Weekly Update

A New Bull Market?

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Published June 9, 2023


The S&P 500 entered a new “bull market” this week as the index has now risen more than 20% from its low point hit last fall. Our friends at Delta research outline below how market sentiment has changed:

“The market is shifting. Sentiment is turning bullish. On the prospects of better growth and lower recession risk, funds are flowing back into equities.

Weekly U.S. Equity Fund Flows

This is especially the case in small capitalization stocks. Almost all of the appreciation year-to-date in the Russell 2000 small cap index, roughly 7.5% through Wednesday close, occurred in the first five trading days of June.

The CBOE Volatility Index (VIX) collapsed to a three-year low this week of 13.5. The VIX measures put option buying on the S&P 500. Low-teens readings indicate low investor anxiety.

CBOE Volatility Index (VIX)

When the VIX has traded below 15 and remained below this level, the stock market has enjoyed multi-year bull markets.

VIX < 15 Bull Markets

Increased confidence in an economic growth-view stems from:

• resolution of the debt ceiling negotiation
• robust non-farm payrolls report for May
• stabilization of regional banking concerns
• rising earnings estimates in the past couple of weeks – importantly, Wall Street analysts believe Cloud infrastructure companies will see the bottom in Cloud growth rates in the third quarter and then reacceleration. This is a result of lapping easier comparisons and Cloud investment/optimizations slowing creating higher return on investment. Cloud computing is a significant growth factor for market leading stocks Amazon, Google and Microsoft.
• rising growth estimates from Artificial Intelligence (AI). Analysts believe AI will be a significant productivity driver (1.5% per year boost) that will lift growth rates over the next ten to twenty years. Because of this new technology and higher long-term economic growth rates, the stock market may be materially undervalued today.

In the past week, Goldman Sachs reduced its probability for a recession in 2023 from 35% to 25%. The direction of the estimate revision downward is a significant change as prior revisions had been up rather than down.

The trade-off to the higher growth, lower risk outlook is interest rates may move higher. The bond market continues to expect the Fed to not raise rates at its June meeting next week but believes there will be a rate increase in July. So far in June, a bump up of the 10-year treasury rate from 3.6% to 3.8% has done little to temper investor enthusiasm.”

But if we hold on to this new bullishness, here’s what could be in store for stocks:

Bull/Bear markets returns

Of course, while investors have expanded their optimism this week, there are still plenty of possible bumps ahead and a high likelihood that the high-flying megacap tech stocks that got this party started will roll over at some point. Whether that inevitable pullback leads to broad market weakness or merely a running-in-place market will be of great interest.


Market Update

Stocks kicked off the first full week of June with a -0.2% dip as the ISM services index showed a slower uptick than expected. Investors are hoping the economy can thread the needle between enough growth to avoid a recession while not so much growth that the Fed sees room to raise interest rates further. A rally in regional bank shares and a reduction in the chance of a near-term recession to 25% by Goldman Sachs pushed stocks up +0.2% Tuesday. But the smallcap index ripped higher by over +2% accelerating a rally that kicked off a week ago on strong employment numbers. The rally in small and midcap stocks is new information for market participants. Those indexes had been holding losses all year despite a rally in megacap tech stocks, largely held down by weakness in cyclical sectors and the regional bank issues in March. Early strength in stocks Wednesday gave way to selling when Canada’s central bank unexpectedly raised interest rates. The move took the wind out of the market sending stocks lower by -0.4%. However, smallcap stocks built on recent gains with another nearly +2% gain. Investors bought the dip though to send stocks up +0.6% Thursday. The lift pushed the S&P 500 past the +20% point from the market low last fall thus leading pundits to declare the end of the bear market. Coinciding with the market’s strength has been a plunge in volatility back below the 15 level for the first time in four years – another clear sign investors have thrown off many of their concerns from the post-pandemic bear market. Stocks were flat Friday though Tesla continued a two-week surge on news that GM and Ford will adopt the electric car maker’s charging stations as a standard.

The S&P 500 (SPY) added +0.46% this week to build on the prior week’s strong breakout. The Nasdaq 100 (QQQ) was flat at -0.04% after a torrid six-week rally. Smallcaps (IWM) finally got in gear with a powerful +1.94% gain this week.

Warm wishes and until next week.