The high risk of hazardous weather this time of year is well known, but the hurricanes have so far been spinning harmlessly away from Wall Street and out to sea. The lack of severe turbulence in the economic data, relative stability in corporate performance and general absence of unrealistically high expectations among investors allowed for an uncommonly, and perhaps unexpectedly, calm start to September, after August saw merely a fleeting 5% pullback in the S & P 500 . Whether Friday’s sharper drop on a quarterly options-expiration day ahead of what is often the toughest part of the month for stocks reflects a loss of composure among investors is possible, but unknowable. What’s still clear is that the market has held in its 11-month uptrend and remains several percent above the level that would change that. The S & P 500 has held on to most of its first-half gains and has made a series of higher lows since mid-August. Using the broadest of strokes, the S & P 500 is almost exactly at the same level it was two years ago – continuing the curious pattern of the index mirroring 2021 action noted here last week – and yet forecast earnings over the coming 12 months are some 10% higher. That doesn’t make the market cheap, but it removes any mystery about how the market can hold up in this area. .SPX 5Y mountain S & P 500 – 5 years Ron Adler, senior tech-stock trader at JP Morgan, makes the case that professional investors have been largely idling warily with an eye toward several known oncoming catalysts. He put it this way early Friday in a trading-desk dispatch, “First, traders were waiting to see how the financials and tech conferences went (they were fine, albeit unexciting). Then, traders were waiting to see how the CPI was (it was mixed, but the hurdle was cleared). Then, traders were waiting to see how the PPI (mainly oil), ECB (dovish), China (better), and the capital markets behaved (so far, so good, and investors still want new things to talk about. AI has become boring).” The macro picture The core macro driver of the 2023 market advance has been inflation receding more quickly than economic growth has weakened, and disinflation is happening in a rather orderly way so far, economists’ forecasts coming close to predicting the pace, as the Citi Inflation Surprise Index shows. This has allowed bond-market volatility to settle down from tooth-rattling highs last year, which has meant that the Federal Reserve has not been the main character of Wall Street’s 2023 story. The Fed is by all appearances entirely or largely done raising interest rates, with any further moves coming in small increments widely spaced in time, reinforcing a global sense that “peak central bank tightening” is past. Forecasts of eventual rate cuts exist out on the hazy horizon but keep getting pushed out, meaning the macro game for some time will consist of monitoring how the economy performs with 5%+ short-term rates indefinitely and, for now at least, 2% inflation-adjusted “real” 10-year yields. It’s true inflation remains well above the Fed’s 2% target, but by the Fed’s own projections it isn’t expecting to reach target before 2025. And while 2% is the central-banker ideal, equity markets historically are comfortable with inflation under 4% or so. It’s also true that many of the genuine macro concerns recently have been met with timely, perhaps lucky, offsets. The well-foreseen drags from student-loan repayment resumption, labor strikes and foreign weakness are being applied as coolant to an economy that started this quarter running rather hot, with the early (and likely to be trimmed) Atlanta Fed GDP tracker near 5% annualized and wage growth still running above 4% annualized. Oil prices are pushing the upper limits of investors comfort zone, with WTI crude surmounting $90 a barrel. Yet we’ve been here before, and indeed the national per-gallon price of gasoline was at current levels in the fall of 2014, and since then the average hourly wage for production and nonsupervisory workers has gone from $19 to $29. The enormous supply of new short-term Treasury debt that many fretted over after the debt ceiling was lifted has indeed hit the market, only to be soaked up in large part by voracious demand from money market funds, which have taken in $1 trillion in net new money this year. For all the resilience in the economy and equity market, though, there’s no denying it has been indecisive tape, lacking in momentum and with uneven performance below the surface. The equal-weight S & P 500 is about where it was last Thanksgiving and small-cap indexes have been sideways and stuck for a year-and-a-half. The underachieving bull All of this fits with what has been a rather underachieving bull market since the October 2022 low, as such things go. Ned Davis Research shows the Dow Jones Industrial Average since then has tracked with two of the weaker initial years of past cyclical bull markets, well short of the average return. This is the flip side of last year’s sell-off having stopped short of achieving a more comprehensive liquidation of equity exposures or a washout in valuations. With it all, cyclical stocks have largely if tentatively held their lead over defensive ones, though former leadership groups such as semiconductors and homebuilders are undergoing proper corrections. Apple and Nvidia are each down 12% from their highs, yet the overall S & P is off a mere 3% from its late-July peak, a headwind for sure but also proof that no one stock, no matter how big or beloved, is the sole key to the market. And yes, the archive-keepers will tell you it remains a dicey part of the calendar for stocks, with the week following September options expiration often weak and this year coinciding with the start of the folkloric but defensible “Sell Rosh Hashanah, buy Yom Kippur” trade. (The former holiday starts Saturday, the latter on Sept. 25.) Worth keeping in mind, though over the past decade the market in this period was up five times and down five, with the worst return a 2.1% drop. John Kolovos, technical market strategist at Macro Risk Advisors, went out on this limb late last week: “Seasonals aside, we are nearing turning points lower for Rates, a major decline in the [U.S. dollar], and even the great and powerful WTI oil is poised to consolidate. Coupled with still loads of skepticism and growing oversold conditions for the broader equity complex, we need to be on the lookout for risk markets to trough and build towards fourth-quarter strength.” Kolovos has been anticipating a “long and winding road to 4800” for the S & P 500, provided it doesn’t crack support near 4300 before then. Rising toward 4800 in coming months would complete the two-year round trip that the market has been tracing out for a while now. .SPX YTD mountain S & P 500 YTD Such a scenario would then certainly give rise to a vexing “Now what?” moment, with valuations presumably quite full, the lagged effects of financial tightening doing their thing, the election-year pattern less generous than the pre-election tendencies. Could get tricky for sure. But would be a true luxury to have a chance to fret over such concerns from atop a 25% gain for the whole of 2023.
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