US equities have been on a tear recently, registering positive growth for three consecutive weeks. Bearish sentiments, recessionary fears, and concerns of a hard crash have given way following improved macroeconomic data, particularly given softer-than-expected retail inflation and receding employment strength, as well as supportive technical signals. Investor expectations are firmly on the side of the Federal Reserve’s rate cycle having peaked. On Monday, 20th November 2023, the S&P 500 closed at 4,547.38, having surged 7.1% over the past month and is now up an impressive 18.4% YTD. As a result, the index has exited correction territory at a near-record pace, executing a turnaround in as little as 16 trading sessions. The index is also fast approaching the 52-week high close of 4,588.96, registered on 31st July 2023. The banking index is up 12.8% over the past month, while technology stocks have pushed higher by 12.3% in the same time frame. The tech-heavy NASDAQ 100 hit a 22-month high in Monday trading and closed at 16,027.06, 46.5% higher during the calendar year; with NVIDIA and Microsoft also peaking at new highs. On widespread bullish momentum, the Dow Jones rose over 200 points in Monday’s trade and ended the session at nearly 6.1% higher for the month.
TL;DR
- US equities have seen a sharp bullish turnaround over the course of the previous three weeks.
- The S&P 500 has executed one of the swiftest exits from correction territory, within just 16 sessions.
- Both banking and technology stocks have witnessed a strong improvement over the month.
- The bullish sentiments have been fuelled by lower retail inflation, a weakening labour market, and expectations that the Federal Reserve’s rate cycle has peaked.
- Falling energy costs and lower crude prices have contributed to easing CPI.
- Company data suggests that fears of a hard landing have begun to dissipate.
- Other than fundamental indicators, technical analysis also suggests that equities are at the cusp of a sustained bull run.
- Historical data indicate that equities have a high chance of durably advancing after the peaking in a rate cycle, and also when following a three-week run-up in equities.
- Weakness in the dollar is in line with broad market convictions that the Fed’s FOMC will no longer raise rates.
- Leading analysts anticipate a 5%-10% improvement in equities by the end of 2024.
FUNDAMENTAL DRIVERS
Crucially, corporates are turning away from recession fears, and expecting bullish impulses to continue.
Recent data shows that in Q3 2023, only 11% of earnings calls of the S&P 500 companies mentioned “recession”, far below the 40%+ registered in 2020.
The positive sentiment has emerged from the improvement in consumer inflation numbers in the US, which declined to 3.2% YoY in October 2023, led lower by easing energy costs.
Crude oil prices have been in a sustained decline with the WTI slipping 7.7% during the past four weeks.
This was a welcome development given the stubbornness showed in August and September when retail inflation was threatening to accelerate and remained at 3.7% YoY.
Source: TradingEconomics.com
In addition, markets have looked positively at the employment situation report, which strongly indicated that the FOMC will begin to ease off the gas and suspend further rate hikes.
In October 2023, nonfarm payrolls (NFP) rose by 150,000, which was below market expectations of approximately 180,000 and less than half of the September 2023 report.
The September report also saw a significant downward revision from 336,000 to 297,000, adding to expectations that the labour market is now durably cooling.
The October report also marked the second-lowest increase in NFP during 2023, only behind the increase of 105,000 in May 2023.
Amid the UAW strikes, manufacturing industries were hard hit as job cuts in the sector numbered 35,000, well below consensus estimates of 10,000.
Source: TradingEconomics.com
The moderation in retail sales also imparted confidence that consumer demand may be robust but kept inflationary concerns in check, as the metric improved by 2.5% YoY in October 2023.
As per the Census Bureau, total sales for the August-October period were also up 3.1% YoY.
Seasonally adjusted e-commerce sales increased by 2.3% over the previous quarter.
In summary, robust retail sales data amidst weakening unemployment data, is cheering the market on the narrative that demand is not giving way.
The FED PEAK
Primarily, the dovish narrative of the Fed is holding sway and this is likely to continue to charge the market’s animal spirits.
The CME’s FedWatch Tool has indicated a significant probability of rates remaining unchanged until the May 2024 meeting.
As per the latest data, there is a 99.9% chance of rates remaining unchanged in the December announcement and a 47.4% chance of a rate cut to 5.0% – 5.25% in May 2024.
The data also suggests an additional 12.9% chance of a decline to 4.75%-5.0% during the May meeting.
Promisingly, the rate-sensitive 2-year yields are also trading below the Fed’s current target rate at 4.9%, favouring a potential rate cut in the future.
The expectation that the Fed’s rate cycle has already peaked is being reinforced by the dollar index which is trading at 103.27 at the time of writing, 2.8% lower than the previous month.
The VIX continues to indicate a decline in market volatility – a positive for equities, and currently stands at 13.41, in the vicinity of its 52-week low of 12.68, and is down 29.3% for the month.
RARE TECHNICAL INDICATOR SIGNALS BULLISHNESS FOR NEXT 3 MONTHS
Given the recent run-up in the market, technical indicators are also supportive of a continued bullish outlook.
Source: Dean Christians, CMT; NASDAQ
The advance-decline ratio is a technical indicator that shows the ratio of advancing stocks versus declining stocks in a chosen index.
In the above image, the NASDAQ’s advancing shares have outnumbered declining shares by 3-to-1 in three out of the previous ten sessions.
Historically, whenever the NASDAQ’s advancing shares have outnumbered declining shares by 3-to-1 in three out of the previous ten sessions, 3 months later the Nasdaq Composite has never been lower.
This increasing trend shows the emergence of a strong broad-based bullishness across the NASDAQ, indicating a majority of companies are seeing higher buying activity.
The latest signal and steadily increasing trend registered in November 2023 further supported a bullish turn in equities.
A near-term run-up in equities is further supported by the S&P 500 currently trading below its 200-day moving average, leading to broader optimism.
Looking back in history, and drawing on data dating back to 1962, a Barron’s report found that the median gain for the S&P 500 post a three-week run has been 2.2% over the following four weeks, and 3.3% over eight weeks.
Combined with expectations of the rate hike cycle having peaked, as well as lower energy prices and moderating treasury yields, this trend could prove very bullish heading into the final quarter of the year.
These findings suggest that equities have likely turned a corner and entered a sustained bullish trend.
Market participants should keep in mind that technical indicators and historical patterns offer powerful clues of what may come in the future, but these trends may not always hold.
As a result, traders have to remain nimble and well-informed to protect their portfolios according to their decision-making.
LONGER-TERM PROSPECTS
In an interview earlier this week, market veteran Phil Orlando, the chief equity strategist at Federated Hermes, stated that the S&P 500 could surge to as high as a record 5,000 points by 2024 end.
In addition, a recently released Goldman Sachs report also expects bullish momentum to continue with a target of a 6% total return, including dividends, in 2024.
Further, a study by Carson Investment Research examined 11 rate hike cycles going back to 1974 and found that once the Federal Funds Rate has peaked, the S&P 500 averages a 5.2% improvement in the first six months, and advances by an average of an even more impressive 14.3% in the next twelve months.
The shift in the CPI, jobs market, the calming of geopolitical tensions vis-à-vis the energy markets, and the supportive technical signals do suggest that fears of a potential recession have been replaced by bullish expectations as the Fed is very likely to have already called a top to its rate hike cycle.
FINAL WORDS
● The primary driver has been the improvement in consumer inflation in the United States, as well as the unanticipated weakness in the labour market.
● As a result, expectations that the Federal Reserve shall no longer raise its benchmark interest rates have driven market optimism.
● CME data suggests that the FOMC will likely begin to cut rates in May 2024.
● Dollar weakness and falling crude prices have contributed to this expectation.
● Technical indicators also suggest broad-based bullish momentum in the near term for US equities.
● Historical data indicates that both the peak of the rate cycle and a period of three consecutive strong weeks for equities signal the onset of a bullish trend.
● Investors and traders should however continue to track inflationary trends, and the status of the labour market and consider their risk appetites while making portfolio decisions.
