Why the Stock Market May Have a Year-End Rally
Photo Credit: Priscilla Du Preez, Unsplash
Weekly Market Recap for November 3, 2023
The S&P 500 gained 20% through July but has declined 6% over the past three months, bringing its YTD gain to 12%. How will stocks finish in 2023? The chart below shows that when the S&P 500 gains more than 10% through October, the median return in the final two months is 5.5%, with a 90% win rate. In contrast, if the S&P 500 is down through October, the median return for the final two months drops to 0.3%, with a win rate of only 56%. For context, the median return for all instances is 3.8%, with a 72% win rate. If the historical trend holds, the S&P 500 could trade higher into year-end. Investors should be aware of the potential for a year-end rally. (Note: The U.S. Treasury's Quarterly Refunding (QRA) Statement released this week revealed plans to issue fewer Treasury bonds and more bills in the near term. This shift is favorable for equities and long-duration bonds because Treasury bills do not compete with risk assets, with the Treasury Yield chart below showing the sharp decline in yields this week. The key takeaway is that QRA removes a near-term headwind and increases the probability of a year-end rally.
Will Seasonality Lead to a Year-End Rally?
S&P 500 Technical Composite
Bullish and Bearish Narratives
Treasury Yields Fall after Treasury QRA Statement
Unemployment May Become a Headwind
Low initial jobless claims suggest companies are hoarding labor, but rising continuing claims suggest workers are taking longer to find new jobs. The risk is that conditions deteriorate, companies decrease headcount, and unemployment rises. When unemployment rises above 4%, it doesn't historically peak until it surpasses 6%. Our U.S. Unemployment Indicator aligns with this historical trend, forecasting a continued rise in unemployment with a peak above 6% in early Q2 2024. From a market perspective, the chart below shows equities historically peak as unemployment troughs. If this historical trend holds, the S&P 500 has likely already peaked and could make new lows in early 2024 as unemployment trends higher.
Equities Historically Peak As Unemployment Troughs
Our View
Navigating this cycle is particularly challenging due to its complexities. While macro historically matters over the long term, markets can diverge from macro in the near term. Seasonality is historically a tailwind when the S&P 500 is up through October, which historically has shown a 90% win rate. However, there is potential for a volatile first half of 2024. Combining year-end seasonality and macro risks into a coherent timeline is difficult, but we place a greater-than-50% probability on the S&P 500 ending the first quarter of 2023 below current levels.
Our focus remains on managing downside risk in early 2024, leading us to maintain a lower beta portfolio emphasizing less cyclical sectors, the minimum volatility and quality factors, and higher-quality bonds. This allows us to participate in a potential year-end rally while protecting against macro risks.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Our Insights
