Jul 24, 2023

This Year’s Surprising Market Rally

Weekly Market Commentary

The S&P 500 Index is up 18.15% since the end of last year. It has advanced 26.82% since bottoming on October 12, 2022 (through 7/21/23; data St. Louis Fed, MarketWatch). Both metrics exclude dividends reinvested.

The S&P 500 Index covers about 80% of available market capitalization, per S&P DJ Indices.

The index includes firms from all the major economic sectors, but it is a market-cap-weighted system, leading to the larger firms having a more significant impact on the index.

According to S&P Dow Jones Indices, the top ten stocks in the index account for 30% of the S&P 500. Earlier in the year, the top seven stocks in the S&P 500 by market capitalization, including Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA), and Meta Platforms (META, Facebook), accounted for a big share of the advance.

Market capitalization roughly equals the price of a stock x the number of shares outstanding.

However, since the beginning of June, the market rally has broadened, according to Bloomberg, and that’s good news.

What’s behind this year’s rally?

The unexpected rally this year can be attributed to four significant elements.

  1. Despite widespread warnings that the economy could be in a recession by now, a downturn has yet to materialize. Economic forecasting isn’t always reliable, and thus far, those who predicted a recession have been incorrect.
  2. Inflation has begun to moderateand investors believe an expected rate hike this week could be the Fed’s last.  Penciling in one more rate hike may be premature, but the much slower pace this year has been a balm for the bulls.  Those on a fixed income and families struggling to make ends meet seek stable prices, but investors would simply like the rate of inflation to continue to slow without an ensuing recession. Why is this so? Because a continued slowdown in the rate of inflation would probably mean the fed funds rate is near its peak.
  3. It’s early, but so far, second-quarter profits are topping low expectations, according to Refinitiv. Investors don’t need a home run on earnings, but singles, doubles, and very few forced errors would be welcome.
  4. The popularity of artificial intelligence (AI) helped fuel early-year gains in tech.

In summary, this year’s catalysts have been powerful: a resilient economy, a possible near-term peak in interest rates, the absence of an earnings season Armageddon, and the introduction of AI.

No one rings a bell when a bull market or bear market ends. While we will refrain from offering a year-end forecast for the S&P 500, historically, bear markets silently end when pessimism and investor angst are high. The October low was no exception.

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