Seasonality Slowing Bull Stampede, Briefly

The unwavering momentum characterizing the Bull market surge toward stocks, particularly spearheaded by chip-related firms, has been nothing short of remarkable. A remarkable streak of twenty-one weeks marked by gains, scarcely marred by a correction exceeding 3%. The unyielding march of the Nvidia/AI upswing persists in amassing sidelined funds, biding their time for more enticing opportunities. Merely half a decade ago, the SOX chip index traded at a modest 11 times earnings; today, it commands a lofty price-to-earnings ratio (PE) of 30x. While Nvidia may perhaps justify its PE of 79 (equivalent to a forward PE of 39x), numerous investors grapple with the decision to withdraw funds from secure 5.2% money market accounts to pursue the tech vanguard reigning over the equity landscape.

Another perspective on investor hesitancy emerges from historical data indicating that the fourth year of a presidential term typically yields a 6% return in the SP 500 Index. With most major stock indices already up by 4 to 10%, coupled with the availability of guaranteed 5% yields, a substantial portion of capital remains on the sidelines, awaiting a meaningful correction ranging from 5 to 15%. Initial prognostications for February leaned towards a 4 to 7% downturn in the first half of March, contrary to the fleeting 2 to 3% retreats that did little to assuage the overextended market fervor.

The seasonal backdrop offered robust support for stocks from late October through mid-February, before tilting towards a brief respite extending into mid-March. Despite the dominance of large-cap tech firms propelling major indices to near-record highs, the broader equity arena settled into a month-long consolidation phase that may have been hard to see wihtout squinting. Yet, with Nvidia entrenched at historic peaks, the minor setbacks and consolidation periods failed to present a compelling entry point for investors looking to board the AI bandwagon with fresh capital. Examining the charts below, we observe the seasonal lull materializing into mid-March, albeit materializing as a narrow sideways phase near all-time highs. Spearheaded by Nvidia’s staggering 96% surge this year, the tech-laden Nasdaq and S&P 500 Index lead the charge among major indices, boasting gains of 10%.

Going into 2024 we targeted an SP 500 Index of 5,000 to 5,200 for the first half of the year. As Q1 enters its final week, the SP is 1% above our first half maximum. Without the 7 largest stocks in the SP 500 Index, the gains of the other 493 companies in the SP would be more pedestrian single digit returns and heavily influenced by money chasing chip stocks, but settling for stocks with lower PE or no earnings.

In the ebullient environment of Bull markets, we frequently observe stretches of  low volatility advances spanning approximately 20 weeks. As we now find ourselves at the 21-week mark, it becomes apparent that the odds of a more substantial and protracted correction has risen. While the markets exhibit signs of being technically overextended, they have not yet reached the extreme levels that typically precede a significant reversal. In such a market milieu, only a momentous news event possesses the potency to unsettle investor faith. Noteworthy is the upward revision of Nvidia’s consensus targets to the robust range of 1,000 to 1,200, indicating that there remains runway for further advances in the chip sector in the ensuing month, despite their apparent nosebleed altitude.

In the realm of Bullish investors, a final gust of favorable winds beckons: boasting a hefty sum of approximately $6.5 trillion nestled in money market accounts, a substantial force to propel the stock market, poised to surge should any catalyst incite a mass exodus. Should the Federal Reserve successfully execute its pledge of 2 to 3 rate reductions within the forthcoming year absent an economic downturn, the naysayers shall find themselves compelled to retreat into a profound slumber.


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