Wall Street on Friday posted a five-week win streak for the first time since May. The benchmark S&P 500 crossed and ended above the 5,800 points level in a historic first, while the Dow is fast approaching the 43,000 points milestone. Despite Middle East escalation concerns, a hotter than anticipated consumer inflation report, and a recalibration of Federal Reserve interest rate cut expectations, markets have continued to march higher. Some of it can be chalked up to favorable reactions to quarterly results from big banks, but the story this week has largely been the market’s resilience to negative developments.
The latest Consumer Price Index reading, which came in at 2.4% and higher than the estimate of 2.3%, and last week’s blowout jobs report have cemented bets that the Federal Reserve will go for a 25 basis point interest rate cut next month. Some even expect the central bank to pause.
Earnings season that began on Friday with the majority of the companies reporting in the next week or two could hold the answer to the direction of the stock market over the next few months.
Future Wealth’s View
The stock market is flashing 21-21-21 (21% return year to date from the S&P 500 which is trading at 21x P/E pushing the VIX to 21x). Why are these numbers significant?
The 21% year to date return from the S&P 500 is on the heels of a 22% return in 2023. If anyone can make the case to invest anywhere else, we are all ears. Returns from every other investment product including hedge funds, PE funds and of course, fixed income and international funds have fallen well short of the S&P 500.
However, the S&P 500 now trades at 21x P/E. Historic P/E average is 19x. While the higher P/E could be concerning, the market is looking at the S&P 500 being fairly valued if one takes out the Mag 7 stocks which are all trading at higher than average P/Es. This math leads us to the main reason for the rotation of stocks from technology into other sectors such as healthcare, industrials etc.
Finally, the VIX (volatility indicator) now stands at 21x. The historic average for the VIX has been 18x. While the higher volatility is not necessarily a bad sign, it is also an indication that the stock market is experiencing high levels of fear and uncertainty. A lower VIX value suggests market stability but we believe that higher volatility may be driven by inflow of new money that is driving more buying and selling. That said, this indicator along with the P/E levels is one to pay close attention to.
There’s never a dull moment on Wall Street.