The S&P 500 gained 1.62% this week with Friday's close at 4,136.48. Friday's weekly close is the highest weekly close since August of 2022.
The index has now closed higher four of the last five weeks and has gained 7.73% over that time period. In our Update from 1/1/2023 we wrote:
"We always marvel about how everything can change on a dime for what seems to be nothing more than a change in calendar year."
Well, we limped across the finish line to end 2022 so it's perhaps no surprise that we came out sprinting like mad here in 2023.
If the narrative coming into the week was "Let the retest of the ~4,100 level begin!" then the retest is off to a pretty good start.
The S&P 500 traded mostly negative to start the week but then roared to the upside after hearing from the Fed on Wednesday (click here). The index went from Wednesday's pre-press conference low at 4,037.20 to Thursday's weekly high at 4,195.44, a gain of nearly 4% in a little more than one trading day...resistance at ~4,100 be damned.
Friday's strong jobs report (click here) then threw a bit of cold water on the rally as apparently weak economic data is good news and strong economic data is bad news. The S&P 500 fell -1.04% on Friday, which left a hint of "resistance" at the ~4,200 region. The narrative here is the idea that given how strong the labor market remains the Fed will need to do more in order to truly defeat inflation. This fuels the "higher for longer" policy stance that runs counter to the idea that the Fed's hiking cycle is done in a month.
Visually speaking, should the index trade back down into the shaded red region on the chart below (say at and around ~4,080-4,100) and then move back above the ~4,200 region by week end, that would be a picture-perfect breakout to the upside. Alternatively, should the S&P 500 trade below the 4,100 region early next week and then stay there by closing the week below the 4,100 level, that would be an ominous sign indicative of a "false breakout".
Given how strong and resilient the price action has been thus far here in 2023 there's no reason to believe the "false breakout" scenario is most likely.
That said, it feels like the "false breakout" is what's happening, the rally to start the year feels "too good to be true" given the macroeconomic landscape, like it's one giant "bull trap", but that's why feelings have no seat at the roundtable of decision-making. For now, Friday's downturn is nothing more than a healthy "throwback".
While Powell didn't take an overly hawkish "whatever it takes" stance at his press conference on Wednesday (hence why the S&P 500 ripped higher in our opinion), Friday's blowout jobs report did move interest rate expectations across market participants in the federal funds futures space. The market now sees a good chance of an additional 0.25% rate hike after March, leaving the terminal rate at 5.00%-5.25%. The market is still pricing in rate cuts the final two months of the year, and given Powell's tone on Wednesday we find that rather difficult to explain.
Technology stocks continue to be the main driver of the S&P 500's upside. The S&P 500 technology sector (SPT) gained 3.75% this week and has now increased five weeks in a row, gaining 13.95% in the process.
In terms of sectors, the price action was again "risk-on" this week. Communication services was the top performing sector, gaining 5.26%. Meta Platforms, Inc. (META) was the big winner there this week, roaring higher by 22.93% (click here). Technology and consumer discretionary were in the silver and bronze spots this week, rising by 3.71% and 2.34%. The laggards this week were once again the energy sector and the defensive areas of the market with the energy, utilities, and health care sectors all finishing the week in the red.
We write about sectors often but we rarely write about different styles of the market, however the price action in January for the "value" style was too good to ignore.
The SPDR S&P 500 Value ETF (SPYV) closed the month of January at a fresh all-time high. The SPDR S&P 400 Mid Cap Value ETF (MDYV) and the SPDR S&P 600 Small Cap Value ETF (SLYV) both closed January at a fresh all-time high. There's a trend here: market participants have a salacious appetite for "value" stocks across any and all market capitalizations.
As for the week ahead, we have a light week on the economic data front. Earnings season will continue to roll along but it's the perfect week for the S&P 500 to take a rest. Remember, prices don't move linearly forever and we've been on a one-way train to the north for a few weeks now. We'd like to see the S&P 500 consolidate between ~4,080-4,200 and rebuild the energy for another push higher. Ideally, past "resistance" will become future "support" should the index be able to sustain above the ~4,080 level over the week(s) ahead. Hopefully a boring week awaits!
S&P 500 Primary Trend - Neutral
The S&P 500 finished the month of January on Tuesday. The index gained 6.17% in January, recovering almost all of its December decline.
Based on January's strength our work now labels the primary trend for the S&P 500 as trendless, or "neutral". During "neutral" climates long-term investors are best served investing in a balanced manner, generally speaking.
Our mantra for 2023 has been for long-term investors to allocate as if the worst is yet to come while being prepared in the event the best is right around the corner. January's pivot to the upside combined with a strong start to February suggest the best might actually be right around the corner. As we wrote last week, it certainly doesn't feel like it but that's the way all lasting market bottoms feel.
There's a bevy of quantifiable studies that would suggest January's move to the upside is just the beginning (i.e., the S&P 500 is onward and upward from here over the remainder of 2023). We share these studies not to suggest further upside is guaranteed over the remainder of 2023, but instead in an effort to dispel a "bearish" narrative that the upside we've seen the last four months can't continue throughout the remainder of 2023.
For example, the S&P 500 closed the month of January with trailing 4-month returns of 10% or more while also having negative trailing 12-month returns. We're essentially honing in on strong 4-month rallies within the context of a meaningfully negative trailing calendar year.
There have been nine prior instances of this 4-month price thrust and in all nine instances the S&P 500 was then off to the races to the upside.
We can also identify all calendar years that have started off gangbusters to the upside like 2023. The table below lists all calendar years where the S&P 500 reached 7.5% or more year-to-date returns at some point during the month of February while also closing the month of February below its all-time high monthly close (we think that's a safe assumption here in February...).
This identifies eight prior calendar years, and the S&P 500's returns over the forward six and eight months have closed higher across all but one instance while the index's forward ten- and twelve-month returns have never closed lower.
As always, our studies can't be used in isolation to predict where the S&P 500 is headed next. It doesn't take us more than a few minutes to produce the tables shared above, and if a few minutes of work was analogous to having a crystal ball then we'd make our clients and ourselves a lot more money. The game is just not that easy.
What these tables do is to help us find dispassion and conviction in the idea that we have no idea what lies ahead. At the moment it's easy to believe we're doomed, it's much harder to have the faith that the Fed has nailed it, a soft landing is on deck, and the S&P 500's "bear market" is over.
These studies help us avoid having an overly negative bias as to what lies ahead because "unless this time is different" the price action in a vacuum suggests we're headed much, much higher here in 2023.
We can all only hope!
Happy Sunday!Steve & Rick