S&P 500 Hits New Highs: Did You Miss the 2024 Market Rally?

For the most part, so far fourth quarter 2024 US S&P 500 stock index performance and third quarter 2024 earnings season has been off to the races in a positive way.  You have heard about the historic seasonality of US stocks with September and the first half of October being some of the worst historical time periods of the year. This coupled with many investors concerns over the upcoming election here in the US for President kept many investors on the sidelines waiting for a better entry. I know a few investors who “went to cash” at the beginning of 2024 trying to avoid the stock markets altogether.

Here is a table from Bloomberg showing the monthly returns and seasonality in the S&P 500 since 2009. If you went to cash early in 2024, you’ve likely missed most if not all of the 20%+ YTD gains.

If you were scared off in late July and early August during the normally weak time period, this year the excuse being the Yen carry trade implosion, short term volatility spike and hedge fund delivering, you have missed the recent 8%+ rally to new all-time highs in the S&P500.  The weak September many equity strategists called for didn’t happen as it seems to have been pulled forward into the 4 weeks of late July and early August. However, as one can see by this table, those losses occurred intramonth and all of the summer months netted positive S&P500 index gains.

Other investors listening to the doomers including the likes of Robert Prechter and Elliot wave theorists over a year ago in October 2023 never got back in because they convinced themselves that a replay of 1987 was at hand, we were at the beginning of a crash or were looking to call a “Generational top” in US stocks and forever cement their reputations as “legendary” market sooth sayers. We debunked that analogy way back then and were advising investors that that was likely a major buying pivot.

Throughout 2024, there have been calls by many strategists for heightened volatility in the stock market due to the upcoming Presidential election. Even the Oak Harvest Team expected short term bouts of volatility in the early first quarter and then again mid-summer. The calls for market volatility and uncertainty around the November election kept many investors who focused too much on political outcomes. Many investors kept themselves from pulling the trigger buying stocks on weakness, or worse yet, totally on the sidelines or “going to cash” throughout the year.

Lately there has been talk of hedging your portfolio for an adverse election outcome in a few weeks. I’m not sure exactly what that means. Particularly when looks at the costs of insurance versus actual market volatility?

What am I talking about? I’m talking about a bit of a technical data series I look at behind the scenes that has been quite good at defining future market moves, or at least, which way many hedgers are leaning and if it’s a worthwhile exercise to spend money to hedge.  We’ve discussed these 3 data series many times over the last few years. In order of relevance to an investor, in my opinion are the following.  They are volatility, as measured by the CBOE Vix index, which most in the media refer to when discussing market volatility. As a reminder, the CBOE Volatility Index (VIX) is a calculation and untradeable.  It is meant to represent the market’s expectations for near-term price changes of the S&P 500 cash index (SPX). within a 30-day forward projection of volatility.

The second measure of volatility is realized volatility, or RVOL. This is a measurement of the actual volatility in the SPX index over the last 30 days. This is also called historical volatility. This is the volatility you see on your screen when you watch stocks on CNBC or Bloomberg, or on you sit in front of your screen day after day.

Finally, is my favorite measure of volatility, its Vol index futures. This is the market for traders to trade their beliefs of what volatility will be out in future months. To me, this is a particularly good measure of the true cost of insurance in future months.  It isn’t some math equation based on a basket of index puts and calls.  Its traders forward expectations of the future, and you are charged accordingly to wager or hedge, or protect your portfolio against volatile market moves.

Many market strategists have thrown up alarm warnings most of the year, warning of stock market risk around the election. The work our team has done throughout the year has said, much of the “risk” in the markets that others have been warning of, that has kept many investors from investing and enjoying some if not all of 2024’s 20%+ year to date index gains, had mostly been priced in already. And 2024 would likely turn out to be a very normal and good year for the markets.

I’ve noted the same thing since the year started.  What’s that?  It’s that almost everyone is already nervous and hedged with the same time frame insight.

Investors we are in the home stretch of 2024 and many are still sitting and watching waiting for the “shoe to drop”.  Waiting on our Presidential election, waiting on the Ukrainne/Russia war to end, waiting for peace in the Middle East, waiting on “volatility to subside”, which as I have repeatedly noted for the last 2 months, already has and is likely to continue. Waiting on the China economy to rebound.  Waiting on the US consumer to collapse.  I can go on and on with this list.

And so far, quarter to date, what has mattered?  Our economy continues to grow at a moderate pace.  Inflation continues to cool at a moderate pace, and overall earnings of the US economy continue to grow and those stocks are rewarded positively.  A quick recap of the earnings quarter to date that have been rewarded?  Bank stocks like JP Morgan, Morgan Stanley, Charles Schwab, and Goldman Sachs, now to mention other large financials like Blackrock the worlds largest investment manager and Travelers insurance.  Consumer communication and discretionary stocks like Netflix and cruise line companies have already reported better than expected subscribers or passengers and healthier margins. Industrial companies like Fastenal and Snap On tools beat modest expectations for growth and stocks jumped substantially.

The negative reports and stock price action have been low so far.  The main culprit widely missing their outlook was ASML, the number one manufacturer of optical equipment for semiconductor manufacturing.  A traumatic slowdown in their China sales on the back of regulations holding back China demand was the main culprit but Intels financial situation always played a role their.  In the healthcare space, Medicare and Medicaid insurance providers missed badly as many of their new enrollees since Covid have upped their service usage and these insurers are talking big hits to their margins by way of higher medical loss ratios.  Many energy companies have given weaker guidance on the back of low oil prices and slower China demand, however energy stocks account for less than 4% of the overall S&P500 index.

The upside standout in the healthcare space was ISRG surgical which is the #1 player in the robotic surgery procedure market.  New tool sales globally as well as higher utilization of their installed tools and higher consumable sales led to a massive earnings and margin beat and the stock made substantial new ATH’s on the week.

By the time this video airs, almost 50% of the S&P500 will have reported and we will be within 2 weeks of the Presidential election.

Many investors are sidelined waiting on volatility to decline.  Folks it already has in the markets themselves. Here is an updated chart of realized volatility “RVOL”, what is actually happening in the markets.

Actually 30 day trailing volatility in the S&P500 has declined to under 9 as of this writing.

Volatility futures for the weeks just following the election in mid-November? Here’s that chart.  It was 18.3 as of this writing. Almost 115% premium to actual volatility.

I’ve repeatedly said throughout 2024, that I thought any time volatility futures rose to 20-22, sellers would come in and SP500 buyers would show up.  That’s exactly what has transpired.

Here’s a shorter-term chart of the December vol future.  This contract is tradeable and expires about 5-6 weeks after the election.  During the time period that if there is any delay in results, we are likely to find out the final vote count.

If this was a stock, most technicians would say it’s a sell rallies and its upward channel has been pierced and it is starting to look like a trend reversal lower.  Lower future implied volatility has historically led to pressure stock prices higher, not lower over weeks and months.

I have found over the last 20 years of investing, that while never perfect, nothing is in investing, its very very very rare for the market makers who traffic in the forward volatility markets, the volatility insurance salesmen I call them, to misprice future market risks outside of black swan events like Covid pandemics or other unpredictable events.

In fact, if anything, my work says, most of these hedges around the election will expire worthless and cause market participants to cover higher, or at least pressure stock prices, higher for longer in 4^th quarter 2024 through early 2025.  Investors we are in the home stretch for the election as well as 2024 stock market returns and they both argue for “higher for longer” into the 2025 inaugural parties for whichever candidate should win.

Do politics matter when it comes to equity investing? I’ve argued during the last 3 elections, not as much as most think. The ultimate issue is what is the economy doing, what are earnings doing and what is the Fed doing, and then what is DC doing. Even when it comes to Presidential and political policies be it tax rates, energy regulation, or tariffs, sometimes they have the opposite outcomes vs expectations. Earnings and earnings growth are far more important than who is sitting in the Oval Office.  Yes, political policies can make or break certain sectors and industries, but overall, as political strategist James Carville said in 1992, “It’s the economy stupid” first and foremost when it comes to stocks and your investment returns.

If you are 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.  You can Google “OHFGX Oak Harvest” or find information on this new strategy of ours can be found at OakHarvestFunds.com.

Do you need a retirement plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at 877-896-0040 or fill out this form for a free consultation: https://click2retire.com/Connect