Investment Insights 

 — Steve Orr 

The fourth

Is the fourth time charmed for the S&P 500? Friday, the big index climbed into new all-time-high territory. Its previous ATH was a close of 4,796.56 on January 3, 2022. Two years on, the index made three runs at closing above 4,800 since Christmas. We wrote last week that multiple breakout failures are only mildly concerning. The majority of cases represent bulls building energy to breakout. Friday’s close of 4,839.81 represents a forward P/E of 19.8x, or 2024 earnings of $244. That would represent a jump of nearly 11% in earnings for this year over 2023. Sure, some of the run over the couple of months can be ascribed to hopes for a “soft landing” by the economy and Fed rate cuts later this year. The Dow Industrials and NASDAQ 100 also finished in record territory.

We agree those hopes are some of the drivers. Getting down in the weeds, last week finished with the largest non-quarter end expiration of stock and index options on record. Traders and dealers cleaning up positions tended to be better buyers. Friday morning, Travelers, Regions and Huntington Bancshares all had double-digit earnings beats to get traders excited. The artificial intelligence meme is back in play as chip producers like AMD, Broadcom, Synopsys and NVIDIA got a big boost from reports that OpenAI CEO Sam Altman is raising money to build a network of semiconductor factories. Another boost came from TSMC, the world’s largest semiconductor manufacturer, that put out a bullish forecast for 2024 chip sales. 

More please

Dreams (or calculations) of possible future earnings help drive prices. Past earnings and management comments can set the stage for more calculations by Wall Street analysts. Only 10% of the S&P 500 have reported, and most of those are banks or financials. They are turning in weak results on their report cards, thanks, in part, to large charge-offs for reimbursing the FDIC bank insurance fund for Silicon Valley and others. To date, the reporting companies are pushing the expected growth in year-over-year earnings to a negative 1.7%. If that decline holds, it will mark the fourth quarter in the last five that earnings have declined. Only 66% have beat analysts’ estimates, well below the five-year average of 77%, according to FactSet. We expect earnings results to improve once the tech, consumer discretionary and utilities sectors report in the coming weeks.

This week, 75 S&P 500 and 10 of the Dow Industrials 30 names report. If week one was banks, think of this week and next as Industrials. Companies from every sector are reporting, but the headline names are more familiar: Lockheed Martin, 3M, Dow, Texas Instruments and General Dynamics. Texas-based names reporting this week include the aforementioned defense industry players, TI, American Air, Southwest and DR Horton. 

Geopolitics

Brief events can rattle markets in the short term but rarely alter the primary trend. Think hurricanes or earthquakes. Manmade issues can be a different breed. Over the past two weeks, Iran appears, either directly (Iraq) or through proxies (Houthis, Hamas, etc.) to be trying to pick a regional fight. Pakistan and Turkey are using the confusion to settle some scores with groups in other countries. The Houthis have been shooting missiles and drones at commercial shipping in the Red Sea in early December. Since then, shipping rates have skyrocketed, and carriers are increasingly avoiding the Red Sea. The passage between the Med and Arabian Seas was already more heavily trafficked over the past year because droughts at the Panama Canal have restricted the size of ships that can use the passage.

Some companies, such as auto maker Stellantis, have issued statements that production would be slowed while parts of shipments are redirected or halted. Regardless of the path, expect price increase news to filter through to inflation statistics later this year. Our expectation of continued inflation around the 3% level was based on stable to falling rents later this year. Goods inflation will be impacted by higher shipping costs. Additionally, supply contraction in shipping from recent layoffs in the trucking industry and UPS could contribute to higher prices later this year. 

More thoughts

Last week, we started down the rabbit hole of election data. Our every-four-year exercise is always enjoyable because the data is so lopsided. Let’s go to the limits of our dusty database and the handy Stock Trader’s Almanac for starters.

White House elections used to hinge on wars and domestic problems. Wars defined Democrat losses and domestic problems cost Republicans the Presidency and Congress. Are the six or seven wars underway “global” enough to be counted as World in the last century sense? We are not sure. One thing we are fairly certain of is peace talks in the spring between Ukraine and Russia. For the moment, let’s go with both wars and domestic problems on voter’s minds this year.

A spring weathervane: when the party in the White House retains power, the Dow Industrials averaged a 1.5% gain in the first five months of the year. That happened 17 of the 30 elections since 1901. The other 13 times when the sitting party lost, the Dow fell an average of 4.5% in the first five months. So, watch the Dow and S&P 500 through May. Another “average” result is in years when the incumbent loses the White House, the S&P 500 dips negative in the March-April timeframe, rebounds and then dips again around Labor Day. When control flips to the other party, there is a correction April-May but then rallies most of the rest of the year.

And what of those dips in stock prices? Since 1896 the market’s drops have been greater than 5% only six times according to the Almanac. Bloomberg data shows five of those dips came at the end of a second term. Markets do perform better over the course of an election year when an incumbent is running for reelection. Since 1900, the Dow averaged an 8% gain when an incumbent was running. Finally, since 1948, the S&P 500 has not finished in the red when a sitting president is up for reelection.