Welcome to Wally World

May 20, 2024

By Pete Biebel, Senior Vice President, Senior Investment Strategist
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It’s been an action-packed trip, but the market indices have finally arrived at new highs. The S&P 500 Index (SPX) ended the week just above the 5300 level for the first time ever, and the stodgy old Dow Jones Industrial Average (DJIA) managed to nose above 40,000. The trek has been fraught with setbacks. There were incidents and escapades en route when it seemed that reaching this destination was a real longshot. And, yes, there was a casualty or two along the way. Yet, we have arrived. Now what?

Last week, a gain of about 3% in the technology sector helped the NASDAQ Composite Index (COMP) climb about 2% net for the week, including a new high on Thursday. SPX was up 1.54% and DJIA gained 1.24%. Both indices hit their intraday highs on Thursday and their closing highs on Friday.

Will the thrill ride continue, or will there be heartbreaking disappointment at the end of the long journey? The vast majority of new market highs are quickly followed by even higher highs. A market in motion tends to stay in motion. So, most of the time, new highs beget more new highs. The trick is to identify the ultimate high, or at least to know when the market is in that neighborhood.

The road signs that point in favor of continuing on this northerly route include a healthy (and not too hot) economy, better-than-expected earnings growth, moderating inflation, and the increasing prospects for lower interest rates later this year. They were all in play last week. As the current earnings season winds down, we now know that first-quarter earnings in aggregate increased by about 6%, when just a 3% improvement had been expected. The consumer price index report last Wednesday showed year-over-year inflation in April was a tick lower than the March reading at 3.4%. That news not only vaulted SPX above its late-March high, but also dropped the yield on 10-year Treasury notes to 4.32%, its lowest level since early April.

The largest roadblock to significantly higher highs is the market’s already expensive valuation. The consensus earnings-per-share estimates for SPX are about $242 for 2024 and about $256 for 2025. That means that the market is currently valued at about 22 times this year’s earnings and nearly 21 times next year’s. Those multiples would be at the rich end of the scale even in a low interest-rate environment. Given the current “higher for longer” interest rate expectations, the odds of those multiples expanding further are not good.

If there’s a market equivalent to the Griswolds’ Wagon Queen Family Truckster, it’s the much-trafficked Magnificent Seven stocks. That small group of mega-cap tech stocks, which hauled the overall market higher on its roof-rack for much of the past 16 months, appears to be somewhat beat up and dented at this stage of the journey. Tesla, Inc. has been the most obvious wobbling tire of the group. In April, the stock hit its lowest level in 15 months, and though it bounced back quickly from there, the stock has been trending lower in May as the overall market advanced. Alphabet Inc. is the only one of the seven that has touched a new high recently; all of the others are well short of their highs from earlier this year. So, even though most of the group has been driving forward this month, there may not be much gas left in the tank.

A peek at the dashboard reveals that a couple of warning lights have begun blinking. At this stage, they’re still fairly dim, but worth keeping an eye on. One is the current very low reading for the volatility index, VIX. A low VIX level is no big deal; it usually means that the market is firing on all cylinders. An extremely low VIX level, however, can be a sign of too much complacency and increases the odds of a spike in volatility in the near future. Friday’s closing level for VIX was 11.98, its lowest reading since January 2020, just before the onset of the Covid pandemic. By March of that year, VIX hit 80.

In addition to the “Too Low VIX” light, the “Excessive Speculation” warning flashed on last week. Meme stock mania was rekindled, and a bevy of heavily shorted small-cap stocks rocketed higher. Much of their early-week gains were subsequently given back, so that phenomenon may have flamed out just that quickly. Still, it stands as another sign that too many people now believe the stock market represents easy money.

The financial media made a big deal of the Dow crossing above the 40,000 level, as if that alone meant that the index would now climb much higher. But there’s nothing magic about the big, round-number levels on DJIA. The Dow is the Aunt Edna of indices. It’s been around forever, but it no longer provides much relevance. DJIA has just 30 member stocks, and it’s a price-weighted index. Both SPX and COMP provide much more accurate measures of where the stock market stands and where it’s going. Nevertheless, people are comfortable with their nightly news updates on what the Dow did that day. They’re familiar with the daily reports and what constitutes a big day. The news media knows that people want to hear about the Dow, even if more descriptive, informative indices take a backseat. So, there’s not much chance that your local stations will place more emphasis on SPX or COMP any time soon. That’s about as likely as me skinny-dipping with a supermodel.

Having just reached new highs, the market averages have no overhead resistance, but the rally has lifted all the broad averages to borderline overbought conditions on both a short-term and an intermediate-term basis. SPX ended last week at 5303. My guess is that it won’t be able to get much beyond the 5325-5350 area short-term. The index could fall back into the low 5200s without doing any technical damage. The 50-day moving average for SPX is approaching 5160; it would be best for the health of the market to hold above that level in the coming weeks.

The earnings season has already delivered a truckload of first-quarter results. The number of reports this week is relatively small, but not without relevance. In addition to announcements from many of the leading retailers, the last of the Magnificent Seven companies, NVIDIA, will finally release its results. Some analysts think the company’s stock is the market’s most important. How the stock reacts to Wednesday’s earnings report could be significant for the overall market in general and the mega-cap tech stocks in particular.

The release of the minutes from the most recent Federal Open Market Committee meeting Wednesday afternoon could be the highlight of a pretty short economic calendar this week.

Economic Calendar (5/20/24 – 5/24/24) Previous Consensus
Monday 5/20/2024 No Reports Scheduled
Tuesday 5/21/2024 No Reports Scheduled
Wednesday 5/22/2024 Existing Home Sales, April, SAAR 4.19mm 4.21mm
FOMC Meeting Minutes
Thursday 5/23/2024 Initial Jobless Claims 222K 219K
Continuing Claims  1,794K 1,790K
U.S. Services PMI, May 51.3 51.6
U.S. Manufacturing PMI, May 50.0 50.0
New Home Sales, April, SAAR 693K 675K
Friday 5/24/2024 Consumer Sentiment, May 67.4 67.6
Durable Goods Orders, April, M/M +2.6% -0.5%
Durable Goods Orders ex-Transportation, April, M/M +0.2% 0.0%


Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market