As the stock market persists in its upward trajectory, it has notably exhibited minimal daily volatility. Remarkably, there hasn’t been a single-day movement of more than 2% since the previous summer. This occurrence marks the 14th instance in the past 70 years where the S&P 500 has maintained such stability for at least six months. The chart below illustrates the outcomes following the previous 13 instances, shedding light on the market’s performance in the aftermath of such periods.

(Source: Sentiment Trader)

During the past 250 trading days, the daily price returns of the S&P 500 have consistently fluctuated within a range of +/-0.78%. This figure is below the long-term average of 0.94%. Although the market’s movements may seem modest, historical trends indicate a correlation with improved returns in such periods.

(Source: DataTrek)

The chart above shows the daily volatility of the S&P 500 since 1960.  When we are below the long-term average of 0.94%, the S&P 500 has tended to be in a bullish pattern.  As the market continues, smaller swings tends to lead to better results.

Japan’s 34 Year Bear Market Ends

Japan reached an unprecedented peak on December 29, 1989, and it took more than 34 years for the Nikkei 225 to establish a new all-time high. The graph below illustrates the zenith in the late 80s and the subsequent extended period before reaching fresh highs.

(Source: FactSet)

In the early 90s, the Japanese market experienced a substantial crash, plummeting over 60% within a few years. This economic downturn marked what is known as “The Lost Decade,” characterized by a prolonged slump. Despite recent market highs, Japan slipped into a technical recession last quarter, with a 0.4% contraction in GDP at an annualized rate, indicating two consecutive quarters of economic decline.

Interestingly, amid these economic challenges, investors are still drawn to Japan due to robust corporate earnings and a renewed emphasis on corporate governance, a trend that has even attracted notable investors like Warren Buffett. This scenario underscores the intriguing reality that a strong stock market and a robust economy can operate somewhat independently of each other.

What Happened to Rate Cuts?

Analysts had widely anticipated rate cuts, with some predicting as many as six cuts by December. The likelihood of a rate cut during the March meeting stood at 84% on December 29, 2023, reaching 100% by May. However, as of February 16, these probabilities have been significantly reduced.

(Source: InvesTech)

The sustained resilience of the economy has not compelled the Federal Reserve to implement rate cuts. On the flip side, critics argue that prolonged higher rates could provide more time for economic developments that might necessitate such cuts. While keeping an eye on these probabilities is intriguing, their accuracy in forecasting can vary widely. This narrative is expected to gain more attention as the year progresses, but for now, it appears that rates will remain unchanged in the short term.

Articles We’re Reading

Stronger-than-expected earnings growth, improving margins following layoffs among key earnings season themes (Bloomberg)

Foreign-born workers may be taking pressure off inflation, accelerating economic growth (CNBC)

Bitcoin, retail favorites surge as FOMO dynamic returns to market (Bloomberg)

Apple continues to significantly lag peers in AI (Yahoo)

Market Snapshot

For the Month Ending 2/29/2024 (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?

With baseball season around the corner, a theory exists on how this affects the presential election which is deemed the “World Series Winner Predicts the Presidential Election” theory. According to this superstitious notion, if a team from the American League (AL) clinches the World Series, it foretells a victory for the incumbent party in the upcoming presidential election. Conversely, a win by a team from the National League (NL) is believed to predict success for the challenging party.

Despite its amusing premise, this theory lacks any logical or causal connection between the outcomes of a baseball championship and the results of a political election.  There was a string of occurrences that happened in the 1950s and 1960s that birthed this theory, but since that time, the correlation has broken down quite a bit.

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.