It’s a new week, but if investors are still feeling whiplash from the last one, it’s understandable.
Earnings from Google parent
Alphabet
and
Microsoft
last Tuesday didn’t inspire confidence, but by the end of the week bulls were back in charge, thanks to robust results from
Amazon.com
and
Meta.
The market also chose to focus on an uptick in jobless claims and positive inflation data, rather than the white-hot jobs report (one that so handily beat expectations it could have been seen as evidence growth and inflation are too high for any near-term rate cut).
On Friday, both the
Dow Jones Industrial Average
and
S&P 500
closed at new all-time highs, while the
Nasdaq Composite
—still shy of its November 2021 record—nonetheless logged a new 52-week high.
Little wonder, then, that Sevens Report founder Tom Essaye wrote that the “past week is one of the most conflicted and contradictory I’ve seen in markets in my nearly three decades in this business.”
Still, the optimists appear to have the upper hand. That might be surprising given the market’s previous big run, which began in late October, was sparked by hopes the Federal Reserve could pivot from rate hikes to cuts. Now the market doesn’t have that catalyst—Chair Jerome Powell said last week a March rate cut was ‘not the most likely.’
Yet rather than get stuck on this interest rate headwind, markets have instead been focused on the economic outlook, which has been undeniably bright, argued UBS Chief U.S. Equity Strategist Jonathan Golub.
After all, what isn’t to like about better-than-expected fourth-quarter gross domestic product growth of 3.3%, consumer confidence at its highest level since 2021 on the back of three months of gains, and improvement in the Institute for Supply Management’s Purchasing Managers Index reading.
In fact, all this points to a soft landing for the economy, and is the reason why any bad news hasn’t been able to make much of a dent.
“For all the noise and nuance in the market, this bullish mantra is still intact: No hard landing, Fed cutting rates sooner than later (by May), inflation declining, [and] earnings growth holding up,” Essaye wrote.
While extreme bullishness is bearish for stocks, the market isn’t yet at that point, noted Bank of America Securities’ Head of U.S. Equity strategy Savita Subramanian. She cited that firm’s Sell Side Indicator, which tracks Wall Street strategist equity allocations.
“Historically, SSI has been a reliable contrarian indicator, in other words, it’s been a bullish signal when Wall Street was bearish and vice versa,” she wrote. “Although some investors might think everyone is bullish, sentiment has not yet risen to levels of euphoria we typically see at the end of bull markets.”
In fact, strategists lowered their equity allocations last month, keeping the SSI in neutral territory—a point at which previously the S&P 500 has delivered positive returns 94% of the time, with a median return of 20%.
Likewise, the S&P 500 closed up 1.6% for the first month of the year, meaning investors have the January effect on their side.
“When the S&P 500 is positive in January, the rest of the year was up 80% of the time. When this happened during a US Presidential election year, the index was up every time, returning an average of 12% from February-December,” BofA’s Technical Strategist Steve Suttmeier noted.
It isn’t surprising stocks were taking a breather Monday after last week’s gains, and doubtless investors shouldn’t take those wins for granted. Still, it is comforting to know there is fuel behind the market’s rally, rather than it running on fumes.
Write to Teresa Rivas at teresa.rivas@barrons.com
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