CWS Market Review – January 23, 2024

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A New All-Time High

On Friday, the stock market closed at a new all-time high. The S&P 500 had gone slightly more than two years, or 512 trading days to be precise, without making a new high.

From high to low, the market had lost more than 25%. It takes a 33% gain to wipe out a 25% loss, but we did it. The drop took nine months while the rally took 15 months.

I don’t want you to think I’m an uncritical cheerleader for the bulls. Of course, if we were to include inflation, then we’re still well short of a new high. Still, in nominal terms, we’ve never been higher.

Take it away, Rita.

The stock market closed even higher on Monday and again on Tuesday. This brings up an interesting subject which is, how well does the market do when it’s at an all-time high?

You might think the market hasn’t done well since, by definition, the market’s never been higher than it is at an all-time high. Also, every bear market starts at a new high. Of course, that’s not a coincidence. Axiomatically, shouldn’t an all-time high be a bad time to invest?

The answer is no. In fact, the market has performed quite well at its all-time high. This gets to an important fact about the stock market and investing: the real money is made during relatively uninteresting markets.

I recently ran the numbers. Since 1957, the S&P 500 has made a new all-time high more than 1,100 times. (I could even be sneaky with the data because the market didn’t pass its 1929 high for 25 years, but I purposely started after that.)

If we were to invest in only those days following a new high, then the market has risen at an average annualized rate of just over 15%. When the market hasn’t been at an all-time high, it’s gained an average of just 6.7%. The market has performed more than twice as well when it’s been at a new all-time high compared to when it hasn’t been. Buy high and sell even higher.

To me the arresting fact isn’t how well the market has done at its high but rather how calm it’s been. The volatility is about 36% less than normal. You rarely see a big day after a new high. Most of the big drops don’t come right at the new high. Instead, the big drops come after a slide.

Since 1957, the S&P 500 has risen by more than 2% following a new high just three times. The normal market sees 2% up days more than four times more frequently. Generally speaking, when the market goes down, volatility goes up. The largest rally off a new high came on January 6, 1999 when the S&P 500 gained 2.21%. That’s a nice gain but compared with other big days, it’s barely a bump.

I’ll give you another example of how boring is good. Low volatility days are much better for the market. If we take all of the daily returns for the last 60 years and divide them into two buckets, the first bucket is days when the market moved up or down by more than 1.2%, and the other bucket is when the market moved up or down by less than 1.2%.

The combined daily returns of the greater than 1.2% days comes to nothing (actually, a small loss). The stock market’s entire gain for the last several decades has come on low volatility days. The simple fact is that most of the big days have been bad days, or they’ve been good days during lousy markets. As the great Jesse Livermore said, “It never was my thinking that made the big money for me. It always was my sitting.”

Don’t Look Past Boring Stocks

Not only are boring markets good, but so are many boring stocks. For some reason, many investors think that a company has to be reinventing the world to be a good investment. That’s not the case. There are many completely boring companies that have been wonderful investments. Many of the worst investments have been in fast-growing sectors.

Here are a few charts you might enjoy:

The red line (Disney) is perhaps the most important name in entertainment with unparalleled intellectual property. The blue line is a hot dog stand.

Goldman Sachs (red line) is one of the largest and most powerful financial institutions in the world. The blue line makes condoms and baking soda.

Intel (black line) is one of the world’s largest semiconductor chip manufacturers. The blue line makes croutons.

Of course, I’m exaggerating, but the underlying point still stands. There’s a lot of money to be made from a dull or uninteresting company. Two boring stocks that I like at the moment are Amphenol (APH) and Miller Industries (MLR)

Q4 Earnings Season so Far

We’re still early in the Q4 earnings season, but I wanted to see how it looks so far. Right now, earnings for the S&P 500 are tracking for an increase of 0.71% compared with last year. That’s a little lower than where it had been. One month ago, we had been expecting growth of 2.24%.

So far, 76.5% of companies have beaten their earnings estimates while 59.6% have beaten on sales. Just under half, or 47.1%, have beaten on both sales and earnings.

For all of 2023, the S&P 500 is on pace to post earnings of $216.85. That means the market is going for about 22 times trailing earnings. That’s elevated but not worrying.

Generally, lower interest rates lead to higher earnings multiples. It looks like rates will be going down this year but not as quickly as previously assumed.

The Federal Reserve starts its first meeting of the year one week from today. The Fed’s policy statement will be due out next Wednesday. It’s widely believed that the Fed won’t make any changes to interest rates at this meeting, but that may change very soon.

For its March meeting, futures traders are nearly evenly divided on the need for a rate cut. For now, the markets are leaning towards the Fed keeping rates unchanged in March. For the May meeting, however, the market places the odds of a rate cut at close to 90%. The Fed hasn’t lowered interest rates in nearly four years.

The market was shaken by the recent comments from Fed Governor Christopher Waller. He said that rate cuts are coming this year, but the market should be cautious in its expectations. The futures market expects the Fed to cut rates by 1.5% this year. That could be too high.

Not that long ago, many folks on Wall Street believed the economy would be in recession by now, but the recent economic news has been somewhat good. Last week’s report on initial jobless claims was quite good. The retail sales report came in above expectations. Homebuilder confidence surged and consumer confidence is at its highest level since July 2021.

By no means do I intend to gloss over the weaknesses in the economy. The housing market is in rough shape and credit-card delinquencies are at some of their worst levels in years. Of course, the economic outlook can change very quickly. Rates will probably come down this year, but the market needs to temper its expectations.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on January 23rd, 2024 at 6:29 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.