Context around the 4-mo stock market rally, plus risk and sentiment indicators, cycles, and recovery times from market loss
The Sandbox Daily (3.4.2024)
Welcome, Sandbox friends.
Super Micro Computer ($SMCI) added to the S&P 500 (index reconstitution), Nvidia’s surge stokes talk of a bubble (AI), Apple hit with a $1.95 billion antitrust fine from the European Commission (rules and regs), JetBlue Airways and Spirit Airlines end their merger agreement (M&A, or not), and a key employment report out Friday (macro eco-data) – this week has something for everyone.
Today’s Daily discusses:
historical perspective on recent market rally
risk and sentiment indicators
let’s get our timeframes right
recovery times from market drops
Let’s dig in.
Markets in review
EQUITIES: Russell 2000 -0.10% | S&P 500 -0.12% | Dow -0.25% | Nasdaq 100 -0.42%
FIXED INCOME: Barclays Agg Bond -0.25% | High Yield -0.03% | 2yr UST 4.611% | 10yr UST 4.219%
COMMODITIES: Brent Crude -0.89% to $82.81/barrel. Gold +1.36% to $2,124.1/oz.
BITCOIN: +7.98% to $68,581
US DOLLAR INDEX: -0.02% to 103.844
CBOE EQUITY PUT/CALL RATIO: 0.60
VIX: +2.90% to 13.49
Quote of the day
“Truth is not determined by a majority vote.”
- Pope Benedict XVI
Historical perspective on recent market rally
Stocks, having just completed a 4 month win streak, enter March with investors wondering how much gas is left in the tank.
From a historical perspective, what does it mean for the market when the S&P 500 finishes the year with back-to-back monthly gains followed by back-to-back gains to start the following year?
Generally, it’s quite positive for stock investors.
In the 11 prior instances since 1957, when SPX was up November through February, the index was higher from its February close through the end of the year every time, with a median gain of 12%.
Something else jumps out when looking at this data – the current rally is the best gain of any of the prior periods at 21%.
So, has the market run up too much too fast?
No, at least not according to history.
Looking back the prior periods when the S&P 500 was up 20% or more over a 4-month timeframe, forward returns are very favorable – with the S&P 500 index higher 100% of the time over the following 12 months and posting a median gain of +18%.
Source: Dwyer Strategy
Risk and sentiment indicators
Early in 2024, markets are continuing to demonstrate strength and come into the week on a positive tone, even as bond yields rose and rate cut expectations unwound.
While equities – especially AI beneficiaries – have been the key drivers of market optimism, more recently other cyclical assets have also started to price a better growth outlook – in particular credit and SMID-cap stocks.
The Goldman Sachs Bull/Bear Market Indicator recently cleared its pre-bear market high reached back in December 2021. This measure is designed to track the economic fundamentals that drive the equity cycle. Higher levels of the indicator are often associated with lower future returns and higher risk for global equity markets, but an elevator Bull/Bear Indicator is not a bearish signal itself, per se. Risk appetite can stay elevated for prolonged periods as long as the macro backdrop remains supportive.
Similarly, sentiment indicators are also seeing a continued bullish shift, with Goldman’s composite pushing its most risk-on bias over the last three months.
Source: Goldman Sachs Global Investment Research
Let’s get our timeframes right
Like anything in financial markets, it’s always important to first identify your time horizon. This gives context and perspective into what variables you are reviewing.
Macro trends tend to evolve over three primary and distinct time horizons:
Secular trends refer to the long-term market activities or changes that develop over elongated periods of time
The business cycle is the time it take the economy to go through all 4 phases of economic activity (expansion, peak, contraction, and trough), meaning it’s closely tied to the corporate profit margin and credit cycles
Short-term swings are the more volatile, mini-cycle moves in which economic conditions diverge (oscillate) from long-term trendline growth toward both extreme levels on the upside and downside
Source: Piper Sandler
Recovery times from market drops
When the stock market drops, how long does it take on average for prices to recover?
For most drawdowns, just a few months on average.
It’s the bear markets (and “major bear markets”) that inflict the most pain, both in price AND time.
Bottom line: the broader stock market is incredibly resilient in its recoveries. Investors who have been able to avoid panic-selling during drops have mostly been rewarded by the market over the long haul by staying invested.
Source: Fundstrat
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.