Bull markets are usually longer and stronger than this 🐂
Bull markets are usually longer and stronger than this 🐂
Plus a charted review of the macro crosscurrents 🔀
📉 Stocks fell last week, with the S&P 500 shedding 0.5% to end at 5,277.51. The index is now up 10.6% year to date and up 47.5% from its October 12, 2022 closing low of 3,577.03.
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Is the stock market up a lot?
Sure.
This bull market, which started in October 2022, has seen the S&P surge 48% in just 19 months. It’s been a move that’s had Wall Street’s top market forecasters scrambling to revise up their price targets.
It’s the kind of activity that’s sure to get some investors a little nervous.
However, at the same time, this bull market hasn’t been unusually strong.
Truist’s Keith Lerner recently compiled the returns and durations of the previous ten bull markets. He found that nine of them had better gains than the current one with an average duration of about five years.
Maybe this bull market goes down in history as one of the weaker ones. We’ll know in hindsight.
For now, it doesn’t seem crazy to see prices continue to trend higher for at least two reasons:
Stocks usually go up: Historically, the stock market has been in a bull market about 80% of the time. Even after setting record highs, which the S&P most recently did on May 21, prices tend to continue going up in the months to follow, setting many new record highs.
Earnings growth prospects are positive: Forward earnings are looking up, with analysts continuing to forecast double-digit annual growth through 2024 and 2025. And earnings are the most important long-term driver of prices.
There’s some concern out there that valuations appear stretched. Unfortunately, as TKer Stock Market Truth No. 6 reminds us, valuations won’t tell you much about what prices will do in the near term.
On valuations, keep in mind that prices don’t have to fall for valuations to get cheaper. If earnings are growing, then the E in P/E ratios will rise just with the passage of time, putting downward pressure on the metric.
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Related from TKer:
Narratives will change, and yet the stock market will go up 🆙
At new all-time highs, the stocks have actually gotten cheaper 🤯
UBS raises its target for the S&P 500 📈
On Tuesday, UBS’s Jonathan Golub raised his year-end target for the S&P 500 to 5,600 from 5,400. This is his third revision from his initial target.
“On February 20, we upgraded our market target to 5,400 citing robust economics,” Golub said. “Since then, consensus 2024 GDP forecasts have increased from 1.6% to 2.4%. At the same time, recession/tail risks have declined on a number of key metrics including economist surveys and the Chicago Fed's Financial Conditions Index. These trends also support further market upside.”
Golub is not alone in tweaking his forecasts. His peers at Morgan Stanley, Deutsche Bank, BMO, CFRA, Oppenheimer, RBC, Societe Generale, BofA, Barclays, and Goldman Sachs are among those who’ve also raised their targets.
Don’t be surprised to see more of these revisions as the S&P 500’s performance, so far, has exceeded many strategists’ expectations.
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🎈 Inflation trends need to cool more. The personal consumption expenditures (PCE) price index in April was up 2.7% from a year ago, unchanged from March’s rate. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.8% during the month, matching the lowest print since March 2021.
On a month over month basis, the core PCE price index was up 0.2%, down from 0.3% in the previous month. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 3.5% and 3.2%, respectively.
Inflation rates have a little more to go to get to the Federal Reserve’s target rate of 2%, which is why the central bank continues to indicate that it wants more data before it is confident that inflation is under control. So even though there may not be more rate hikes and rate cuts may be around the corner, rates are likely to be kept high for a while.
For more on inflation, read: Inflation: Is the worst behind us? 🎈and 'Check yourself' as the data zig zags ↯
💸 Big retailers are rolling back prices. Walmart, Target, Amazon, and Walgreens were among big retailers announcing price cuts on goods.
⛽️ Gas prices tick lower. From AAA: “The national average for a gallon of gasoline has fallen by a nickel since last week to $3.56, the largest one-week drop thus far for 2024. The primary reasons are tepid demand and a lower oil price.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🛍️ Consumers are spending. According to BEA data, personal consumption expenditures increased 0.2% month over month in April to a record annual rate of $19.34 trillion.
Adjusted for inflation, real personal consumption expenditures declined by 0.1%.
It’s more evidence that the economy has gone from very hot to pretty good.
For more, read: Economic growth: Slowdown, recession, or something else? 🇺🇸
💳 Card spending is holding up. From JPMorgan: “As of 18 May 2024, our Chase Consumer Card spending data (unadjusted) was 3.4% below the same day last year. Based on the Chase Consumer Card data through 18 May 2024, our estimate of the U.S. Census May control measure of retail sales m/m is 0.45%.“
From Bank of America: “Total card spending per HH was up 1.8% y/y in the week ending May 25, according to BAC aggregated credit & debit card data. Y/y spending growth in many categories was boosted by the shift in Memorial Day observance (5/27/2024 vs. 5/29/2023). Even adjusting for this shift, total card spending going into the long weekend appears to be tracking well relative to 2023.”
For more on consumer finances, read: Unsettling stats about consumer health are missing the bigger picture 💵 and Consumer finances are somewhere between 'strong' and 'normal' 💰
💼 Unemployment claims tick higher. Initial claims for unemployment benefits rose to 219,000 during the week ending May 25, up from 216,000 the week prior. While this is above the September 2022 low of 187,000, it continues to trend at levels historically associated with economic growth.
For more, read: Labor market: How cool will it get? 🥶
👍 Consumer vibes improve. From The Conference Board’s May Consumer Confidence survey: “Compared to last month, confidence improved among consumers of all age groups. In terms of income, those making over $100K expressed the largest rise in confidence. On a six-month moving average basis, confidence continued to be highest among the youngest (under 35) and wealthiest (making over $100K) consumers.”
For more on improving sentiment, read: The economic vibes are healing 😀
👍 Labor market confidence improves. From The Conference Board’s May Consumer Confidence survey: “Consumers’ appraisal of the labor market improved, on balance, in May. 37.5% of consumers said jobs were ‘plentiful,’ down from 38.4% in April. But just 13.5% of consumers said jobs were ‘hard to get,’ down from 15.5%.“
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it’s been reflecting a cooling labor market.
From JPMorgan: “…the Conference Board’s labor differential … has been gradually drifting lower over the past few years as the labor market has started to cool. That said, the level of this measure remains elevated by historical standards and points to a still strong labor market.“
For more on the labor market, read: The hot but cooling labor market in 16 charts 📊🔥🧊
🏠 Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.3% month-over-month in March. From S&P Dow Jones Indices’ Brian Luke: “This month’s report boasts another all-time high… Our National Index has reached new highs in six of the last 12 months. During that time, we’ve seen record stock market performance, with the S&P 500 hitting fresh all-time highs for 35 trading days in the past year.”
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏠 Mortgage rates rise. According to Freddie Mac, the average 30-year fixed-rate mortgage increased to 7.03% from 6.94% the week prior. From Freddie Mac: “Following several weeks of decline, mortgage rates changed course this week. More hawkish commentary about inflation and tepid demand for longer-dated Treasury auctions caused market yields to rise across the board. This reality, as well as economic signals that have moved sideways over the last few weeks, have resulted in mortgage rates drifting higher as markets continue to dial back expectations of interest rate cuts.”
There are 146 million housing units in the U.S., of which 86 million are owner-occupied. 39% are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s April State Coincident Indexes report: "Over the past three months, the indexes increased in 46 states, decreased in three states, and remained stable in one, for a three-month diffusion index of 86. Additionally, in the past month, the indexes increased in 43 states, decreased in four states, and remained stable in three, for a one-month diffusion index of 78.”
📈 Near-term GDP growth estimates look good. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.7% rate in Q2.
For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸
Putting it all together 🤔
We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. While it’s true that the Fed has taken a less hawkish tone in 2023 and 2024 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened, inflation still has to stay cool for a little while before the central bank is comfortable with price stability.
So we should expect the central bank to keep monetary policy tight, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.
At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.
Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.
Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
TKer’s best insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
