S&P500 : The “Old Normal,” back to our regularly scheduled program

By the time this piece airs, we will have already made it through 75%+ of S&P500 earnings releases including most of the large cap tech stocks and the Federal Reserve will have met for their early May meeting and disseminated their “collective wisdom” on the economy and interest rates. For those only listening to this week’s stock talk, please note you cannot see or might not feel my level of sarcasm around the term “collective wisdom” economists and Federal reserve members.

In last week’s piece, titled the “Good, Th Bad, and the Ugly”, we once again updated and coverred 3 data series we follow in real time which have been very good leading indicators for broad market moves and even fairly accurate at catching smaller, shorter term squiggly lines which from a trading standpoint is fun, but froma long term investing postion, are fairly irrelavnt.

The “good” was the real time data was saying, inflation expectations were peaking 2 weeks ago just as the doomsdayers were getting most vocal about its return. We posted this chart before last week’s rally, noting the similarities to its late October 2023 peak about 4-5 days before the stock markets troughed, and promptly rallied 1100 S&P 500 points in almost exactly 5 months.

The real-time 5-year inflation breakeven rates.

Inflation expectation and statistics in the USA are very seasonal! ….

That was the good news. Second the “bad” news, and the most likely reason for the broad market selloff the first 3 weeks in April. The bad news was the pivot higher, not lower, in 5-year real interest rates. Remember investors, this is the interest rate that comes closest to accurately forecasting whether investors are willing to pay higher PE multiples for the market or lower PE multiples.  Higher real rates histrically compress PE multiples, while lower trending real rates historically lead to higher PE’s and higher markets the past 15 years.

Finally, “the Ugly”. The Ugly was that we continue to follow the pattern of October 1998-2000, when the Dot.com bubble rally happened, but the Federal Reserve stayed too tight and eventually caused a recession in 2001. Of course, stocks anticipate future economic events, and the first leg down in a multiyear bear market began in mid to late summer 2000 with a drop of -30% into 1q2001. Stock market bulls want to avoid this outcome, while bears relish in this overlay hoping they will finally be right after 10-12 years of calling for secular bear markets.

Which brings me full circle to this week’s piece, “Back to our regularly scheduled program, return to the Old normal”. Here’s a daily chart of the S&P500 including last week’s rally.

Five months up from late October 2023 through late March 2024, almost spot on to the day, as our team had expected back in late October 2023.  The cash S&P500 rallied +1100 points, which met our optimistic expectation for the 1h24 we discussed for the better part of 6 months during the 2^nd half of 2023 as many others were talking recessions, or worse yet market crashes.  Our team had this very positive outlook because this is what is “normal” historically during the 2h of the 3^rd year presidential cycle and 1q of the 4^th year.  That factor as well as its quite historically normal to have a big rally when the Fed merely pauses after a series of big interest rate increases, without cutting interest rates.

So where to go now?  What’s more normal look like? Well, here it I, remembering that there are no guarantees or “perfect” in the stock market.  This could be the forward path for stocks at least through late summer.  This path has been derived by many of the same sources we often quote at Oak Harvest on the investment team.  Who is that?  Those are strategists, technicians, chartists, and historians that have been proven over many cycles to be pretty accurate while also being relatively precise in their calls. Larry Williams and his great stock market cycle work. Steven Suttmeier and his quant data group at Bank America/Merrill Lynch and chartist Rich Ross as Evercore IsI to name a few.

Here’s 2 charts from Larry Williams that he first published back in late 2023 for his 2024 forecast. First Larry’s Natural cycle forecast for 2024, which takes the prior years pattern, compares it back in time to all similar time periods then projects forward what the next year “could” look like based on that.

First, trend is more important than absolute level on most all of Larry’s work. However, so far so good on this ones “forecast” of 2024.  It projected an early down January. Check. A significant rally into mid-March to new ATH’s. Check. Then about a 3 week sell off into mid-April. Triple check. Before finding a bottom and heading to more new ATH’s into summer where one wouldn’t worry again until after July 4^th into August for a down move in 3^rd quarter pre-election.  That remains to be seen.

Larry’s second chart, which we referenced months ago, and used in late October 2023 to support our positive outlook for 4q23-1q24, is his daily, long term cycle projection.  Here that one is.  His projection for 2024 is the red line.

It too has been money as it forecast a big 1q24 rally to new ATH into late March before a normally seasonal week first part of April.  This work also supports another bought of weakness to come over the mid -May period before a strong early summer rally taking the markets at least back toward the highs they reached in March.  Call that a rally back to 5250 on the S&P500 into July 4^th weekend,

So that’s; it for this week folks.  The Good, The Bad, and the Ugly.  And while thefirst 3 weeks of April were certainly ugly for most high growth stocks, but not unexpected after a 5 month rally up?I don’t want to leave you on a down note.  Investors, even if we continue to play out in a similar way as post dot.com in 2000, recall that the markets hung in there for the better part of almost 5-6 more months.  In fact, the tech stock sector actually rallied strongly post April options expiration for 2-3 weeks before selling off again and making a slightly lower low in mid-May.  They then went on a strong rally led by semiconductors all the way back to near their prior all-time highs into July 4^th and mid-summer.

Steve Suttmeier’s work at Bank America supports similar forecasts for the next 3 to 4 months. Here’s the monthly seasonality of the S&P 500 for the 4^th year in a Presidential election cycle since 1928.

Average year 4 returns have April flat to down a bit, and we did see a -5% selloff this year the first 3 weeks of the month. May has historically been the worse month of the 4th year cycle, averaging a loss of close to -1.25%. However, under this forecasting tool investors should not be panicking as May has also historically been the low for the remainder of the year most Presidential election years. Looking at this pattern of returns, one has seen a cumulative positive return of almost +6.75% post May during the summer months of June through August. Using this pattern, and only this pattern, a quite normal scenario for the next 4 months could see the cash S&P 500 resuming its down move into late May, making a marginal new low versus its April low, lets call it 4900, before rallying strongly in a summer rally. Call it at least back to near its ATH of about 5250 on the S&P 500.

However, investors recall that the +10.2% rally in the S&P 500 in the 1q24 was the 14^th best 1q return going all the way back to 1928.  And historically, outside of the current period we are in, and another for about 2 months pre-election in November, that has been very bullish for stocks the remainder of 2024 and early 2025.  Back to Sam Stovalls historic work, here are the returns from the best 1qtrs in market history.

Stovall’s data shows that 14 out of the 15 top first quarters since 1945 ended up with additional double digit percentage returns with no down years.  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 5850-5900 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 and of course we had the first 3 weeks of April.  However, the average decline was over -11%, which is a little above average.

While this upside seems like a stretch even to the most bullish cheerleaders, and I have a hard time getting there by year end 2024, history would say, a market move to 5900-6000 over the next 9 to 12 months it is actually more likely than this being a replay of the 2000 Dot.com bubble, and the markets tanking back to 3500-3600.

So if the few strategists, technicians, and market historians who have been right for the better part of 2 years, if Larry Williams, Steve Suttmeier, and Sam Stovall’s work continues to be prescient, while most economists, academics, and equity strategists whiffed on their 2023 forecasts, here’s a possible roadmap for how the S&P 500 may rally to new ATH’s and beyond in the coming year.  No guarantees or promises.

Investors, that’s it for this week, 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 as a shock absorber for a stock portfolio.  Information on this exciting new strategy of ours can be found at OakHarvestFunds.com.

Viewers, for those of you who made it this far, I want to give a shout out to the entire OHFG team as last week, USA TODAY, ranked us as one of the Best Financial Advisory Firms 2024. The award is given to top registered investment advisory (RIA) firms in the United States based on two key criteria:

• Recommendations from individuals from among 25,000 financial advisors, clients, and industry experts
• Growth in Assets under Management (AUM) over 12 months and 5-years, respectively

I personally am looking forward to helping us move up this list over the coming years by taking care of our current and future client base. From the whole team here, thank you and have a great weekend.