rate cuts in 1990, 1995, 1998 and 2019 (this excludes the rate cuts in 2000 and 2007 that were accompanied by popping market and housing bubbles, conditions that we don't see as parallels to today), noticeable stock-market pullbacks occurred before and after the rate cut (save for 1995, which didn't experience even one 5% pullback during the year). However, these spates of market weakness proved to be buying opportunities for both stocks and bonds. In fact, the average return 12 months after the first cut is a very respectable 15.9%.

We don't think the market is set up for a dramatic downturn, but we do think investors would be well served to anticipate a few bumps as we advance. We'd highlight that it was particularly encouraging to see that markets didn't use the hotter-than-expected U.S. wage-growth number as a catalyst to sell off (under an interpretation that wages will disrupt the inflation trend and keep the Fed in a restrictive stance for longer). We think this was a rational (non)reaction in equities (though bond yields did erase their midweek decline), and, in our view, reflects the wider view that the healthy economy is good for rising corporate profits, which we believe will be the main character in further equity-market gains in 2024.

We will end today’s shorter edition with another interest table. In addition to the tailwinds of a first rate cut, market tends to do well in Election years, which is something we will see this fall. Looking back, history would show that stocks tend to start slow in an election year but really pick up in the Spring, which could also coincide with the first rate cut…

 

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