How long can markets keep up this pace of higher highs? While we do think there is a case for a pullback in equities, we would expect that to follow along the lines of seasonality, rather than falling off a cliff.
The inspiration for this week's musings is the 1990 hit song, "High Enough" by the supergroup Damn Yankees. Why do they call it a "supergroup" you ask? We'll explore in the in the trivia, but it's primarily because a group of musicians from other existing bands decide to get together to record an album (or two). Here's some trivia about the song:
This power ballad peaked at #3 on the billboard charts in the U.S. The song sold more than 500,000 copies, reaching "gold" status. It also propelled the self-titled album to #20 on the US albums chart. For all you who grew up in the digital age of music, yes - back in the day - a single could make or break an album because you had to purchase the album to get the single (with the exception of 45 records or single cassettes).
Damn Yankees was a superband formed by Jack Blades (Night Ranger), Tommy Shaw (Styx), Ted Nugent, and Michael Cartellone. Some other notable superbands that were formed in history:
The 4 Seasons
Jefferson Airplane (Jefferson Starship)
Cream
Crosby, Stills, Nash, & Young
The Eagles
The Power Station
Bad English
Bell Biv DeVoe
Temple of the Dog
Foo Fighters
According to Ted Nugent, the song was primarily written by Blades & Shaw, although, Nugent says it was a "team effort." Nugent state that the song was really about human relationships and achieving a higher level of awareness and respect for one another.
The song came about as Blades was hanging out with Shaw while doing his laundry in the basement of Blades' new apartment building. Blades started singing "I don't want to hear about it anymore..." Shaw said it sounded great so they started banging out the notes on a piano in Blade's new apartment a few hours later. The rest is history.
"I don't want to hear about it anymore
It's a shame I've got to live without you anymore
There's a fire in my heart
A pounding in my brain
It's driving me crazy
Can you take me high enough
To fly me over (fly me over)
Yesterday?
Can you take me high enough?
It's never over
And yesterday is just a memory
Yesterday is just a memory"
Here's what we've seen so far this week...
A Pounding In My Brain Driving Me Crazy. Many are busy finding ways to compare the current state of the market to previous peaks. While there are certain data points that are interesting, looking at the whole of the situation leads us to believe we are not there yet.
If we look at the prior 90 days or so to the peaks in 2000 and 2007, we see a contrast to today. Currently, the move higher in equities has been orderly. Over the last 98 days we've seen thirteen 1% daily moves higher and six 1% daily moves lower. Fairly tame for a bull market. Conversely, in 2000, 98 days prior to the market peak, there 21 daily moves of 1% higher and 6 daily moves of 1% lower. However, volatility was greater then versus today as there were three 2% up days and one 3% up day. Similarly on the downside, in 2000 there were two 2% down days and one 3% down day. We see similar results in 2007 as there was greater activity on the upside and downside from a daily percentage swing perspective.
While the trading activity has been orderly this time around, the investor sentiment remains positive. The percentage of investors with a bearish sentiment is near the lowest in 5 years. Now, that can change quickly, but that's why we monitor the data, not opinions. Data can change as underlying elements of the market/economy change - whereas, the opinions of market pundits seem to change with the wind.
Besides sentiment and volatility, there's another reason to step back from the "this time is the same as last time" mentality and that is the use of margin debt. Investors typically use margin to take aggressive/leveraged bets on investments. When the use of margin reaches a 2 standard deviation level, that's when we usually see bubbles form - such as 2000 and 2007. Currently, the use of margin by investors is only at average historical levels and not elevated nearly enough for concern at this point. Again, while the data can and will change, we're just not at a worrisome stage today.
Can You Take Me High Enough? At this point, there are plenty of reasons that equities can move higher from current levels. Today, the S&P 500 has been trading above the 5,000 level - a sentimental/psychological level, if anything. If it closes above the 5,000 level, as it failed to do yesterday, we could continue to see higher highs.
Since the October 27th bottom last year, equities have rallied significantly. Initially, it was all about the "Magnificent 7." However, lately, we're seeing better participation from other sectors of the market. The Equally-Weighted version of the S&P 500 Index is actually out-performed the Cap-Weighted version of the index since the October 27th low (+55% vs +22%). That's good news as investors are rotating out of stocks that are a bit bloated from a valuation standpoint and into stocks that have a better likelihood of sustained participation moving forward.
That being said, the market looking to close higher this week would make 14 of the last 15 weeks positive. We are due for a pullback and it would be completely normal. Since 1928, the S&P 500 Index has a 3% dip during the calendar year at least 72% of the time. Mild corrections of at least 5% happen 34% of the time, on average. We are in an election year, so some short-term volatility from time-to-time should be expected.
Moving forward though, it's really about the consumer and the Fed. Many have recently been pointing to Fed rate cuts as the beginning of the end for equities. But, that's not entirely true. What's really more important is the pace of rate cuts by the Fed. The Fed (Powell) made it clear last week that they intend to cut rates slowly. As the graphic shows, when rate cuts happen slowly (and the economic evident supports a slow rate cut cycle), equities tend to be higher by 24% one year later, on average. However, in a fast rate cut cycle (meaning that something went terribly wrong), the market is higher by only 5% on average. If the Fed accomplishes their current task of a soft landing and slow measured rate cuts, a bullish case is still very much on the table.
Here's the successful hit of the superband...
Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
Past Performance does not guarantee future results.
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