SP500 – 4300, It’s Summer Time For a Break. What Does Narrow Breadth Really Mean?
The OHFG investment team laid out our first half out look back in late 2022. Back then we called for declining volatility in the first half of 2023, a return to growth stocks over value stocks, and a rally back to 4300ish on the S&P500. Back then and almost weekly, the rhetoric by many strategists on TV was “inflation was out of control”; we were headed into a 1h23 recession; stock volatility was not only “too low” but “wrong” and that the S&P500 would retest its October 2022 lows, call it 3500 any day, week or month now. Strategist after strategist proclaimed the recession was eminent and earnings estimates were way to high and the markets were overvalued.
We disagreed with this viewpoint, calling our outlook “the Old Normal, Economic cycles return”. We published a first half 2023 target of 4300 when the markets were trading around 3800 at the end of 2022. Even with our data sets and history on our side, we got loads of pushback on this outlook as the negative headlines around inflation, Federal Reserve Hawkish rhetoric, the headlines of war in Ukraine, and Covid lock downs in China were rampant on CNBC, Bloomberg TV, and Fox News.
Here’s a weekly chart of the S&P500 as of June —. So far, October of 2022 has remained the market’s low for the last 2 years. There has been no lower low. There has been no retest of the June 2022 lows or the October 2022 lows.
Since October of 2022, over the last 7.5 months, the S&P 500 has made a series of higher weekly lows and higher weekly highs to rally back to almost 4300 today..
Here’s a monthly chart of the SP500. It’s been rocky road since Dec 202 when the S&P500 peaked at 4800 4-6 weeks after the Fed first alluded to interest rate increases in 2022. The S&P500 has held the monthly uptrend that’s been intact since the 1q 2009 Great Financial Crises lows, and the S&P 500 is trying to regain its upward momentum.
If you listened to those strategists’ opinions on CNBC, who most often have never managed any outside capital, or worse those non-fiduciary newsletter writers who can and do “say anything”, charging $99/year, you might have “gone to cash in the summer or fall of 2022 when the markets were near their lows. If so, you are now likely sitting on the sideline waiting to put your savings back into the stock markets at those lower retest levels. Well, we have now regained about half the losses from 2022.
As of this writing, the 2022 leaders, slower growth defensive names and energy stocks are down year to date. 2023 has been led by a group of higher growth technology and communication stocks recovering from disastrous 2022 returns. Most of those names are heavy weights in the NASDAQ Composite index. Here’s the monthly chart of the NAZ composite.
Many bearish commentators and strategists, who have missed the markets rally the last 7 months, have made valid observations that much of the markets move YTD has been helped by a few large cap technology names. Every week a new bearish comparison enters the conversation. Here’s the data from Ned Davis Research. As of May 30th, the median stock in the S&P 500 was down -1.6% versus the averages gain of +9.7% year to date. Just over 10% of the S&P 500 is up over 20% YTD while almost 36% of the names are down over -12%.
Ned Davis Research
According to Ned Davis research, when measuring poor breadth in the S&P500, there have been 10 periods the last 50 years where the 3 month performance of single stocks outperforming the overall S&P500 fell below 30%. Here’s that data:
As you can see, most of these data points were clustered during the chronically high inflationary period of the 1972-1980 when the Fed started and stopped and started raising interest rates many times. Outside of that, there was the signal about 9 months before the Dot.com bubble peak when stocks rallied over 10% the next 12 months and the signal at the Dot.com bubble peak in 1q 2000 which stocks then fell almost -25% into early 2001.
What’s interesting to me, is the side note of the NDR study. What’s that? It is the note that post “narrow leadership” markets like we have been in YTD, small cap stocks have historically outperformed large cap stocks and value stocks have outperformed growth stocks. And even more interesting? The factor screening for Low quality has outperformed a high quality factor.
Viewers it’s not unusual for a narrow market breadth dynamic to happen during rallies or bull markets. It’s happened more times than not the last 14 years. Particularly frustrating year to date has been the wide dispersion in sector returns.
As of May 26th, the best performing sectors of YTD are technology and communication services, both sporting over 30% returns for the year. That’s outperforming the S&P500 by over 20pcntpnts. Technology has tripled the S&P500 YTD return of about 9.7%. The worst group, Energy, was the best group in 2022.
If you sold near the market lows in 2022 and “went to cash” should you panic back in now? I don’t think so. Why? The rally is quickly approaching the 8-month mark, in mid to late June, and this 8-month mark has historically marked a short-term market peak to digest rapid gains. No guarantees of course. Moreover, the summer travel season almost always gives investors a chance to find attractive stocks at better, lower prices. Why? Because historical, volatility tends to trough and increase during summer, particularly after the 4th of July weekend through Labor Day.
Likewise, should you just give up on 2023 because the S&P500 has rallied off its October 2022 lows and is up over 9.5% ytd? The data says no, you shouldn’t write off the rest of the year. We shared that data with you in last week’s video, here’s the link for that video. Go check it out.
The Normal World of Equity Investing
This is the normal world of equity investing. Many younger investors have never seen this type of market action. The Fed manipulated interest rates lower for years to combat the GFC in 2008/09 and then the Covid pandemic and removed much of the swings in both our economy and the markets. As we said last December in our outlook for the first half of 2023, we are likely back to the old normal folks. Cyclicality, Seasonality. Economic cycles that ebb and flow, and yes can go negative. Remember, there is no perfect investment philosophy, there is no perfect trading tool, that is all weather, outperforming every stock cycle or in every economic environment. But investors, sitting down and planning with a true financial advisor, like we have on staff at Oak Harvest, not just an investments or stock market “guy” like myself, should give you piece of mind that you can reach your financial goals and objectives over time, through the ups and downs of the markets.
At Oak Harvest, we have many tools that our advisors use to help our clients meet their retirement goals and objectives. These tools are both market based and insurance based, that we can use to meet your retirement goals. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at 877-896-0040 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.