S&P 500 = 6000? Equity Markets – Post 1q24, Where do we go from here? Soft Landing Cont. Scenario 1

The S&P 500 closed out its first-quarter performance since 2019. It’s the best in 5 years; in the top 10 the last 54 years, and in the top 15 since the end of WW2. Investors, this is how stocks behave during a “soft landing” as we discussed back last October.

The cash S&P500 closed out March at 5,254. That is a little over 1% higher than our team’s optimistic outlook for 1h2024 we set way back in October of last year when the markets sat near 4150 and most strategists were preaching recession fears. Lower lows coming or worse yet crashes. I will note that our team’s outlook for 1q24 was an exceptionally strong first quarter peaking in mid to late March. This was the “normal” presidential cycle timing we discussed throughout 2023.

For the first quarter, the S&P 500 gained over +10.2%. The value biased, Dow 30 advanced “only” +5.6% in first-quarter performance. And contrary to many financial networks reporting and hyping, the tech heavy Nasdaq, while strong and ended the quarter up over 9.1%; it lagged the broader S&P500.

For the month of March, the S&P 500 gained 3.1%. The Nasdaq gained about half that at 1.8%, and the Dow rose 2.1%. It was the fifth straight positive month for all three major averages.

AI leader Nvidia, was the best S&P 500 stock up 82.5% for the quarter while Tesla’s EV, battery powered profit machine ran out of electricity and was the worst performing S&P 500 stock down almost -30%,
The question for investors now of course is “where do we go from here” during summer, the election period and into year end? Investors, this week we cover the possible positive outcome of a continued soft-landing scenario through 2nd, 3rd and 4th quarters resulting in more “goldilocks” for the rest of 2024. Next week we will present the negative scenarios.

Lets start with the historical data first, knowing 1- there are no guarantees that history repeats, however 2- also knowing that history often rhymes due to normal repetitive human behaviors particularly when it comes to finance and money.

Looking back to WW2, stock market historian Sam Stovall at CFRA research points out that strong 1st quarter have historically foreshadowed ieven strong full year gains. Here’s his table of the top 1st quarter returns since 1945.

Chart: Greatest Q1 S&P 500 Price Gains and Subsequent Intra-Year Declines

Stovall’s data shows that 14 out of the 15 top first quarters since 1945 ended up witj additional double digit percentage returns. The only outlier was 1987. Those prior 14 year gains averaged 23% total return on the year. Such a return from our current levels would triangulate to cash S&P 500 near 5900 at year end. However, Stovall’s data series also revealed heightened volatility on the way to those outsized gains. 13 of the top 15 had declines of -5% or more, which is standard in any year. However, the average decline was over -11%, which is a little above average.

Things supporting continued sizeable gains for the 2-4qtrs of 2024 including a Federal Reserve who paused their rate hiking almost a year ago, and since late last November has messaged a moderately more dovish interest rate outlook for 2h2024.

Investors might ask how stocks performed during non-recessionary economic times when they cut interest rates. That is when the Fed makes pre-emptive cuts in order to continue an economic expansion versus cutting rates out of need or desire to kickstart an ailing economy in recession.

With both Switzerland and Mexico cutting rates in the last 2 weeks, and other countries messaging coming cuts, one can make a case for a synchronized global interest rate cutting cycle to have just begun. This would be bullish for equity assets. Here is a great table from Michael Hartnett’s group and Bank America Securities showing previous pre-emptive cutting cycles since WW2.

Exhibit 18: Non-Recessionary Rate Cuts are Bullish
As one can see, such cycles are historically been overwhelmingly positive for equities. The additional returns. Post initial Fed cuts have ranged from about 10% over 3 months to about +15% a year later. I want to drop a triangulation number for the S&P 500 that keeps popping up in my work for 1q25. What’s that number? That number is 6000. That is the number one gets as a “normal” soft landing economy target for 1h2025 should the Fed navigate the summer storms. That’s the number you get by assuming the Fed follows through with their first cut around Junish of this year and by taking the average 9 month return post Fed cut from our current level. 5254×1.14=5990.

While our team had expected a strong 1q24, calling it Goldilocks in 4q23, we did not anticipate its near linear rise with very little volatility at the index level. There has been only one 4-week stall since the October 28-30th pivot higher in the markets. Additionally, there has been Only one pull back by the S&P 500 of over -3%, and that was out of the gate during the first week of 2024 to start the year on tax selling. Since then, the largest decline in % terms has been barely -2% and spot volatility s measured by the VIX index has dropped to near its historic low bound, ex the historically low vol year of 2017.

As many followers of OHFG investment content know, I have developed a forecasting model that is largely based on the volatility of the markets. Its special sauce has been guarded in the investment kitchen, but it did forecast 4650-4700 for year end 2021 way back in the summer of 2020 post Covid crash as well as many other market level including the optimistic forecast of 5200 for mid-March 2024 back in the summer of 2023. Following this model, and this model only, and knowing that unpredictable economic events can happen, this volatility model also gives a target in 1q2025 of at or near 6000+ on the S&P 500. Investors, this would be the Goldilocks outcome. This is the economic soft-landing scenario for the rest of 2024. This is the low vol, buy the dips, it’s a secular bull-market market. It’s also quite a normal outcome for a 4th year presidential cycle should the economy hold in there at slowing but good enough into the election and the quarter after. While most would view this forecast as “inconceivable”, and I am not willing to get it tattooed on my arm just yet, many of the signs behind the headlines continue to say its outcome is quite possible. Investors, just on Thursday 3/27, with the S&P 500 over 5250, the positive to negative breadth in the S&P 500 was almost 10 to one. That shows a broad market movement. Moreover, while lagging most of 2023 and 2024, the small cap Russell 2000 index just broke out to both 52 week and 2-year highs. Here’s that chart.

Russell 2000 Index

That isn’t generally thought of as a sign of an impending top. This isn’t historically bearish. This is a subtle sign of expanding breadth in the markets. In fact, on Wednesday March 27th the NYSE had a 4 to 1 breadth advance and the S&P 500 advance to declines was near 10 to one, 9.93 to be exact.
With these things in mind, our investment team often gets asked “What do you like?” in the investment universe. Most often my sarcastic answer is “we like it when our longs are green, and our shorts are red”. And even though I can’t offer more specific advice here, I will leave my viewers with a little data that might be helpful over the coming year. Here is a table also from BOA Securities showing historic sector performance of S&P 500 sectors pre and post Federal Reserve interest rate cuts. This shows the % of time a sector outperforms the S&P 500 around the time Feds first rate cuts since 1974.
Exhibit 23: S&P 500 sectors' outperformance hit rate around the first Fed cut
If you want a little peak at where our team may be going with our clients’ money that can be tactical in nature, this table is a good first cheat sheet.

Investors, that’s it for this week and our teams thoughts on an optimist scenario for the rest of 2024. Next week I’ll give you a bit of the same rundown but present what a negative, hard landing for 2h2024 might look like and how the markets might fair under that scenario.

Right now, our team doesn’t see the leading signs of a future recession but I can say, the math I see behind the scenes, the same math that said 5150-5200 on ct we will have one again one year.

For investors or retirees uncomfortable with wider range of possible equity outcomes, the Oak Harvest team has launched a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges and shock absorber “insurance” for a stock portfolio. Information on this exciting new strategy of ours can be found at OakHarvestFunds.com. From the whole team here, thank you and have a great weekend.