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· Typically, after the last rate hike, S&P 500 returns go up
· Nov-Dec Period historically proves to be strong for US equities
Learnings from the past
Periods following the end of the tightening cycle frequently, meaning over 80% of the time, result in stock returns being positive in the months post the last Fed hike, as shown by data over the last 40 years.
Although the full effect of rate hikes takes time to feed into the real economy and the financial markets, resulting in weaker earnings growth due to consumers, who account for a good majority of all spending, getting squeezed. Equity valuations usually get a boost from the Fed’s dovish or less restrictive stance, as market participants start pricing in the effects of rate cuts on equities with more confidence.
Source: J.P. Morgan Asset Management
Bulls look to be gearing up for a huge end-of-year rally.
The last two months of the year frequently turn out to be great for equities.
Despite October’s negative return, which marked the 3rd consecutive month of declines for the S&P 500, for the first time since the COVID-19 pandemic, an event with a relatively rare occurrence in the market.
This negative streak is on track to be broken in November-December, the strongest two-month return period on average.
The festive spirit and many discount campaigns, including Black Friday, allure consumers to spend more, lifting the economy and revenues for many public companies.
Further, on average, the last month of the year has the highest chance of positive monthly returns for the S&P 500 at 74%, according to historical data by LPL Research.
Source: LPL Research
Potentially, lower long-term rates and a stable growth environment will serve as a tailwind of equities/
If we look at SPX average returns by months and extrapolate that for 2023 YTD, it’s clear that it has much room for growth, potentially finishing near its all-time high of 4800-ish, helped by what could turn out to be another major Christmas rally.
Source:GS GIR and GS Asset Management
The S&P 500 has been rallying lately due to better-than-expected macro data, including SLOOS numbers revealing that lending standards tightened at a slower rate than last quarter and softer CPI print that bolstered bets that the Fed had ended its hiking campaign.
Magnificent 7 balloon
However, one big caveat here is that most, if not all, of the gains in the S&P 500 come from AI-related stocks.
The market, especially its engine, the magnificent 7, appears to be quite expensive on a given where ten-year Treasuries yield is, despite its drop from 5% to 4.5% in the last few weeks.
The “big 7” trades at a jaw-dropping of close to 30x forward earnings, while the rest of the market is at 17x. In a historical context, given where rates are, the S&P 500 is slightly overvalued at 19x earnings vs its long-run average of 15x.
What is more, the concentration in the S&P 500 is tighter than ever. The “Big 7” adds up to nearly 29% of the S&P 500’s weight, while its top 2 contributors, Apple and Microsoft, account for over an eye-popping 15% of the whole index.
All in all, if the AI mania goes down, the S&P 500 will likely follow suit.
Investors can long the S&P 500 using our 3x US 500 , 5x US 500
Alternatively, they can short or hedge their long positions on the S&P 500 using our -3x US 500
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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
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The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
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