The Market as a Sport: Bulls in the Lead at the End of the First Quarter
If the market were a sport and a game lasted a year (literally, not just figuratively) then the betting apps’ win-probability charts would be skewed way in favor of the bulls at the end of the first quarter. This isn’t simply a function of the score, with the S & P 500 up more than 10% and a majority of stocks now participating in the advance. It’s also about how the odds for the next few quarters fall, based on what we’ve seen so far.
Here’s a scouting report covering a few relevant themes at play heading into the second quarter. The behavior of the market itself is perhaps the strongest selling point for a bullish outlook from here. The way the market has acted (resolutely strong, no notable pullbacks, constant rotation, broadening participation) and why (a firmer economy, earnings upturn, Federal Reserve looking to ease, bond yields in an unthreatening range) are tough to assail.
There are historical studies flying fast around Wall Street detailing what tends to come next after strong and persistent rallies similar to what we’ve seen year to date and since the late-October market low. After the S & P has returned 10% or more in a first quarter? Truist Wealth counts 11 prior instances since 1950. The index continued higher the following quarter nine of those 11 and was up the remainder of the year all but once.
The index is also now up five straight months for the 29th time ever. All but one of the previous episodes saw the market higher nine months later, which in this case would take it through 2024. Bespoke Investment Group calculates that as of Thursday’s close the S & P 500 has remained statistically overbought (one standard deviation above its 50-day average) for 50 days for the 12th time.
One can make the case that the tape won’t remain as unflappable as it’s been for much longer while still granting that the weight of the evidence argues against a consequential market peak being at hand. Note that in those prior 11 times the S & P entered the second quarter up at least 10%, the smallest pullback the rest of the year was 4%, and those were in the 1960s.
It’s been gratifying to see the market pile up the performance and style points as it has, even with the prevailing outlook for Federal Reserve rate cuts this year being deferred and diminished. The Fed’s stated eagerness to preserve a chance for a soft landing, rather than insist on a lot more economic slowing before getting less restrictive, affirmed this view.
As the rally has rolled, animal spirits have flowed anew, the AI-investment obsession has raised the metabolism of the market and traders are opting to play faster and looser again. JPMorgan finds that retail traders are again accounting for a heady proportion of all options orders, comparable to the peak pandemic speculative phase that topped out in early 2021.
Citi’s Levkovich Panic-Euphoria gauge, made up mostly of market-based readings with a smattering of opinion surveys — peeked up into the Euphoria zone by week’s end. In this indicator, Euphoria is defined as the conditions associated with a higher-than-average chance of negative returns in the coming year.
The AI investment boom is undeniable, and increasingly central. An S & P 500 index investor is now effectively putting at least 15 cents of every dollar in stocks that are driven mainly by AI excitement. Exciting or sobering, depending on one’s point of view, or perhaps a blend of both – much like the market itself right now.
