The S&P 500 surged 4.66% this week with Friday's close at 5,995.54. Friday's close is a new all-time high daily and weekly close.
If the biggest takeaway (in terms of price action) from each of our last two Updates was the S&P 500 establishing "resistance" in the ~5,860-5,880 region, then the biggest takeaway this week was the S&P 500 making a mockery of said "resistance" (click here). The index traded quietly on Monday, briefly dipping below the ~5,700 level to 5,696.51 before closing the session back at 5,712.69. And that's when the election party started...
The S&P 500 increased each of the last four trading days this week, gaining 1.23% on election day, 2.53% the day after election day, and adding another 1.12% total over the Thursday and Friday sessions. Overall, the index's 4.95% over the last four trading days is the strongest four-day stretch since almost exactly two years ago. It's a case of correlation - and correlation doesn't always imply causation, but market participants, collectively, cheered Tuesday's election results and/or the sheer fact that the election is finally behind us, all week long. It was like the Fed's decision on interest rates and subsequent press conference (click here) was irrelevant, just a small cherry on top of a big cake.
The S&P 500 took its first trip above the 6,000 level on Friday, trading up to a new all-time high at 6,012.45 before backing off into Friday's close. There are no known levels of "resistance" left on the charts, and the index isn't "overbought" on its daily or weekly charts, so we'd love to see the index behave as if the train has left the station. If we had to title this Update, we'd call it "Up, up and away".
Strength this week was broad-based as all 11 sectors within the S&P 500 closed higher this week.
The biggest winner was the consumer discretionary sector's gain of 7.51%, driven by Tesla's ridiculous advance of 29.01%. Energy gained 6.50%, and both the financials and technology sectors gained more than 5% this week too.
The biggest laggards this week were the so-called "defensive" sectors - consumer staples, utilities, materials and health care, all of which gained less than 2%. By contrast, economically sensitive small-cap stocks, as measured by S&P 600 Small-Cap Index (SML), gained a massive 8.57% this week. So, it's fair to say there was a nice "risk-on" cyclical tone to the price action this week.
Continuing in the "thing of beauty" breakout category is...Bitcoin (BTC)!
We're still not exactly sure what BTC is, or what the fundamental use case is and how it's relevant, but when the chart looks like this we're not sure you really need to be overly concerned with what the underlying asset is. Collectively, market participants are bidding BTC to the moon, and the underlying ETF flows support tremendous demand (click here). "Follow the money" is a popular saying in the investing world for a reason.
Moving over to the bond market, in last week's Update we discussed the slide in bond prices these last few weeks:
"The iShares 20+ Year Treasury Bond Index Fund (TLT) fell -1.08% this week. TLT has now declined six of the last seven weeks and the yield on a 30-year United States Treasury bond has risen from a September low of 3.90% to this week's close at 4.59%. With annualized inflation running at ~2-2.5% across a variety of time frames, that's a 2% real return for conservative investors who want no less than 4.59% guaranteed for the next three decades. That's fairly enticing for some."
Well, TLT traded down -1.42% at its low for the week, but managed to reverse to the upside and finish the week higher by 1.82%. Perhaps TLT was enticing to many!
Interest rates have been ripping to the upside for two months now, but prices don't move linearly forever.
Perhaps TLT's upside reversal this week is a precursor of what's to come, and lower interest rates across the curve are a catalyst to higher prices for stocks. Forward-looking, the Fed didn't say anything this week to lead market participants to believe they'll "pause" (pun intended) their rate cutting policy any time soon. Participants still believe in the idea of three more rate cuts over the forward one year, leaving the federal funds rate at 3.75%-4% eight short months from now (click here).
As for the week ahead, we can't help but wonder: What on earth can the S&P 500 do for an encore? If 2024 is anything like 2020 or 2016 (our last two election years), then the S&P 500 is truly "up, up and away" the remainder of 2024. In 2020 the index consolidated a bit before drifting higher into year-end. In 2016 the index just kept on booming to the upside. While what happened in 2020 and 2016 is irrelevant, it at least establishes some precedent regarding how market participants, collectively, behaved after a price thrust higher during election week. Said price thrust higher didn't mark a sign of impending doom or downside reversal.
S&P 500 Primary Trend - Up
Our work continues to label the primary trend for the S&P 500 as up, or "bullish".
During uptrends, long-term investors are best served implementing and maintaining an equity overweight across their asset allocation. Whether this means allocating 51% or 100% of your portfolio toward equities is dependent upon your individual investor preferences.
While we're confident and optimistic that the S&P 500 will have a nice move to the upside over the coming three to six months, and really through the first half of 2025, we recognize that investing today is like roaming in a field filled with land mines (and a second Trump presidency includes tremendous behavioral uncertainty that only adds to the list of potential land mines). This is why strategy diversification is invaluable as we head into 2025 and beyond.
Passive equity investing strategies are guaranteed to step on land mines in exchange for maximizing returns (i.e., capturing all of the market's advance) during more favorable market climates. Think of passive equity investing as maximum risk for maximum reward.
But active tactical asset allocation equity strategies attempt to avoid land mines in exchange for generating less returns during more favorable market climates. The good ones are generally described as a lot less risk for only slightly less reward over the full market cycle.
Now - one approach is not right, one approach is not wrong, and neither approach is better than the other.
We never understood the common rift between active and passive long-term investors, especially the "Boglehead" community. The reality is there's a mountain of academic and empirical research that shows the synergy between diversifying "how" you invest in equities. It's the combination of passive equity investing strategies and active investing strategies that create a synergy in portfolio composition to help long-term investors stay in the game, smooth returns and optimize what they can control - their behavior with their portfolio - over the full market cycle. That's where the magic lies!
Happy Sunday!
