SPX Hits Seven Green Weeks in a Row

The stock market showed strong upward momentum during the week ending October 18, 2024, bolstered by positive earnings reports and solid economic data. The S&P 500 rose approximately 0.8%, maintaining its upward trend, while the Dow Jones Industrial Average and NASDAQ also made gains. A key driver was better-than-expected September retail sales, which reaffirmed the "soft/no-landing" scenario for the economy—where growth continues without a severe recession. Additionally, initial jobless claims were lower than anticipated, further boosting investor confidence.

In the technology sector, semiconductor companies experienced mixed results. Taiwan Semiconductor (TSMC) reported robust earnings, pushing its stock and the semiconductor index higher, despite earlier cautious guidance from ASML. Companies like Nvidia also saw gains but showed some price stagnation later in the week.

Looking ahead, analysts remain cautiously optimistic as earnings season progresses, with many key reports still to come. While small-cap stocks showed strong performance, some experts believe the recent gains may be nearing a point of consolidation (Source: Schwab/ Edward Jones)

2024 has been a banner year for stocks so far, and that has many investors worried.

Through the end of the third quarter, U.S. large-cap stocks, as measured by the S&P 500, were up 22% (including dividends). Other previously lagging market areas—like small-caps and value stocks—have also posted strong rallies. Apart from the Energy sector, every S&P 500 sector is up at least 20% over the past 12 months.

One data point that caught my attention this week: the S&P 500 index currently trades at levels 20% higher than the Wall Street consensus for all of 2024.

For many investors, strong equity market returns feel disconnected from on-the-ground economic realities. Many households continue to harbor negative feelings about the economy, mostly tied to the rapid jump in prices during the 2022-2023 inflation event. With two ongoing wars, destructive storms, and a contentious election season in the U.S., many wonder where the optimism comes from. Although jobs have been plentiful and real wages have been rising more recently, the prevailing sentiment is that the stock surge this year has been too much, too fast.

Zacks reports that a ‘fear of heights’ mentality is taking hold as the market continues to rise, with investors anticipating that "what goes up must come down." While bear markets always follow bull markets, the assumption that strong rallies cause bear markets or that they immediately follow is incorrect. History does not support this line of thinking.

For one, stock market returns—whether it's the S&P 500, Russell 2000, or any other index—are not serially correlated. In other words, how U.S. stocks perform in one year has no bearing on how they’ll perform the next year.

Performance affects valuations, which can help forecast forward returns, but just because stocks rise 40% or fall 20% in a given year doesn’t tell us much about what to expect in the next 12 months. To estimate return probabilities, we rely on fundamental analysis—not historical returns.

Some point out that the S&P 500’s over 20% year-to-date gain should raise eyebrows, especially since it closely follows 2023’s 26% gain. These returns are roughly double the S&P 500’s average annualized return of 10.26% from 1957 through the end of last year.

This is true. But what’s missing from this line of thinking is that the S&P 500’s long-run annualized returns include bear markets. If we look at just bull markets, the average annualized return is closer to 23% (going back to 1932), which makes 2023 and 2024 look more like average years than outliers. If we could make the argument that strong equity market returns were making investors optimistic to the point of being euphoric, then I believe we’d have a cause for concern. But as I detailed above, I believe investors still largely feel uneasy about the current economic and geopolitical setup, particularly in an election year. The better case, in my view, is that stocks are continuing to climb the wall of worry as economic fundamentals strengthen—not that euphoric sentiment is pushing investors further out on the risk curve than they should be.

Bull markets do not end simply because stocks have risen briskly for two years in a row. There is no set mean to which stocks revert, and corporate earnings do not grow or contract on a predetermined schedule. The S&P 500’s return in one year does not predict its return the next year.

A bear market will inevitably follow this bull market, and it may even follow a strong year of returns. But it won’t happen because of the strong returns—it will occur due to a global economic shock or cyclical recession that affects global GDP by trillions of dollars. That’s not something we expect to see in the next year.

Falling interest rates and a no-landing economy are boosting asset prices. However, growing government deficits are pushing up the price of gold. Read more in Barron’s.

Where the Yields Are

It’s still possible to find cheap stocks offering dividends of 4% or more.

• Verizon Communications / VZ
  - Recent Price: $43.91
  - YTD Change: 16.50%
  - Market Value (billion): $184.8
  - 2025E P/E: 9.3
  - Dividend Yield: 6.20%
  
• Pfizer / PFE
  - Recent Price: 29.67
  - YTD Change: 3.1
  - Market Value (billion): 168.1
  - 2025E P/E: 10.5
  - Dividend Yield: 5.7
  
• United Parcel Service / UPS
  - Recent Price: 135.84
  - YTD Change: -13.6
  - Market Value (billion): 116.4
  - 2025E P/E: 15.4
  - Dividend Yield: 4.8
  
• Kraft Heinz / KHC
  - Recent Price: 35.81
  - YTD Change: -3.2
  - Market Value (billion): 43.3
  - 2025E P/E: 11.3
  - Dividend Yield: 4.5
  
• T. Rowe Price Group / TROW
  - Recent Price: 111.58
  - YTD Change: 3.6
  - Market Value (billion): 24.8
  - 2025E P/E: 12.2
  - Dividend Yield: 4.4
  
• Chevron / CVX
  - Recent Price: 148.73
  - YTD Change: -0.3
  - Market Value (billion): 272
  - 2025E P/E: 12.3
  - Dividend Yield: 4.4
  
• CVS Health / CVS
  - Recent Price: 65.02
  - YTD Change: -17.6
  - Market Value (billion): 81.8
  - 2025E P/E: 8.9
  - Dividend Yield: 4.1
  
• Sirius XM Holdings / SIRI
  - Recent Price: 27.07
  - YTD Change: -50.5
  - Market Value (billion): 9.2
  - 2025E P/E: 8.1
  - Dividend Yield: 4

• Amgen / AMGN
  - Recent Price: $324.62
  - YTD Total Return: 15.20%
  - Dividend Yield: 2.80%
  
• FedEx / FDX
  - Recent Price: 267.45
  - YTD Total Return: 7.4
  - Dividend Yield: 2.1
  
• Goldman Sachs Group / GS
  - Recent Price: 522.75
  - YTD Total Return: 38.1
  - Dividend Yield: 2.3
  
• SLB / SLB
  - Recent Price: 44.7
  - YTD Total Return: -12.5
  - Dividend Yield: 2.5
  
• State Street / STT
  - Recent Price: 90.93
  - YTD Total Return: 20.6
  - Dividend Yield: 3.3
  
• Zoetis / ZTS
  - Recent Price: 192.65
  - YTD Total Return: -1.7
  - Dividend Yield: 0.9

*Note: Data as of Oct. 14. Source: FactSet

I’m feeling very cautious at these levels. Factors I’m focusing on this week:

1. IBM & TSLA earnings
2. Existing home sales
3. PMI & Durable Goods
4. Price action in NVIDIA, SEMI’s, KRE, XLF, & IWM

DATA: Barron’s print edition page 28 10/21/24 Market Week Avi Salzman

Paragraph: one ChatGPT AI online 10/21/24 Last Weeks Market Recap

Paragraph: two Mitch On The Markets online edition 10/19/24 Have Stocks Risen Too Far Too Fast Mitch Zacks

Paragraph: three Barron’s print edition page 7 Hot, Hot, Hot: The Everything Rally Randall W. Forsyth

Paragraph: four Barron’s print edition page 11 10/21/24 8 Dividend Stocks to Buy Andrew Barry
Paragraph: five Barron’s online edition 10/17/24 Above Average Lawrence C. Strauss

Paragraph: Six Closing remarks & factors I’m looking at. Richie Naso

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