A lively start to the year breeds optimism

It’s Spring, and green is showing up everywhere. Is it a trader's dream or a signal of caution?

In the past quarter, the S&P 500 Index, the benchmark for U.S. equities, achieved 24 new all-time highs; it’s climbed over 20% in the last six months without a visible drawdown in sight. This might spark a contrarian thought: Surely, this cannot be sustainable. Initially, we shared this instinct. Yet, upon examining the data and history as precedent, well, we learned to stop worrying and love the rally. Or at least, trust it, along with the fundamentals supporting it. 


Read Q1 2024 Market Review

Aside from the post driven meme-stock mania of 2021, the last time we saw similar market activity was 11 years ago, in the first quarter of 2013. But let's start even earlier, in 2012. That year had parallels with 2023 in many ways, with weakness in the spring and again in the late summer and early fall (due to a mid-cycle slowdown after the global financial crisis), but finished with a strong push in the fourth quarter. Ultimately, 2012 ended with strong returns overall. Then 2013 started with a bang, with returns very similar to 2024, and that first quarter ended with an 11% gain, with over 40% of the days marking new highs, mirroring the latest trends.

Was this a sign of a rally or were equities "due" for a pullback? Well first, let's acknowledge that volatility is a function of equity markets. And a drawdown of 5% is what we would call normal market activity. Something more meaningful would be a fall in equities of more than 10% (otherwise classified as a correction). Again, entirely normal, given that corrections happen approximately every other year and for any and rather unpredictable reasons. So, following the impressive 31% gain on the S&P 500 Index in 2013, there was a pullback of 5% in the first quarter of 2014. This was entirely unpredictable other than for being a completely normal market event. So yes, volatility may lie ahead. What are the likely triggers? The usual suspect remains disappointment with U.S. Federal Reserve actions, or rather the lack thereof. But other factors could also come into play. However, one thing is certain: there will be a bad week at some point in the future, and it won’t necessarily mean the end of the rally.

In the last 100 years, the average six-month drawdown has been 6%. The current six-month weekly drawdown is less than half a percent. The dip barely has time to register before it’s bought up. The infamous “Fed put” (actions by the U.S. Federal Reserve to help out the markets) may be gone, but it has been replaced by an extreme version of “Buy-the-dip” (buying stocks when they’ve dropped in value). With so much money still on the sidelines, and short-term yields expected to decrease later in the year, there's still gas left in the tank. Even corporates are in on the action, with stock buybacks on pace for very strong numbers and equity issuance dwindling.

It’s worth noting that it’s not just the tech darlings being bought anymore. In fact, people are bargain hunting in cyclicals, financials and anywhere they can find quick alpha (higher returns than the overall market). Seasonal factors are also likely to support performance in the first couple of months of Q2, at least until June. Then, seasonal factors go from tailwinds to headwinds, as that month is historically the second weakest of the year.

In essence, don't bet against the market solely based on the notion that it's rising too quickly. While there are plenty of legitimate grounds for skepticism, the rapid pace alone isn’t historically a sound reason.