On January 19, the S&P 500 hit new all-time highs when it broke through its previous high set on January 3, 2022.  This marks a span of 511 trading days between consecutive all-time highs, ranking as the 6th longest duration since 1950. There have been a total of 15 instances, including the current one, where the S&P did not reach new all-time highs for a minimum of 200 trading days. The chart presented below illustrates the average performance over the 12 months following the preceding 14 occurrences.

(Source: 3Fourteen Research)

Out of those 14 occurrences, the S&P 500 exhibited positive results in 13 cases, with an average return of approximately 14%. The lone instance of negative performance was observed in 2007, just prior to the Great Financial Crisis. Although the data can be analyzed in various ways, the overarching takeaway is that historically, achieving new all-time highs following a prolonged interval has often signaled potential for additional growth. Of course, past performance is not indicative of future results.

Bullish Outlook, but Bearish Set Up?

While the broader market attains new all-time highs, there has been a shift towards more defensive sectors, potentially prompting a temporary halt in the rally. The chart below illustrates the relationship between US Treasuries and High Yield Bonds, with the black line indicating a preference for high yield bonds (higher risk) when descending and a preference for US Treasuries (lower risk) when ascending.

The same trend is mirrored in the stock market, represented by the blue line. A downward trajectory signifies a greater focus on the S&P 500 compared to more defensive sectors like consumer staples. Conversely, an upward trend indicates an inclination towards a more conservative segment of the stock market.

(Source: Allstar Charts)

The above chart uses a technical perspective on the market, offering insights into short-term trends. Should investors persist in favoring more conservative sectors collectively, technical analysis would indicate a potential pause in the recent rally observed.

Interest Rates & Assets on the Sidelines

Last week, Federal Reserve Chair Jerome Powell did not implement an expected rate cut. However, contrary to the expectations of Wall Street strategists, the timing of the first rate cut in 2024 was not as anticipated. Many analysts had presumed a March rate cut, but Powell introduced a note of uncertainty, stating that it was improbable for the initial rate cut to occur in March. He emphasized the Fed’s reliance on data for decision-making.

For those enjoying higher yields through money market funds and certificates of deposit (CDs), Powell’s remarks might be well-received. These financial instruments collectively hold almost $9 trillion in assets. Elevated cash yields are a positive outcome of a higher interest rate policy. While these yields may persist at higher levels and for an extended period, it appears that the Federal Reserve’s decision to cut rates in 2024 will eventually impact the yields for these investors.

Articles We’re Reading

Layoffs being mentioned on US earnings call at highest rate since pandemic (Bloomberg)

US-led forces carry out second wave of strikes against Iran-backed Houthi militias (FT)

Fed’s Bowman positive on disinflation traction, but flags risk from strong labor market and remains cautious on policy changes (Reuters)

World’s biggest companies staying long-term optimistic on China (WSJ)

Market Snapshot

For the Month Ending 1/31/2024 (Cumulative Returns)1   

1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the  valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal  funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor  Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar  Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

Did You Know?

The first time the Federal Reserve implemented a significant interest rate cut was during the Great Depression in the early 1930s. In response to the severe economic downturn, the Federal Reserve initiated a series of interest rate reductions to stimulate economic activity. The initial move occurred on August 18, 1931, when the Fed reduced the discount rate from 3.5% to 3%. Subsequent rate cuts followed as the economic challenges persisted during the Depression era. This historical event marked one of the early instances of the Federal Reserve actively using interest rate policy to address economic hardships.

Before the Depression, the Federal Reserve had not yet fully embraced the active manipulation of interest rates as a means of managing the economy. In the early 1920s, there were some rate changes, but they were not as systematic or deliberate as the later practices during the Depression. The severity of the economic challenges during the Great Depression prompted central banks, including the Federal Reserve, to reconsider their approach to monetary policy, leading to the development of more active and interventionist strategies, including interest rate cuts, to address economic downturns.

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.