The Same Old Song and Dance

Mar 4, 2024

By Pete Biebel, Senior Vice President, Senior Investment Strategist
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The stock market’s routine in recent months may be getting a little too routine. Most of the broad averages continued their bullish dance (again) last week. The S&P 500 Index (SPX) waltzed higher, gaining 0.95% for the week. The gain for the NASDAQ Composite Index (COMP) was nearly twice as much; that index cha-cha-ed 1.74% higher last week. Both indices now have gains in 16 of the past 18 weeks. While SPX has been twerking to new all-time highs for the past several weeks, COMP was finally able to do-si-do to a new high last week, its first since November 2021.

The Dow Jones Industrial Average (DJIA) was out of step with its peers. It too has already traced out a conga line of numerous new highs this year, but last week it got tripped up by weakness in several of its high-price component stocks. The worst of those was UnitedHealth Group, which stumbled more than 7% on the week. Still, it was the best first two months of the year for SPX and DJIA in five years.

The most foot-loose and fancy free of the indices last week was the Russell 2000 Index of small-cap stocks (RUT). Through much of the past two months, RUT was dragging its heels in comparison to the leaps forward in the large-cap averages. But last week RUT got its groove on, notching a gain of 3%. That’s sweet music to all those who fretted about the market’s widely publicized concentration of leadership. The theory was that broadening participation is a sign of improving health for the overall market; however, there’s a twist on this improvement in RUT. More on that in a minute.

Information technology took the lead among the industry sectors with a gain of 2.66% for the week. Two of the wallflower sectors, which had been sitting out much of the market’s rally, kicked up their heels and were among the four best sectors last week. The underperforming real estate sector rang up a 2.12% gain, reducing its year-to-date loss to 1.30%. And the energy sector, which had been deader than disco for the past five months, rose 1.37% last week. That gain came in harmony with a rally in crude oil as the price for a barrel of West Texas Intermediate crude gushed from near $76 last Monday to $80 on Friday.

Four sectors stepped out of line last week, though three of them (financials, utilities and consumer staples) had just miniscule losses. The big loser was the healthcare sector, which slumped 1.03%. The aforementioned UnitedHealth Group is the second-largest component stock in the S&P Healthcare Sector Index, accounting for just under 9% of the sector’s weight.

In summary, the band played on last week; the party continued. The market’s bullish ballet has shown remarkable persistence, which has choreographed impressive upward momentum. And why not? The economy continues to shuffle ahead, inflation seems to be less and less of a concern, and the unemployment rate remains lower than a contortionist’s limbo bar. The consensus expectation for GDP growth in the first quarter of 2024 is around a 3% annual rate. That rate of growth may not be so robust as to sweep anyone off their feet, but it’s a rate that is sufficient to help companies increase earnings while not rekindling high inflation.

SPX has gained about 25% since its late-October low, while COMP is up about 30%. Since the sock hop era of the 1950s, there have been 16 occasions in which SPX rallied more than 20% in a four-month period. On every such occasion, SPX was higher a year later with an average gain of 18%. And SPX may very likely be higher a year from now, though an 18% gain from here is a bit of a stretch. An increase of that size from the current level would put the index above 6000. At that level, SPX would be valued at 22 times the most optimistic estimates for 2025 S&P earnings per share.

One thing that should keep us on our toes is the level of bullish enthusiasm among market participants. Extreme sentiment readings are a reliable contrary indicator. Extreme bullishness among the investing public is a reason to be cautious. The American Association of Individual Investors survey shows bullishness near the extreme high end of its range and bearishness at the extreme low end. That same survey also indicates that, unlike the last time the survey saw such extremes, this time investors’ actions are in concert with their opinions. Individual investor stock fund allocations are at the highest level in two years.

Along that same line, a Goldman Sachs report revealed that its U.S. Equity Sentiment Indicator has risen to its highest level in nearly four years. The same report also included a table showing current equity allocations of four investing groups: foreign investors, mutual funds, pension funds and households. The current equity allocation of both foreign investors and households, the two traditionally wrong-footed groups, now stands at its 99th percentile of historic allocations over the past 70 years.

With regard to small-cap stocks, it’s probably too soon to be doing a victory dance for widening participation. There’s something funky in RUT’s improving performance. The gains in RUT are not the result of broad-based small-cap strength. Instead, a lot of RUT’s mojo has come from a very narrow group of stocks. Year-to-date, 24 component stocks have gained more than 100%, one of them more than 200%. Of those 24 stocks, 12 have the word “therapeutics” in their name. The list also includes a couple “biosciences” and a pair of “biotherapeutics.” Year-to-date, less than half of the index’s 1,942 component stocks have a net gain for the year. We’ll need to see genuinely broader participation before we can be confident that the party has started for small caps.

While the long-term trend is solidly intact, things could get a little bumpy short-term. Whether the week ahead brings another toe-tapper or a more somber refrain, I continue to believe that the averages are overdue for at least a resting phase. SPX ended last week near 5137. I think it’s very unlikely that the index can climb even another 1% higher before a more extended consolidation phase ensues. The good news is that the market is currently so extended that even a 5% pullback would not cause any technical damage.

The economic report dance card promises several updates on employment, but not much else. We’ll get updated ADP and Job Openings and Labor Turnover Survey (JOLTS) numbers on Wednesday. Unemployment claims will be reported on Thursday with the monthly nonfarm payrolls and unemployment data coming Friday.

Economic Calendar (3/4/24 – 3/8/24) Previous Consensus
Monday 3/4/2024 No Reports Schedule
Tuesday 3/5/2024 Factory Orders, January, M/M +0.2% -3.1%
ISM Services, February 53.4% 53.1%
Durable Goods Orders, January, M/M -6.1% -6.1%
Durable Goods Orders ex-Transportation, January, M/M -0.3%
Wednesday 3/6/2024 ADP Employment, February +107,000 +150,000
Wholesale Inventories, January, M/M +0.4% -0.1%
JOLTs, Job Openings, January 9.0mm 8.9mm
Thursday 3/7/2024 Initial Jobless Claims 215K 218K
Continuing Claims  1,905K 1,870K
U.S. Productivity, Q4, SAAR +3.2% +3.1%
U.S. Trade Balance, Trade Deficit, January $62.2B $63.3B
Friday 3/8/2024 Non-Farm Payrolls, February +353K +210K
Unemployment Rate, February 3.7% 3.7%


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