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Another Argument for Staying Invested

| June 19, 2023

We mentioned last week how the stock market is finally starting to broaden out. Leaders outside artificial intelligence and huge tech companies are emerging. The rally has led the S&P 500* to its next resistance level at 4,300.

Since last week we've seen continued improvement in the New York Stock Exchange Advance-Decline Line Index, which is a technical indicator of market sentiment and breadth (advances in the index reflect market breadth and growth):

To be frank, at this point there doesn't seem to be much keeping the S&P 500 from challenging 4,500, especially considering we just cleared three big hurdles:

  1. The May consumer price index results were in line with forecasts.
  2. The May producer price index came in below forecasts, indicating lower production costs.
  3. The Federal Reserve paused interest rate hikes (though last week Chair Jerome Powell indicated two more hikes could be on the table this year).

 We’re continually more encouraged by forward-looking charts that bode well for the economy. Most notably, the forecast for inflation and product shortages show marked improvement by later this year.

Interestingly, even after China’s reopening, OPEC+ production cuts of 1 million barrels per day, and the U.S. intending to restock the Strategic Petroleum Reserve, U.S. crude oil still trades around $70 a barrel. It's beginning to look like the predictions of $100-per-barrel oil this summer may not be realized. This matters because cheaper oil and gas prices will have a healing influence on the rate of inflation going forward along with the continued normalization of global supply chains:

In the short term, quarter-end window dressing will begin in earnest next week. And there’s a war chest of cash on the sidelines.

According to the Investment Company Institute, as of June 8, total money market fund assets increased by $36.63 billion, to $5.46 trillion. Among taxable money market funds, government funds increased by $18.01 billion while prime funds increased by $15.78 billion. Tax-exempt money market funds increased by $2.84 billion.

Regret Seeping In?

At some point, market momentum could become a problem. It could allow regret to seep in. In other words, those with cash on the sidelines could lament being out of a rising market.

Investors and money managers have watched the stock market broadly rally from October 2022 lows. We know tech’s performance has been stunning. But as you can see in the table below, almost all indexes have rallied in one form or another from those October lows, some more spectacularly than others. Only one of 34 indexes is in the red:

Those who decided to sit out in fear of a “bear market” via the aforementioned money market holdings may be feeling some regret. The thought of sidestepping more pain might have felt good at the time, but now it's not looking so hot.

From a behavioral finance standpoint, regret leads to the fear of missing out or FOMO, which can make markets spike. Such movements have little to do with fundamentals or technicals, but they’re real and powerful.

Will those who continue to wait it out be making a big mistake?

Let’s begin answering that question by reviewing MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” investor buys versus sells. The BMI fell for much of April and May, despite the S&P 500 rising due to a small handful of tech stocks. But with the market broadening, the BMI is on its way up again:

The data shifted in June, with selling essentially vanishing and buying picking up across the board:

Look at the “big money” love for smaller stocks in June so far:

From a sector basis, it's no longer tech solely holding up the market. Each sector is now rising in price as buying occurs across the board:

This visible buying in each sector is inherently constructive for a new bull market in the second half of the year. Many previously pressured equities are now being snatched up, lifting nearly all sectors. But even as everything else is playing catch up, tech is staying strong.

Does that mean everything will be rainbows and butterflies? If you’re paying attention to the news, there’s a narrative building: the frothy AI hype has elevated tech to unsustainable levels. In other words, tech’s outperformance won’t last.

Of course, nothing lasts forever. Still, we think this tech run has more room to unfold because data supports strong performance through the end of 2023 (remember that letting winners run is how you outperform in the long run). Here’s why:

Earnings Resilience

The tech earnings picture is brighter than many think. And when growth is scarce, tech shines. Tech’s reliable, all-weather growth is still attracting investors with recession fears in the backs of their minds.

Fed Uncertainty

As inflation continues to ease, we’re more confident the Fed’s tightening campaign is winding down. At some point there will be anticipation of rate cuts, which will provide tailwinds for growth tech stocks.

Earnings Momentum

The tech sector’s 12-month forward earnings forecast has been revised up 20% since November 2022. The rest of the S&P 500 has been revised up just 3%. Plus, tech is expected to see 17% calendar year 2024 earnings per share growth (EPS) versus 11.3% for the S&P 500 (that's 33% more profit growth).

Larger Profits

The tech market leads all sectors with 24% operating profit margins, which is almost double the S&P 500’s rate of 13%. That is a historically wide spread.

Reasonable Valuation

Currently, tech trades at 27 times 12-month forward EPS versus the S&P 500’s 19 times 12-month forward EPS. However, this premium valuation is easily justified by the previously discussed faster earnings growth of the tech sector:

So, investors could continue to avoid the market due to fear. But if they do, our current data indicates there's a good chance they will miss out on additional gains in the second half of the year – and they’ll probably regret it.

This is another argument for staying invested. Nobody seems to have noticed that this whole upward run started last fall. And no one knows how long it will last.


*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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