With November complete, we can look back and appreciate how historically strong seasonality finally appeared. As of this writing, the S&P 500* was up approximately 9.1% for the month, even with the Thanksgiving flatness. That’s worth celebrating!
But what about the future? Well, last week interest rates and the CBOE Volatility Index (VIX) – often dubbed the market’s “fear gauge” – fell meaningfully. Today we’ll cover what that means for the remainder of this year and early 2024.
Rate Reversal Ripple
In what was probably the most surprising catalyst in recent memory, Federal Reserve Governor Christopher Waller, a known hawk, made dovish comments last Tuesday:
These are surprisingly dovish views for Waller. Importantly, the idea of cutting rates is contrary to the popular, entrenched consensus of rates being “higher for longer.” The fact that it was delivered by Waller adds emphasis, in our opinion.
Of course, the message is consistent with our data-dependent approach that’s guided us for several months. Inflation is tracking lower than consensus and what the Fed expected, meaning interest rates could fall next year to prevent over-tightening. This would be positive for stocks.
Following Governor Waller’s comments, the 10-year Treasury yield responded by falling sharply to around 4.3%, the lowest reading in nearly 30 months:
Additionally, VIX fell to about 12.69, which is the lowest reading for the year:
These two data points exert a lot of influence on equities. Their respective moves have increased the probability of additional upside in equity markets for the remainder of this year.
A third catalyst for upward market momentum was last week’s personal consumption expenditures (PCE) report, which was flat month-to-month and down 0.4% from September’s reading on an annualized basis. The results were in line with expectations and strengthen our conviction that inflation is tracking well.
With constructive near-term data, we think the market will zigzag its way upwards:
- Data continues to support a “soft landing” versus a full recession.
- Interest rates drive stocks, and the Fed is increasingly dovish.
- Retail investors are buying again after $240 billion of outflows:
- This as the S&P 500 gained roughly 20.0%. It means retail “FOMO” or fear of missing out is likely to follow along with short covering from those who bought puts weeks ago.
- Strong seasonality could produce a “Santa Claus Rally”beginning mid-December.
With all that said, it’s obviously been one hell of a roller coaster ride for investors. And while investing fear is often irrational, nothing stokes it like a wickedly volatile market. This year has been exceptionally volatile, creating an unenjoyable test of investor resolve.
Just look at the recent monthly roller coaster ride the S&P 500 has been on:
- August -1.77%
- September -4.87%
- October -2.20%
- November +9.1%
The last reading erased much of the pain, but not much of the anxiety. The November rise coincided with MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” investor buys and sells, right on que rising swiftly from oversold to a 53.7% reading, as of this writing. Selling basically evaporated as the calendar flipped from October to November, lifting the BMI:
A Tale of Two Months in a Year of Outliers
Since October and November have been so divergent, we thought it would be interesting to view them against historical averages to see what the future might hold for us. To recap, basically all stocks were taken to the woodshed and beaten to a bloody pulp in October. It’s evident in the chart below on the left, starkly contrasting the chart on the right from November, which saw nearly three times as much buying as October and five times less selling:
October experienced only 416 buys versus 3,476 sells from “big money” investors, whereas November saw 936 buys and 543 sells:
Going back to 1990, typically January, February, April, May, October, and November are the strongest buying months of the year:
Combining these charts shows just how terrible October was compared to history. And while November might’ve felt wonderful, it was slightly below average in terms of historical buying and selling. The market’s snap back in November shows how oversold the market was – it recovered quickly on historical below-average buying and selling:
Expanding to the whole year, March, May, September, and October were all substantially above average for selling, while January, February, June, and July were all above average in buying:
This year felt like a roller coaster because it actually has been more volatile than usual in terms of performance and money flows. To paraphrase the song, it’s more than a feeling. The data supports it too.
Eight out of the 11 months on record so far this year have been outliers! That’s exactly why investors feel like bloodied warriors crossing 2023’s finish line.
The bad news is volatility, especially in October, was way outside of historical norms. But the good news is it's behind us and we're in December, which usually means stronger stock performance, historically.
Seasonality or Sustained Support?
Make no mistake, a seasonal bump is welcome. But the data picture is strong, so we want to explore if this newfound strength in the equity market has a longer-than-seasonal runway.
The BMI is exiting heavily oversold conditions, which is typically bullish. Also, earnings are turning higher. Couple all that with potentially peaking interest rates that could soon fall and stimulative tailwinds, and it presents a situation where historically elevated money on the sidelines could keep pouring into equities, even into early 2024.
What we witnessed at the end of October was one of the most violent, risk-on environment reversals in years:
Since the Oct. 27 low, both large- and small-caps stocks are up big:
That rise is after one of the lowest BMI readings ever (17.0%). While many worried, history and current fundamental data gave us confidence to make a contrarian call that a swift recovery was approaching. The reversal is another confirmation to not rely on wishbone analysis or fear, but rather follow data-backed signals with a proven track record.
Turning to early 2024, we want to look at how the near-term might play out by examining historical forward returns for the S&P 500 once the BMI breaks out of oversold territory. After a month, stocks average a 3.0% gain, after six months it’s 9.1%, and after a year it’s 15.4%:
As we begin to see money pouring back into stocks, it’s supportive of all-time highs in the first half of next year. To recap:
- Institutional money is flowing in.
- Retail shorts will keep covering their positions.
- Retail FOMO will likely soon follow.
- As interest rates drop, $6 trillion in money market funds should start flowing to stocks.
Even more importantly, after Fed Governor Waller’s statements, the odds are now in favor of interest rate cuts next year:
That would be the biggest tailwind the market could experience and would support a continued runup to all-time highs. Keep it simple: follow the big money.
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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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