Broker Check

Data Points Provide Positive Support for Stocks

| June 03, 2024

We’re entering the last month of the second quarter after a strong May that followed a weaker April. What can we expect from June and the start of the third quarter in July?

Sitting here today, we at Cornerstone see five key catalysts for the upcoming period.

First, historical seasonality data indicates a high probability for June to be positive:

  • Since 1927, equities rose in the first quarter and fell in April 17 times.
  • Outside of recessions, clear data supports May and June being higher.
  • For May, it’s 73% of the time; for June, it’s 100% of the time (11 out of 11 instances, with a median gain of 3.9%).

Next, inflation is more favorable. For example, housing inflation is beginning to fall:

The Case-Shiller Index measures monthly U.S. single-family home value changes. It typically leads the consumer price index by about 17 months. It’s currently pointing towards more decreases in owners’ equivalent rent ahead.

A significant increase in housing supply will be coming too, which will ease inflationary supply and demand pressures:

Also, data shows a big jump in new vehicle inventory – up 51% from a year ago:

Next time you're out, check out local dealership lots. You’ll probably notice many more vehicles than a year ago.  For the first time since before Covid, I have noticed that the dealership vehicle overflow lots by my house have new car inventory in them.

A third catalyst is continuing low leverage in the market, as measured by margin debt data from financial regulator FINRA and the New York Stock Exchange:

Margin debt relative to total market value is still trending downward overall:

Fourth, $6 trillion (and growing) in cash remains on the sidelines:

When interest rates decline, it’s reasonable to expect that capital to go to equities.

Finally, earnings season was largely positive. It reinforced how the AI spending transformation is still strong.

Overall, these data points provide positive support for stocks in June. If it is a positive month, as expected, we’ll be looking at a winning first half of the year.

Ignore the Wall of Worry

The reason we explore data so thoroughly is to help deal with daily uncertainty and worry. Everyone worries; it’s an attempt to tame uncertainty. However, science says we're wasting precious time.

Studies have shown the amount of free time we have outside work, chores, or sleep, is about five hours a day. So, only 20% is free time.

Worse, a 2019 Penn State University study showed 91% of worries don't happen. A Cornell University study found that number to be 85%.

Thus, when we worry, we’re wasting that minimal free time we have. To us, this is why data is so important. It helps free up time normally spent worrying about uncontrollable things.

When investing, there are bumps and bruises. But when things get rough, hindsight usually shows doing nothing is often correct.

In April, Wall Street sputtered over anxiety on interest rates, inflation, and the Federal Reserve. But as our readers know, data helped provide a level of comfort to ignore the wall of worry going into May.

Again, science is clear – we need to stop worrying. Let’s now use that same objective lens to look towards June and July.

Our friends at MAPsignals helped illustrate money flows bottoming out about two weeks ago and new capital moving into stocks, creating a cup pattern in the Big Money Index (BMI, a 25-day moving average of “big money” netted investor activity). It’s the third time it’s happened in a year:

The BMI reversal came after 10 consecutive down days. Since 1990, there have been 737 similar instances (just 8.5% of trading days). The forward returns for the S&P 500* afterwards are healthy:

This helped give us confidence that worrying about April drops would be a waste of time, especially considering these instances are so rare at just 8.5% of trading days since 1990.

But there’s another important point: 10-day BMI drops have occurred at least once every year since 1990. So, while the drops are rare over a 34-year period, they’re also consistent, occurring at least once annually.

When they do, the narrative is usually ugly and scary. However, since such drops happen yearly and forward returns are healthy, we can find comfort in not wasting precious time worrying.

Use the data to ignore the wall of worry.

Four Key Macro Reasons for A Continued Bull Run

Looking forward, keep in mind that while June is often mixed, July is a historically strong month from a seasonal perspective, along with most of the second half of the year:

We believe there are four key macro reasons for a continued bull run outside of typical seasonality.

First, only rising interest rates have dented this bull run. Higher rates are bad because they tax the economy as well as make bonds and money market accounts more attractive than stocks. When the 10-year Treasury rises, stocks fall:

We're bullish on stocks because data indicates inflation will keep falling. So, it's just a matter of time before the Fed starts easing monetary policy, which will tame interest rates.

Second, it's reasonable to expect rates to stay under control because long-term yields are historically stable when inflation runs between 2%-4%, as it is now:

Inflation needs to exceed 6% before there are lasting jumps in 10-year bonds, like in 2022 when rates soared as inflation hit 9.1%.

Third, stocks move on earnings and fundamentals. This is our mantra and we’re sticking to it. S&P 500 12-month forward per-share earnings growth ramped up to 12% after better than expected first quarter earnings:

When earnings improve, stocks follow suit. Earnings, earnings, earnings!

Lastly, let’s examine valuations. Large-cap growth valuations are elevated (rightfully so) thanks to big technology companies’ amazing growth and profitability. But the rest of the market’s valuations are becoming more reasonable due to earnings ramping up:

This is especially true in small-cap and equal weight indices, exemplifying the value available underneath the surface. This is why this year’s market continues to broaden relative to last year.

All in all, it’s created an “everything rally” as almost every sector has healthy gains to date (and the macro forecast should keep it going):

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* 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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