While the market is looking good so far year-to-date, most of that “goodness” happened in January and February, and now the market has been sideways (hasn’t really made any progress) since mid-March. April gave us a classic 5% pullback in the S&P 500, and May slowly recovered it…but not much more than that.
Historically, the last week of May and the first week of June tend to be strong (or at least positive) for the stock market, but as of right now, we may have already seen that strength play out in the middle of May. We are seeing weakness creep back in across market sectors and broad markets. It hasn’t been enough weakness to start playing defense, but it’s not too much further from here before we’ll need to do so.
If our election year thesis continues to play out as expected, then we should see market strength continue into the summer before we get to the usually difficult months of September and October. Once we get to the fall Election season, anything could happen. But whether the political environment stays the same or changes, there will still be opportunities to watch for. Investors will just have to be ready to adapt to whatever changes the market brings. And as our very own Will Hepburn likes to remind us, that’s what we do here: “We adapt to changing markets.”
Meanwhile, the Bond market has continued to struggle. As of today’s writing, the iShares Aggregate Bond Index (AGG ETF) has a 3-year annualized return of -3.33% (FastTrack data). For investors trusting the traditional diversification of stocks and bonds, the last 3 years have been a time when diversification has hurt rather than helped. This is also one of the reasons we, in general, really don’t like target date funds (funds that move investors more and more into the bond index as they get older). These “no-brainer” funds just aren’t helping those who need it most – investors heading into their retirement years.
Our Shadowridge Long-Term Trend indicator is still holding on to the positive reading it has held through the entire month of May. Last month looked like the sell-off had stabilized, and that indeed was the case. However, it is now getting close to testing its own positive trend again.
Our Mid-Term Cycle went negative on the 23rd of the month and has now pushed below the -200 reading, suggesting to us that money is flowing fairly steadily out of the market. This is one of our stronger indications of potential trouble in the stock market. If other metrics agree, we will be back to lowering our market exposure and risk.
As of Wednesday night (May 29th, 2024), our Shadowridge Dashboard showed Positive to Negative market sectors as 3 to 8. Different from previous months, the few hold-outs in strength have been technology, communications, and utilities. That is an odd mix, for sure. Technology and communications tend to be market-leading, while the utilities sector tends to be where money flows to be on the defensive. So are we in a leading market or one that is lagging? These contradicting sectors aren’t indicating a clear direction.
As for the bond market, the Economic-sensitive segments are holding up (Floating Rate, High Yield, and Preferreds) while the Interest-Rate-sensitive segments (Aggregate, Corporate and Municipals) remain weak. We do believe, at some point, this strength will reverse, along with the yield curve inversion sorting itself out. Again, many thanks to Rob at RGB Capital Group for inspiring this way to view the bond market.
Current status of the 10 RGB Bond Segments as of Wednesday, May 29th, 2024 (Source: ShadowridgeData.com)
As I mentioned earlier, the Bond Indexes (the Aggregate and the 10-year Treasury) remain negative Year-to-Date in 2024. Not only are they lagging, but they have also become more correlated to the Stock market—another strike against using bonds as “market diversifiers.” We remain largely in the short-term and Bank Loan areas of the bond market, which have acted more like what an investor should expect from a diversifier: to help smooth the bumps.
Bottom Line: after riding a pleasant wave up for much of May, we again have started to go back on defense in some models as data suggests. But for now, we believe there needs to be more weakness to go into full lockdown. Not saying that couldn’t happen over the next week or so, but we need more signals to agree. And we haven’t seen that just yet.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.