The S&P 500 gained 0.77% this week with Friday's close at 4,594.63. The index has now increased five weeks in a row, gaining a massive 11.59% in the process.
That's the strongest five-week return for the S&P 500 since the week ending 12/4/2020, or almost exactly three years ago. If we search for the last time the S&P 500 increased five weeks in a row and gained 10% or more over that five-week stretch, then we have to go all the way back to April 2009 to find the last instance. Friday's close is the highest weekly close thus far in 2023, and the last five weeks remind us of our favorite phrase, one we've shared countless number of times in our commentary:
"The price of the S&P 500 will trade beyond the limits of imagination."
Now, as exciting as the last five weeks have been, it's important to maintain some perspective here. Let's reference back to something we wrote in our Update from 10/29 (Steve's birthday!):
"About the only positive we can say right now is that prices don't move linearly forever, and the S&P 500 has been falling in a linear manner. The index has closed lower 10 of the last 12 trading days, four of the last six weeks, and is two days away from a three-month losing streak."
Well, we can completely reverse this statement as of today. Prices don't move linearly forever, and the S&P 500 has been rising linearly over the the last five weeks. Not only do we have a five-week winning streak, but the S&P 500 has closed higher 19 of the last 24 trading days. We share this not to suggest that the S&P 500 has a meaningful selloff in its near future, but instead to set the expectation that we expect the fight to get decidedly more even over the weeks ahead, and probably starting as early as next week. It's not all that common for five-week winning streaks to make it to six-week winning streaks, so perhaps the S&P 500 will come up for a breath of air over the week ahead.
Ironically, all the S&P 500 did this week was trade back up to the same price it was at on July 27, a little more than four months ago.
In last week's Update we talked about the "retest" of July's highs likely getting underway over the week ahead (i.e., this past week), and that's what we saw this week. The S&P 500 actually found a pinch of selling pressure the first four days of the week with its daily lows from Monday through Thursday all ranging between 4,537.24 (Friday's lows) and 4,546.32 (Monday's low). Friday's upside spurt left the index face-to-face with recent and relevant "resistance" from July, so the price action this past week isn't yet an "all-clear" sign in our view.
Fundamentally, the economic data this week would seem to support the idea of a "soft landing" given cooler than expected inflation data (click here), which ensures the "Fed pause", and somewhat weak economic data (click here) that leads to the "Fed pivot" in 2024 (click here). Powell spoke about it on Friday (click here), and while his remarks seemed balanced, the market collectively labeled them as "dovish" with broad equity market strength and surging prices across the long end of the Treasury bond market (i.e., falling interest rates).
One of the major themes of 2023's price action has been how the large majority of the S&P 500's year-to-date return has been attributed to just seven stocks, otherwise known as the "magnificent seven" (CNBC even made an index of them! click here). As an example, as of Friday's close the traditionally market-capitalization weighted S&P 500 index (where the "magnificent seven" comprise a gigantic overweight across individual equity constituents) is higher by a whopping 19.67% thus far in 2023. By contrast, the S&P 500 Equal Weight Index (SPXEW), which weights all of the S&P 500's constituents equally, is higher by just 6.18% on a year-to-date basis.
This has left media pundits and many a market technician begging for a broadening of the advance to support the idea of the rally's staying power. Well, if this week was any guide, really if this past month is any guide, then we may finally be getting what we've been asking for.
We wrote this same section in our Update from 11/19/2023, but this week's price action was the once again the "everything, everywhere, all at once" market. In other words, everything went up this week and breadth was fantastic.
Ten of the eleven sectors within the S&P 500 closed higher this week and four of the eleven gained more than 2%. Real estate gained 4.65%, materials climbed 2.75%, industrials jumped 2.26% and financials gained 2.23%. Technology gained just 0.63% and the lone loser this week was the communication services sector, which might as well be a sibling to the technology sector. Small-cap stocks got into the action again this week, rising by 3.11%.
As we wrote a few weeks ago, this week raises optimism about the idea of the rest of the stock market joining the party.
Long-term Treasury bonds, as measured by the iShares 20+ Year Treasury Bond ETF (TLT) absolutely roared to the upside this week, gaining 3.88% with Friday's close at $92.99. TLT has now increased five of the last six weeks and it's no surprise to us that the S&P 500 found its footing right alongside TLT finding its footing. In our Update from 10/29 we wrote the following about TLT:
"As we wrote last week, we fully believe the risk/reward relationship for TLT is incredibly attractive over the coming months (i.e., a lot more reward than risk over the coming months). The current "oversold" condition across almost all time frames is remarkable. There will be a rally, there always is, and it could easily see TLT gain 10-20% in no time."
So, there are now just four full weeks left in 2023 and the year is shaping up rather nicely across the board. It's been anything but an "easy" year in the world of investing; keep in mind that almost 100% of the S&P 500's year-to-date advance is attributed to the index's performance in January and November alone! One strong sprint to start the year, a whole lot of nothing, and then one last sprint to finish the year. That's 2023.
As for the week ahead, can the S&P 500 extend its weekly winning streak to six? There's a good deal of market-moving economic data coming forward, with the most important on Friday via the jobs report. The Volatility Index (VIX) closed Friday at 12.63, its lowest weekly close since early 2020, or before the pandemic began. After the past two years, we'd welcome a slow, boring, low volatility ride to new all-time highs...and we think that's where we're headed in the first quarter of 2024. Fingers crossed!
S&P 500 Primary Trend - Up
The S&P 500 finished the month of November on Thursday of this week, and what a month it was. The index ripped higher for the month, gaining a whopping 8.92% and never spending a single tick in negative territory (i.e., November's monthly low was greater than October's monthly close).
Coming into November the S&P 500 had declined each of the prior three months, and in terms of monthly closing prices the index shed -8.61%. A "boom or bust" situation existed for the S&P 500 at the end of October, and with the luxury of hindsight the index chose boom in a major, major way.
Historically speaking, when the S&P 500 ends a three-month losing streak by gaining 3% or more and doesn't finish the month at a new all-time high monthly close, the index has been off to the races to the north over the months ahead and a new all-time high monthly close was in the near future.
The month of November marks the 14th instance in which this pattern has occurred. The S&P 500's forward returns have closed higher across virtually all time periods measured in each of the last 10 instances. You have to go back to the late 1960s to find any instances that didn't see the S&P 500 march up, up and away over the forward one year. So, unless "this time is different"...
Now, to be fair, this time could very well be different because it's always different fundamentally.
We do live in unprecedented times so the idea of experiencing unprecedented price action wouldn't be all that surprising. The table above doesn't help us predict the future, there is truly nothing that can predict what lies ahead in 2024 unfortunately. But what the table does do is help us minimize the impact of our innate biases regarding what lies ahead.
It's pretty easy to want to sell it all right now across our portfolios, to take the money and run. The S&P 500 just produced a great calendar year worth of returns in just five short weeks, amid a macroeconomic backdrop that's best described as uncertain. But the table helps us understand that yes, this can continue, the S&P 500 can continue to rally over the year ahead and more often than not it does. Remember, long-term investing is a mental battle, it's a constant tug-of-war between adhering to a prudent, sound and disciplined long-term investing plan against succumbing to the emotions of fear and greed.
Our work now labels the primary trend as up, or "bullish", and during uptrends long-term investors are best served investing in the more traditional sense of the word.
Uptrends are a time to buy 'em and hold 'em and keep your defense on the sidelines. They're a time to mute the talking heads on the television, a time to try to ignore all of the "noise", especially in a year like 2023 where the "noise" is arguably the loudest it has ever been.
This is why we love using a systematic, rules-based, non-discretionary approach to asset allocation and security selection decisions.
If left to human discretion, emotions are then involved and we don't know how anyone would keep investing in stocks the past few months. The "noise" has been too loud, and "noise" of this magnitude will always strike an emotional chord and force us to lose that mental tug-of-war.
During volatile climates there's always a reason not to buy stocks, there's always a reason to believe buying them and holding them is a recipe for disaster. This is because the "bearish" case is always known and knowable, thus it's always more articulate than the "bullish" case. Take 2024 as an example: We know about the economic uncertainty, we know about the geopolitical situation, we know about the upcoming election. It's easy to believe the market will find turbulence in 2024. It's far more difficult to have faith in the idea of the market taking all of the above in stride in 2024.
This is why a dispassionate, robot-like approach to investing decisions will generally win over the long term; it overweights faith in the future when the fear in the present is likely too much to overcome.
We encourage all of our readers who are long-term investors to not let the fear of striking out keep them from stepping up to the plate.
This uptrend can continue, the S&P 500 can climb to prices that are unimaginable over the coming twelve months. It's imperative those long-term investors who need to participate (a derivative of your individual investor attributes) do participate (importantly, there are plenty of our readers who don't need to participate! Earning 5% in risk-free assets is more than enough for some!).
Happy Sunday!Steve & Rick