Bottom Line—Why Didn’t Good News Cause A Bigger Rally?
Last week was a resoundingly positive from a news standpoint. First, earnings were, on balance, “fine” as bank results were good. Yes, there are some consumer related concerns but they aren’t enough to offset the positives. Second, economic data clearly reinforced the soft landing narrative as retail sales were solid and claims declined. Third, there was positive geopolitical news as China promised more stimulus while Israel revealed it won’t hit energy or nuclear infrastructure in Iran and is not looking for their response to further escalate tensions.
Put simply, that’s about as positive a news flow as investors could have hoped for next week and it underscores that the macroeconomic backdrop for this market remains solidly positive. And in that regard, it is supporting these current levels in stocks. But despite this very positive news, the S&P 500 barely rallied and that seems a bit odd, given news couldn’t have been much better.
However, that lack of an extension of the rally last week does underscore two important points about this market that we cannot lose sight of, despite the very positive current news. First, last week was clear evidence that much of the good news we’re receiving (solid growth, stable earnings, falling inflation, no negative geopolitical surprises) is already reflected in the S&P 500 above 5,900. As such, that news is not going to fundamentally propel stocks higher in the near term.
Second, there are still risks to this market and while they aren’t the tectonic risks of
1) Dramatically slowing economy,
2) Spiking inflation or
3) Geopolitical disorder, with stocks so richly valued these risks have the potential to cause a drop in stocks and at these very extended valuations, even relatively modest risks make the risk/reward of new investment here mixed.
Some of those risks include:
1) Fewer Fed rate cuts. If data is so good, then the Fed may cut less than expected. The market is pricing in another 50 bps of cuts in 2024 and consistent cuts in 2025. If that comes into doubt, it’ll be a headwind on stocks.
2) Geopolitics and Politics. The stock market currently assumes no degradation in the Russia/ Ukraine war or Middle East conflicts.
Meanwhile, at these levels, it can be inferred that the market is also pricing in a Trump victory (numerous publications also stated this over the past few days). But the race for the White House remains extremely tight and a victory, either way, is not at all certain.
3) Earnings. Yes, earnings season is off to a “fine” start. But it’s still very early and this week and next week are really the “heart” of earnings season and results still have the potential to disappoint markets.
Now, I’m not trying to say this market is “as good as it gets.” But it does make sense to partially view the markets that way up here. Yes, things are good, but the S&P 500 is trading at, essentially, 22X earnings and that reflects “good” conditions and even “great” conditions. So, don’t be surprised if markets continue to churn at these levels even with more positive news, or if a sudden, negative surprise hits stocks more than the fundamentals might warrant.
Finally, as long as underlying data on the economy remains solid, then any pullback on negative peripheral news (even if it’s close to 10%) should be viewed as an entry point, not a significant reversal. Please read your quarterly letter when you get it as it has my questions on the risk you want to take going forward. Very important that I get your feedback in the next two weeks...
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc.