It only took the S&P 5600 12 weeks to recapture the losses endured during the decline into the April lows. Since this is a very peculiar way for the markets to act, I felt it might be interesting to go back in time (all the way back to the 1930’s) and check out how markets have gone moving forward after this kind of a quick recovery of a move down. Normally, stock markets take an elevator down, and the stairs (rebuilding) back up. This is another reason why it tends to take much longer to make money than to give it back. Fear tends to overshadow greed when it comes to market action. So, this April was a manifestation of a seven-week decline followed by a twelve-week recovery to new highs.
In looking at what I mentioned above about quick recoveries, like we just experienced, I studied every time this has happened in under six months going back to the 1930’s. Overall, the 2025 breakout to new highs is consistent with bullish market behavior. Here is a picture of the 2025 action and then a table of every time that this has happened:
It should be noted that 6 months out, from every one of these occurrences, the market has been positive 100% of the time, and 92% of the time after a full year. I also note that this time was very short in time. I believe this is because the reason for the pullback could be attributed to the action of a new president that was extremely hard for the markets to handicap given the uncharacteristic nature of President Trump’s style.
As a result of this work the rise in the markets since the April lows should force everyone- whether considering existing portfolios or new capital allocation, to look at what to expect going forward. In so doing, I believe these points should be considered:
- What do markets normally do when they have experienced a recognizable and measurable decline that is immediately followed by an advance to above the decline?
- Why did this decline occur, and was the reason structural or simply based on a temporary market or environmental change? IE, in this case it simply got “Trumped?"
- What was the market doing before the decline, and is it now showing the same characteristics, therefore supporting the fact that the decline was simply a “special situation” and therefore a non-sustaining one?
- Is there a backdrop in place- valuation, earnings progression, underlying economy, available capital, M-2 money supply- that can provide the needed fuels to allow the markets to accelerate further?
- What are the presidential cycle components of the current market action, and do these support a further advance or time for a pullback / digestion of the advance?
- Where’s the beef!? Is there money out there? This, I feel, is one of the major components not discussed enough. There is $7.2 Trillion in cash looking for a home!!!! And Trump even said it this week, for every one interest rate point decline in interest rates, it equates to $368 Billion in interest savings. So, if this is the case here, what is the amount of interest $7.2 Trillion is earnings (that will need a home) at 3-month T-bill rates of 4%? Holy Guacamole- that’s a lot of money that needs a home.
- Is the market broadening so that it is showing that all productive sectors, even those that are growing at a bit slower pace participating in the advance? This needs to be the case for the advance to remain durable.
To address these points, here is the immediate backdrop for the month of July. This week is packed full of economic reports and a Fed meeting on Tuesday and today, but reflecting on the month of July, these were the important points to check off:
- July 9th Tariff scare was pushed out to August 1st and now trade deals have been signed with major trading partners like Japan and the EU, so these deals are being completed as the administration promised. And Japan is investing $550 Billion in the US. I think this is pretty positive. It appears that China is sitting at the table and the tariffs with them have been further postponed as well.
- CPI and PPI came out benign. Sort of Goldilocks- not too hot and not too cold.
- Earnings are coming in far better than expected. Through Friday, 34% of S&P had reported. 83% beating estimates and beating by a median of 4%.
- FOMC is most likely going to go unchanged. Tuesday-Thursday Fed commentaries.
- Historical July market movement is positive.
When looking at the chart above, the logical question that should be asked is what is driving the market’s performance this year / this time / this first year presidency? This could give an indication of where investor capital is going, both institutional and individual. At present, and actually since the market began its liftoff back in late 2023, it has been very consistent in Growth or Hi-Beta, and most specifically the MAG 7 which have the biggest vote in the indexes themselves. So here is the comparison of all subsets of the US equity markets, please note where I have highlighted those parts that have been particularly strong:
Taking this to a global perspective also is a relevant analysis. As can be seen below, if we look at the foreign markets and most specifically how the US S&P is performing “relative” to the All-World Index, it is clear that even though the international indexes showed some strength at the beginning of the year, the US markets are beginning to take the lead once again as they have for the past 16 years consecutively:
Now that I have covered what could be expected after what has been happening, the next thing that I wanted to gain perspective on is the long, long-term. The very long-term chart of S&P going all the way back to 1929. See that it is at the top of its historical range. Sort of a moment of truth here. Is it overvalued, or ready to move higher? This is the ultimate question. Given the way earnings, tariff settlements, GDP growth and the $7 Trillion cash sitting on the sidelines, barring a black swan event, this market appears poised for an additional advance:
If we take this 100+ Year Bullish Channel and zoom it in to just the upper right …I believe it is premature to claim that the line has been definitively broken. When we zoom in on that line, it does look as if the market has respected where I currently have it drawn, as it offered consistent resistance late last year and into the early part of this year. If it is positioned correctly, the S&P has attempted to push above it in the past week. Unfortunately, we are not yet seeing the kind of acceleration higher that we want to see on a major resistance break. To take the upper right-hand corner and zoom in a bit more so we can really see how it is acting up here at this high point, this is what we have:
The last real question that I ask myself is, “Where should the markets go if they don’t break out to the upside further?” I begin by looking at this chart a bit differently and looking at levels where pullbacks in the broad market could back down to, we end up with the chart below. Notice that I have put in horizontal green lines at different levels. They really don’t mean that I would expect the markets to go there, but rather that these seem to be places that the market has had indecision points and could be places that changes in leadership could occur. Switching to the more short-term daily chart, there still has not been any breaking of support in the S&P 500 and until that happens the trend remains "up." At a minimum, we need to see a move below 6200 to potentially get anything going on the downside here, though not too far below there is the 6147 prior all-time high from February that should now offer its own support after it was bettered last month.
So, for those looking to stay in an offensive posture, I think that's reasonable above that 6147-6200, but below there I think the risks will go up. There is now ample support underneath the S&P, particularly above 5600, where several potential support areas reside. I, therefore, continue to believe that the downside is probably limited to 5-10%. There really isn't a good reason to go down more than that given all that support, so, should it happen, that could be a sign that something is not right.
The run up from the April low has been terrific. The noise in the media has been deafening, yet the equity market has shown incredible resilience and consistent progress. Will this continue? It is tough to know, but this is why I posed all the points I did at the beginning of the note. We will of course be paying attention to earnings and economic reports as well as solutions to the international problems both militaristic and Trump Tariff related.
At present, the path of least resistance seems to be higher, and just last week John Stoltzfus, chief Investment Strategist of Oppenheimer & Co. revised and raised his year-end target for the S&P to 7,100 from 5,950. Based on last week’s index levels this could represent close to an 11% additional advance into year-end. That to me is really quite attractive! Stay tuned.
- Ken South, Tower 68 Financial Advisors, Newport Beach
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