Unpredictability of the Stock Market: A Tale of Two Weeks
Sixteen days ago I wrote the following in my notebook. “It was not a good week for the markets. The S&P 500 closed at 4,224.15 leaving it down 2.39% for the week, and that it closed so near its lows for the week was not a good thing. This was also a close below the 200 day simple moving average (SMA). How quickly do we get back above that line, seeing as it is still an intact upward sloping moving average? It is interesting as it will soon unravel seeing as we have significant earnings releases this coming week, and the FOMC the following week.” At the time, I had gone from being bullish and confident on the short term stock market outlook the weekend before, to now finding the whole market set up as vulnerable. I think it is fair to say that market sentiment was also giving undertones of bearishness in outlook.
As I sit here, two weeks post that note, the stock market was as unpredictable as ever, as the S&P 500 fell 2.53% the next week, and rose 5.85% this past week. The effect is, the week’s performance we have just had, reversed the damage from the prior two weeks combined! “There is nothing like price to change sentiment” is a quote attributed to Helene Meisler, and boy is she right. At face value, it looks like experienced, well qualified, competent professional money managers are erratic. Just like you and me, they are being human. I guess that is why economics and financial markets are a behavioural science.
Let’s first look at the earnings releases and market reactions since I first wrote the note. I touched on the impact of The Magnificent Seven in my last post, and it is safe to say with Six of the Seven having reported earnings, the market’s reality with their results and outlook is no longer an unknown until the next quarter’s earnings season. According to FactSet, 81% of S&P 500 companies have now reported earnings. Taking actual results, and expected earnings to be released of the 19% of the S&P 500 that have yet to report, earnings growth for the S&P 500 is 3.7% for the third quarter of 2023. If that 3.7% is indeed achieved, it will mark the first quarter of year-over-year earnings growth since the third quarter of 2022.
All but one of the Magnificent Seven have reported earnings. Of the 81% of the companies in the S&P 500 that have reported thus far, 82% reported a positive earnings surprise. That makes for an argument, that in theory, an earnings related element of surprise could shift market sentiment to negative as we go into the calendar year end. In theory, but note I am not placing a probability on that being the case. If you factor that the one that is left to still report of the Magnificent Seven is NVIDIA and that we don’t know how the market will react to those earnings, even if they don’t disappoint, you can understand my caution. A bad reaction to NVIDIA’s earnings release could see the S&P 500 head lower again, as the ripple effect of NVIDIA stock selling takes effect. But I certainly can say that earnings are a lower probability risk than they were two weeks ago.
The FOMC was most likely the biggest catalyst of the change in direction of the S&P 500’s performance this past week. After The Fed came out hawkish, and set the cat amongst the pigeons in the markets with their commentary post the September meeting, the tone was definitely not hawkish after the November 1st meeting. I am not arguing that they were dovish, but they were most definitely not hawkish which is a big shift from September. There was no increase in rates in the last two Fed meetings, and now a rate increase in December seems highly unlikely. This has resulted in Bond Yields falling (so Bond prices rising) and stocks largely soaring, (so not simply the Mega Cap stocks). Not only were all 11 sectors of the S&P 500 up this past week, but so were Mid-Cap stocks, Small Cap stocks and Micro Cap stocks. What we have just experienced is a broad market rally of both stocks and bonds.
So what is there to be concerned about?, Most seem positive and bullish and The Fed is for now, most certainly done raising interest rates. Well, just because the Buyers are more aggressive and driving prices up of these assets (stocks and bonds) as there are more of them than Sellers, does not mean this is a slam dunk rally into year end. Market participants had clearly put a lot of weight on the rising rate environment which seemed to have no end in sight. Now that they think rising rates are over, they have an appetite to buy stocks at current prices. Until that changes, the bullish are of the view that “the price is right” and asset prices are likely going up in future, so they are buying!
It is always good to listen to Tom Lee when I get negative vibes dominating my thought process, and two weeks ago it was prescient that he was the guest on The Compound and Friends. He brings a data based perspective to argue why he has his outlook and that appeals to me. He made a good argument about why he was still bullish then. One of the points he highlighted was that if you considered the impact of funds flow, in terms of how much money was leaving the stock market in favour of Bond Funds and Money Market Funds, he thought it was impressive that at that stage the stock market had been up so far this year. In other words, as different investment returns compete for money, and seem like a better alternative than investing in stocks, naturally stock sellers increase as they would rather invest in Bonds or other alternatives as well. That’s what makes the fact that the stock market has gone up in 2023 even more impressive.
For every Tom Lee, with lucid and logical data driven arguments, there are sound arguments from other Market Strategists who do not have as positive an outlook of where the stock market and stock prices are headed. At the moment though, there seems to be a consensus tilt to “no recession” and “stocks going up”. That shift in sentiment, together with a set up where stocks were dramatically oversold (prior to this week), made for the perfect cocktail of the beginning of a true “everything rally”.