Was the recent early May Stock Rally predetermined?

In last week’s release, titled “Return to the Old Normal, back to our regularly Scheduled Program, How the rest of 2024 might play out for the S&P500”, we covered a lot of ground.  Here’s the link to that video.  The equity markets had already been in rally mode for about a week into what turned out to be bad news is good news “lower than expected, BLS jobs release Friday that was reported at 175,000 jobs, almost 20% lower than economist expectations.

Into that number the S&P 500 had already rallied about 2% or 100 cash S&P 500 points off its closing, option expiration Friday April 19^th close of 4967.  With that bad news is good news attitude, the attitude that the Federal Reserve might cut interest rates sooner than later, shorter term traders had to reverse course, cover shorts, or buy stocks back. Longer dated yields fell sharply, setting off what investors should come to expect, a rather broad overall market rally, led by? Yes, you guessed it, the Old Normal, large cap tech stocks, semiconductors stocks, and some industrial names.

The Nasdaq Composite led the rally up 2% on the day. The SMH, semiconductor ETF was up 2.7%, And almost anything “techie” jumped between 2-8%.  It certainly didn’t hurt that Apple announced a positive earnings and revenue quarter versus low expectations due to its China exposure, announced a $110 billion stock buyback, and teased their entrance, development, and future release of an AI enabled phone later in 2024 or early 2025.

But frequent listeners who know me well, know that I like real time tradeable date that leads markets, and I often say that the news headlines or government economic data is most often an excuse, or east reason given, for a move that was highly likely to occur anyway if one looks behind the scenes.

Recall that just 3 weeks ago, on Friday April 26^th, at the near height of the “inflation won’t drop, and the Federal reserve might have to raise rates” hysteria on financial networks, our investment team posted our weekly stock talk video titled: “The Good, the Bad, and the Ugly?  Here’s a link to that video:

In that video, our team called out that the “good” our team was seeing was that the real time data was saying, inflation expectations were peaking right then. Right when others were becoming most alarmist.  Just 3 weeks ago, the doomsdayers were getting most vocal about inflations reacceleration return. Viewers our scripts are written over the weekend.  It takes almost a week from script to posting here on YouTube. That one was penned on Sunday April 21^st. Looking back, that was the weekend the S&P500 bottomed short-term^. This video was taped on Monday morning April 22^nd and released on Friday April 26^th.Here’s an updated chart, of 5-year year time inflation expectations. Recall we had no idea what the excuse might be for a rally, but this real-time series said one was coming.  In advance of the current rally in equities, we noted the similarities to inflation expectation late October 2023 peak about 4-5 days before the stock markets troughed.  Back then the S&P 500 promptly rallied back to its then all-time highs of 4800 in only 6 weeks, and then going on to rally 1100 S&P 500 points, from October 2023 low to March 2024 high, in almost exactly 5 months.

The real-time 5-year inflation breakeven rates.

That was the good news back in late April. We gave you the “bad” news back then, and the most likely reason for the broad market selloff the first 3 weeks in April as well. The bad news back then 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.

Well, early the week of May 1^st, a few days in front of the “weak” Friday’s jobs data, our investment team published this updated chart of the real time real interest rates on Linked in. Here was the chart we posted with annotations on it.

That was before the Jobs data was released and many strategists and TV personalities were nearing hysterical levels saying the Fed would not cut rates for all of 2024, which of course would likely be bad for equities, due to lower 2h24 earnings than expected, given the economy is slowing and most economic data series are coming in light vs expectation.

Here’s the same chart of real rates 3 days after the jobs data, after the S&P500 gained another 1.5% and the growth heavy Nasdaq ran 2% on Friday. Did our team know the data would be “weaker” than expected. No, we didn’t.  Did we survey every state and try to triangulate job creation? No of course not. We were just looking behind the scenes are real-time tradeable data that have been pretty good historically at helping one catch turns or rotate a little more in and out of certain industries and sectors. Why do I say that?  Because as soon as the Jobs data hit, you can see the computers taking over and buying certain ETF’s or stocks with characteristics and selling others.

For example, utilities had been the best performing group in the market in April along with Energy stocks and staple names like Pepsi or Walmart, however post jobs data, the energy group was the worst S&P500 sector and the utility group was only marginally green even with a big rally in interest rates which should make “boring and stable” companies like utilities and staples more attractive. Over the long term, yes, they work during lower interest rate times, however, when real rates fall, equity risk premium falls, and the quantitative driven investor kick in usually buying the highest growth most volatile stocks as they benefit “at the margin” the more than slower growth more boring dividend growth names.

Where do we go from here? We laid that out in our piece last week. Here’s the link.

And investors, I do want to directly apologize to Jerome Powell for one of my last week comments where I sarcastically mentioned the “collective wisdom of the Fed”.  Whether the whole Fed is smart or not, given JP’s prepared speech and press conference answers after the release of the Fed’s decision earlier in the week, I was beyond pleasantly surprised that it does appear that JP, if not anyone else on the Fed, is looking behind the scenes and beyond the stale and inaccurate government economic data series, and he is keeping an eye on and taking into consideration real-time market and economic data. Maybe he is watching the Citi Economic surprise index go straight down the last 4 weeks as the data has consistently underwhelmed the collective estimates of economists and strategists making those predictions.

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 and shock absorbers for a stock portfolio.  Information on this exciting new strategy of ours can be found at www.OakHarvestFunds.com.

From the whole team here, thank you and have a great weekend.