We’re halfway through 2024 and it’s been a strong year so far. The S&P 500* is up over 15%, as of this writing. Though last week was shortened due to Independence Day, there was still important macroeconomic data released:
Let’s examine that data to determine if the economy is tracking towards a soft landing, no landing, or something worse altogether:
Perhaps the most vital data is the May Job Openings and Labor Turnover Survey (JOLTS) because it’s a leading indicator. It came in little changed at 8.14 million openings, however, openings decreased 1.2 million on a yearly basis.
That indicates a cooling labor market. The JOLTS report is in line with other labor market metrics that reflect the same:
We at Cornerstone think the labor market will continue softening. But will it sway the Federal Reserve on interest rates?
Turning to equity markets in the near term, history shows that seasonality and technical indicators are favorable for the first half of July, at least until volumes decrease substantially (more on that later).
Looking into the second half of 2024, as we sit here today, we think strong stocks will keep flexing their muscles. This was true in 2023:
- 65 stocks in the S&P 500 gained more than 30% in the first half of 2023.
- Those stocks gained 12% in the second half of 2023.
- The win ratio was 77%.
- The index’s other 385 stocks gained just 6% in the second half of 2023.
The phenomenon of first-half winners (30% gains or more) outperforming the rest of the market in the second half of the year also occurred in 2021 and 2022. In fact, since 1990 it’s happened 79% of the time:
Why?
We think it’s because the superior fundamental factors supporting stocks in the first half of the year continue driving gains through the remainder of the year.
Here are the stocks that gained 30% or more in 2024’s first half#, ^:
Understanding the similarities to the past, there are also some potentially key differences between the second half of 2023 and the upcoming second half of this year.
Perhaps the biggest and most important is the Fed being closer to cutting interest rates. So, on the margin, we think stocks and sectors leveraged to interest rate cuts could see big jumps, unlike the past couple years. The other key difference is potential uncertainty surrounding the upcoming presidential election.
Of course, time will tell how this all plays out.
Daily Volatility Becomes the Norm
Looking ahead to the rest of 2024, we think it’s clear the short-term “silly season” is about to be upon us. Basically, that means daily market nonsense like volatility has little actual value over the next few months.
First quarter earnings season is over. School is out. Summer has arrived. As a result, business isn’t back to normal until sometime in September.
During this time, market silliness can happen. Stocks can gyrate more than usual while liquidity is low.
The chart on the left below shows lower liquidity via the “big money” trading average. And it’s begun to lead to dwindling breadth, as shown in the chart on the right:
This is especially important considering breadth has been a strength in the market through the first half of the year. Every year around this time, decreased breadth and liquidity conditions can make for jittery markets, both up and down. In other words, daily volatility becomes the norm.
So far though, there’s good news. Sectors are holding up relatively well. Technology remains at the top, which is usually bullish due to its growth-heavy focus. Also, other cyclical sectors like energy, industrials, financials, and discretionary round out the top five:
That’s all positive, bullish news. However, the bad news is current price action shows some stalling at the sector level despite macro markets hitting new highs.
This is an early indication of short-term summer breadth weakening that can translate to lower conviction. Around half the stocks in the S&P 500 recently moved below their 50-day moving averages and remain there:
Breadth was good so far this year and was a strength in the market. This recent reversion, while seasonally normal, is important because it coincides with overall lower volumes. So, despite a rising index, under the surface we’re beginning to see an indecisive summer market.
Zooming out, if we look at MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” professional investor buys and sells, it has dropped despite the market rising. It’s created a wedge pattern that’s increased in size:
Still, this action doesn't mean a crashing market is imminent.
Keep in mind, a falling BMI doesn’t necessarily mean heightened selling. Not all BMI drops are the same.
The BMI can fall from slowed buying, even if selling remains consistent. As big buys roll off the moving average, the index can fall because there’s less buying pressure.
Our friends at MAPsignals did a great study recently comparing times since 1990 when two conditions were met:
- The BMI fell from overbought territory (80% or more).
- The fall was a 45%-55% decrease from the prior peak.
That’s exactly what’s happening now.
History shows 58 such instances. The forward returns and the frequency of positive returns show that sticking it out was a good move for investors in the past:
More importantly, when refining the analysis to see what occurs when stocks are neither bought nor sold convincingly, which has happened 30 times since 1990, the results are even better:
We point this out to acknowledge where things stand relative to traditional summer seasonality. As the “wedge” charts above show, buying and selling are both low and balanced. Thus, given the current data and history, we think it’s wise to not overreact as markets enter the usually bumpy months of August and September.
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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.
# SMCI, NVDA, LLY, ANET, AMAT, DECK, WDC, AVGO, META, KLAC, NFLX, QCOM, CMG, TER, LRCX, ORCL, ISRG, and GOOG are owned in Cornerstone client accounts.
^ SMCI, NVDA, ANET, AMAT, AVGO, META, KLAC, NFLX, LRCX, and ORCL are owned by Daniel Milan personally.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.