The S&P 500 is testing its highs and so is complacency.
After two years of hard work, the S&P 500 (SPX) is testing all-time highs. As a result, many investors may be wondering whether this is something to celebrate or worry about.
Your answer to this question will reveal your approach to investing. After all, some investors don’t believe in “buy low and sell high.” Instead, they stick to the “buy high and sell high” strategy.
Like all other approaches, this one works until it doesn’t. But if mean reversion no longer makes sense and still has value in valuation, the S&P 500’s risk-reward balance could become woefully unbalanced.
Mission accomplished… Or maybe not
The problem with assessing the health of the U.S. economy is that people use different measures. For example, it is difficult to reach a consensus on whether the United States has actually experienced a recession over the past two years. Although a recession has not been officially declared, that doesn’t mean people agree that it never happened.
As far as current Treasury Secretary and former Federal Reserve Chair Janet Yellen is concerned, it is clear that a recession will not occur until early 2024.
Representative Yellen recently declared that the mission was virtually accomplished, saying, “I think the situation we are seeing now can be called a soft landing.”
Just a year ago, there was little agreement that a ‘soft landing’ would occur in the U.S. economy and markets. Now the sentiment pendulum is swinging sharply in the other direction, with bullish voices outweighing bearish warnings.
Matthew Martin and Ryan Sweet of Oxford Economics succinctly summarize the bulls’ argument: “A strong labor market, slowing inflation and easing financial conditions have reduced the odds of a recession over the past few months. “He said. “The Fed’s pivot to lower interest rates is imminent.”
I’m surprised they didn’t mention the “strong”/”resilient” American consumer that economists and strategists constantly point to. I’ll keep pointing that out because there’s no denying that 2023 was the year cash-poor consumers shopped ’til they drop, applying the ‘buy now, pay later’ principle.
Of course, the “soft landing” story is debatable. This is especially true as U.S. manufacturing continues to struggle throughout 2022 and 2023. But even in the manufacturing sector, if you look hard enough, you can find hope.
Nonetheless, GenTrust’s Jim Besaw believes the market has already priced in the best-case scenario for 2024, which consists of five assumptions. Inflation will go down. Recessions will be prevented; Artificial Intelligence (AI) will live up to the hype. The delayed effects of higher interest rates will not be realized. Geopolitical tensions will continue to be contained.
Achieving all five of these assumptions is difficult by any stretch of the imagination. Inflation has already fallen significantly, but will likely fall further. Avoiding a recession is certainly not guaranteed, and it is difficult to achieve consensus on what actually counts as a recession.
I believe the biggest challenge for the market will be managing the almost inevitable downturn after the AI hype dies down and dealing with the delayed fallout of higher borrowing costs. With the S&P 500 hitting record highs, investors feel unprepared for disappointment, let alone disaster.
It is bearish when few people are bearish.
There are always a few alarmists out there. Like a broken clock that is right twice a day, they will eventually be right because market crashes happen sooner or later.
Leaving aside the naysayers, bearish voices are now few and far between and are being drowned out by market optimists. Fears of a recession among business leaders quickly subsided. Six or seven rate cuts are the baseline expectation for 2024, even though no one at the Fed has promised or even hinted at this.
In the financial markets, fear seems to be fading away and replaced with hope. However, this is not just a feeling, as future data represents extreme positioning.
To find out, take a look at the Chicago Board Options Exchange’s (CBOE) Volatility Index, also known as VIX or “fear gauge.” Recently, it fell to 13th place, the level just before the outbreak of the COVID-19 pandemic.
The market was the same then as it is now. This is happening in the seasonal month of February. weak moon For stocks, quick access is possible. So it’s good to pay attention and remember that sharp market declines tend not to happen when the public and experts expect them to.
