The last three months represented a spectacular run for the stock market. The S&P 500 advanced 15%, the second-largest quarterly increase since 2009. Only the COVID-related rebound in 2020 produced a larger return in a calendar quarter (Morningstar). Few investors, including us, forecasted such a rebound in late March during the height of the uncertainty surrounding the Iran conflict and oil prices. This is another reminder that markets tend to reward perseverance and optimism, and that the strongest advances often follow periods of heightened uncertainty.
Importantly, this rally was not built on speculation. Corporate earnings results far exceeded expectations, providing fundamental support for higher prices. In fact, earnings have grown faster than share prices this year, and the market is now cheaper by most major valuation metrics (FactSet). Think of a $10 package at the grocery store containing 1lb of meat. 6 months later the package of meat costs $11 but now contains 1.25lbs of meat. Despite the higher price, you are now getting more meat per dollar, which makes it a better value. That is what has occurred in the stock market so far this year.
Investors may worry that “what goes up must come down” or “easy come, easy go” regarding stock market performance. Fortunately, history suggests otherwise. Data from Blackrock show that forward returns following advances like the one we just experienced are stronger, not weaker, than average. In the stock market, strength begets strength.
That does not mean the path forward will be straight up. Just as athletes need rest days after intense exertion, the market needs time to digest its recent gains. That process began in May and continued through June with several modest dips and periods of sideways trading. Such consolidation is normal and healthy during a long-term bull market.
Looking forward, we continue to note several risks. Markets often experience some volatility under new Federal Reserve chairmen, and Kevin Warsh has pledged a new communication style. The market may need time to learn how to interpret his messaging, which could lead to some investor skittishness. Additionally, midterm election years have often seen a pre-election dip in prior cycles. However, investors should not be overly concerned with the potential for a summer selloff. One is far from guaranteed, and the weight of the evidence continues to suggest a healthy long-term environment for stocks.
Between the exceptionally strong labor market, the AI technological revolution, and the ongoing bull market powered by corporate earnings growth, the market is experiencing a modern Roaring ‘20s. It may not feel like it in real time – general uncertainty and a focus on the day-to-day news can obscure the bigger picture – but we think history will show that investors are living in the “good old days” right now. We will continue to monitor our objective indicators to maintain appropriate risk and investment positioning as conditions evolve.
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here.
