Market Update May 31, 2024

Could the Bear be awakening from hibernation? As I mentioned last week, the old adage “Sell in May and stay away” would not have fared very well the past decade, as the S&P 500 produced an average return of 1% in June followed by an average return of 3.1% in July and 0.3% in August. 

However, the holiday shortened week has proven difficult for the broad market. The S&P 500 is down 1.3% and the Dow Jones Industrial Average has dropped 958 points through Thursday. The economy is challenged by stubborn inflation and high interest rates, both of which add drag to our economy.  These conditions tend to push stock prices lower.  When you consider the S&P 500 currently trades at 20.5 times forward earnings vs. the 10-year average of 17.8 times, it’s plausible that things are trading at a steep premium.  on their weak earnings and guidance.  

Hedge fund manager John Hussman, one of the most bearish forecasters on Wall Street, reiterated his prediction of a market correction. According to Hussman the extreme runup in the market is driven by investor impatience and fear of missing out. “There are certain features of valuation, investor psychology, and price behaviour that tend to emerge when the fear of missing out becomes particularly extreme and the focus of speculation becomes particularly narrow. Last Friday, we hit a fresh ‘motherlode’ of these conditions,” he wrote on Tuesday. 

Fellow economist David Rosenberg is issuing a similar warning, stating the stock market is “primed for a correction” as earning valuations hit historically high levels. In a series of notes over the past two days, Rosenberg warned that the S&P 500’s 26% rally over the past year is running on fumes, as earnings growth has jumped by only 6% over the same time period. “This sort of move over a seven-month span has only happened 5% of the time over the past three decades,” Rosenberg said. “Everyone is talking about this being an earnings-driven stock market, but over the past year, it has actually been four parts multiple expansion and one part EPS growth.” 

These are just two analyst opinion, and most strategist at major Walls Street banks see the S&P staying above 5,000 through 2024. As I have stated for a while, we are cautiously optimistic. We continue to our them or overweight in cash for buying opportunities. A market pullback may be in the beginning stages, which is normal and healthy for the market. Particularly when the market is overvalued, as it is today.  

Stock Market Crash: S&P 500 Has 70% Downside Amid FOMO Extremes, Hussman Says (businessinsider.com) 

Stock Market Outlook: Earnings Growth Not Enough to Sustain Valuations (businessinsider.com)