ETF Insights| October 1, 2024
Our forward outlook for the S&P 500 remains bullish as inflation and the Fed have cooperated to setup a “soft landing” scenario from the inflation that plagued markets in 2022.
Price Action & Performance
New all-time highs for the S&P 500 are a confirmation of the bull trend that began in early 2023. The upside breakout higher from the July to September consolidation measures to a target near 6200 by year end from its current level of 5762.
Oscillator work shows the RSI just short of overbought conditions and the MACD on an uptrend buy signal which equates to a neutral rating in our work. This means there is potential for near-term correction but not so much so that we want to bet against the prevailing trend higher.
Sector performance confirms the bullish tone as the advent of dovish Fed intervention with a 50bp cut to the target Fed Funds Rate has seen higher beta sectors take control of the tape from lower vol. exposures.
Economic and Policy Drivers
Interest rate policy projections will continue to be critical to positioning, but the Fed got the easing cycle off to an unambiguous start with a 50bp cut and guidance to cut another 50bps by year end. For now, the expectation for lower rates has spurred bets on laggard industries and Sectors. Real Estate, Financials and Materials Sectors have accrued gains against this backdrop as lower rates are projected to spur marginal improvement in the Economy and lessen the probability of contraction. On the other hand, Utilities and, to a lesser extent, Healthcare and Staples sectors have also seen improved performance as the historical beneficiaries of lower rates and more conservative investor positioning.
High level concerns for the equity market include a flagging consumer. Rates have been arrested to the upside, but they are still far higher than pre-covid levels. The S&P 500 Homebuilders Industry rocketed higher in July on expectations that rate cuts will help home affordability, but many other industries within the Discretionary Sector have failed to sustain any level of outperformance. We are also seeing a turgid housing market where transactions are down in many geographies due to a combination of high prices and high interest rates that are keeping many home buyers and home sellers on the sidelines. It will be interesting to monitor the interplay between equities and rates moving forward. We wonder how low rates can go if they spark a positive turn around in consumer fundamentals and lending. Typically, if those two things firm, rates move higher on their own.
Politics and Policy will factor into positioning over the next month. Bets on a second Trump Administration would likely involve going long the Energy Sector and Materials Sector as regulatory burdens would likely be eased. The Republican party is typically perceived as being more business friendly, but their likely immigration and foreign policy platforms (Withdrawal from NATO/Restrict Immigration) are potentially very inflationary. The view here is that the three main drivers of inflation going forward will be economic policy towards China (Donald Trump’s sanctions on China pre-covid and the subsequent dis-integration of the previous global supply chain paradigm were a driver of the current inflation we feel), over-restriction of immigration, and the other is the vast and growing wealth inequality that exists in this country. We think policy that addresses China relations, immigration and reforms the tax code would be the most important topics to watch as far as how they will affect the stock market. We can expect policy positions to be staked out in more detail as the election approaches.
In Conclusion
We got confirmation of the bull trend for equities in September, but calling leadership from here is harder. We have positioned our Elev8 sector portfolio for higher equity prices by going long XLK, XLY, XLC and XLF. We are exposed to commodities prices through longs in XLI and XLB, however we find the technical position of Crude and XLE to be too weak to gain any positive conviction. Given the bullish setup for equities are largest underweight to start the month is in historically defensive sectors XLV and XLP. We expect the bull to flex its muscles into year end, but we acknowledge there is precedence for equity market volatility in prelude to the upcoming US presidential election.
Chart | S&P 500 Technicals
S&P 500 12-month, daily price (200-day m.a.|14-day RSI|12, 26, 9 MACD)
Sector SPDR Relative Performance to S&P 500 | 3-month
- Relative Performance has shifted over the past 3-months. XLK has joined XLE as a laggard while the other 9 GICS sectors have seen improvement. The underlying bull trend has us betting on XLK and against XLE moving forward
S&P 500 Street Analyst Ratings and Price Targets:
Data Sourced from FactSet Data Systems
