1. The labor market shows signs of modest cooling, but is still hot.
2. The S&P 500 index is approaching its all-time high and continues to trend upward.
3. The banking sector is still struggling, but upcoming earnings reports may provide some optimism.
### Summary
The S&P 500 returns over the last one, five, and ten years are only slightly above their long-term averages, suggesting that the stock market is not unanchored from reality. However, the performance of long-term US Treasuries has been poor, with even 10-year Treasuries resulting in losses over the last five years. Slower economic growth may be on the horizon, but it remains uncertain whether it will be enough to bring down inflation rates.
### Facts
- The S&P 500 returns over the last one, five, and ten years are only slightly above their long-term averages.
- The performance of long-term US Treasuries has been weak, resulting in losses for investors even after accounting for coupon payments.
- Slower economic growth may be on the horizon, but it remains uncertain if it will bring down inflation rates.
- The nature of the stock market rally suggests that investors are still searching for buying opportunities rather than thinking about selling.
- Energy, industrials, and financials have become favored sectors, while technology stocks have started to decline.
- The Chinese economy is struggling, with retail sales and industrial production growth slowing down.
- The Federal Reserve has expressed concerns about inflation but also noted downside risks to the economy.
###
After a strong surge in June and July, the S&P 500 index has experienced a significant decline in August, with tech stocks being hit particularly hard, as fears of rising interest rates and a slowdown in China weigh on the market.
A stock market rally is expected in the near term, as recent market corrections have created potential opportunities for investors to increase equity exposure, despite the possibility of a 5-10% correction still lingering. Additionally, analysis suggests that sectors such as Utilities, Staples, Real Estate, Financials, and Bonds, which have underperformed in 2023, could present decent upside potential in 2024, particularly if there is a Federal Reserve rate-cutting cycle.
The S&P 500 has fallen nearly 5% in August, and opinions on whether stocks will rebound are divided among Wall Street firms and market commentators, with some, like Goldman Sachs and Fundstrat, remaining optimistic while others, including Michael Burry and David Rosenberg, are bearish.
The recent price pullback in Bitcoin and the cryptocurrency market is not surprising, as most risk assets typically suffer when the S&P 500 falls; however, volatility for both Bitcoin and the S&P 500 is declining, which suggests mainstream migration and a potential lack of price-pump potential for Bitcoin.
Investors are turning to high-yield cash alternatives, such as savings accounts and bonds, which offer returns of over 5% and are outperforming the S&P 500, prompting some to reconsider their exposure to the stock market's volatility.
The top 25 stocks in the S&P 500 outperformed the index in the 35th week of 2023, with tech stocks leading the way, suggesting a return of bull markets and a decrease in recessionary fears; however, market health, the balance between developed and emerging markets, and investor behavior still need to be addressed. Additionally, market correlations have dropped since COVID, and on "down-market" days, correlations are 5% higher than on "up-market" days. Market correlations also decrease during upward economic cycles. Retail investors are showing a preference for dividend-driven investing and investing in AI stocks. The global subsidies race is impacting valuations in tech and leading to supply chain inefficiencies. As a result, there are opportunities for diversification and investment in a wide variety of equities and bonds.
The S&P 500 Index experienced its best week since June, while Bitcoin faced a marginal loss due to the delay of spot Bitcoin exchange-traded fund applications by the Securities and Exchange Commission, although analysts remain optimistic about future ETF approvals.
Economist Gary Shilling predicts that the S&P 500 will decline by around 40% during this market cycle, citing recession indicators such as the yield curve and The Conference Board's Leading Economic Index. He believes that a US recession may already be underway due to the Federal Reserve's focus on reducing inflation, and high valuations in the stock market increase the likelihood of a significant drop.
The utilities sector in the U.S. stock market, which has been the worst-performing sector in 2023, is showing signs of improvement and outperforming other sectors like technology as September comes to a close.
Almost all S&P 500 sectors experienced losses in the stock market, with consumer discretionary stocks leading the declines, while financials were the only sector in the green.
The Federal Reserve's decision to maintain high interest rates has caused concern in the financial markets, with the S&P 500 and Bitcoin potentially underperforming; however, there appears to be a decoupling between the S&P 500 and Bitcoin, which could be attributed to factors such as regulatory concerns and the anticipation of a spot Bitcoin ETF introduction. This decoupling may favor Bitcoin.
The S&P 500 has been hit hard by the September Effect, but investors should remain optimistic as history suggests the market will rebound, and there are compelling buying opportunities in certain growth stocks like Block and SolarEdge with upside potential of 93% and 127% respectively.
The S&P 500 closed out the quarter with a 3.6% loss, attributed to factors such as rising interest rates, a slowing housing market, and businesses preparing for tough times, resulting in a slow decline in stocks. Additionally, the resumption of student loan payments and expectations of more rate hikes from the Federal Reserve are expected to impact consumer spending power and business cutbacks. However, as the year comes to an end, traders and investors may look forward to 2024 for possible rate cuts and a return of strength in the market.
The Federal Reserve's aggressive interest rate hikes have resulted in a decline in the profitability of S&P 500 companies, with the return on equity ratio falling this year, and the trend could worsen if interest rates remain high.
Utility stocks in the US experienced a sharp decline due to higher bond yields and the Federal Reserve's plan for elevated interest rates, causing investors to find utility dividends less attractive compared to risk-free Treasury yields.
S&P 500 utility stocks are currently undervalued and offering attractive dividends, making them an appealing opportunity for value-focused investors, despite competing with Treasury yields.
Utilities stocks have experienced a significant drop in value due to a spike in long-term interest rates, presenting a buying opportunity for long-term investors who are focused on quality companies with growing sales, earnings, and dividends.
The S&P 500 broke a four-week losing streak, but market breadth was poor and the small cap Russell 2000 fell into the red for the year, suggesting that higher interest rates are taking a toll on the economy and increasing the chances of a recession.
The technology sector has consistently outperformed the S&P 500 over the last five years, making the Vanguard Information Technology ETF a potential option for investors looking to capitalize on the sector's historical wealth creation, although concentration risk and volatility should be taken into consideration.
