Why the Stock Market May Have a Year-End Rally

Market Update
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

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

SP 500 Technical Composite

Bullish and Bearish Narratives

Treasury Yields Fall after Treasury QRA Statement

US Treasury Yields

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

S&P 500 vs US unemployment

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

Featured
Election Driven Rally Pushes US Equities Higher
Election Driven Rally Pushes US Equities Higher

Stocks traded higher this week, with most of the gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end.

Treasury Yields Rise Following the Fed’s September Rate Cut
Treasury Yields Rise Following the Fed’s September Rate Cut

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome.

The Next Two Weeks are Filled With Market-Moving Events
The Next Two Weeks are Filled With Market-Moving Events

This week, stocks traded lower after several weeks of consistent gains. The S&P 500 dropped -0.5%, underperforming the Nasdaq 100's +0.3% gain but outperforming the Russell 2000's -2.8% return. The Magnificent 7 rose over +2%, making Growth the only factor to trade higher. The next two weeks are filled with market-moving events, and once they pass, stocks could rally into year-end.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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