The stock market has experienced a remarkable rally in recent months, breaking records and defying expectations. This rally has been particularly evident in the S&P 500 index, which has seen significant gains and achieved unprecedented milestones. Deutsche Bank strategist Henry Allen has analyzed this rally using three key charts, shedding light on just how unusual and impressive it is.
The first chart presented by Allen illustrates the consistent climb of the S&P 500 over the past few months. It reveals that the index has risen in 15 out of the past 17 weeks, a feat that has only occurred once before in the past 50 years. This occurred in 1989, highlighting the rarity of such a sustained upward trend.
The second chart delves deeper into this trend, focusing on the performance of the S&P 500 over the past 18 weeks. Allen notes that if the index finishes positively this week, it will mark a joint record with 16 out of 18 weeks showing gains. The last time this happened was in 1971, just before the end of the Bretton Woods system. This milestone further emphasizes the exceptional nature of the current rally.
Finally, Allen narrows his criteria to gains of at least 0.2% over a week. According to his analysis, the S&P 500 has achieved this in 15 out of the past 17 weeks. However, if it manages to do so again this week, it would be the first time in history that the index has achieved such a feat. This highlights the unprecedented nature of the current rally and its potential long-term significance.
Allen attributes this rally to several factors. Firstly, Nvidia Corp.’s blowout earnings have played a significant role, with technology stocks seeing impressive gains this year. Additionally, lower inflation has raised hopes for interest-rate cuts, while lower commodity prices and positive jobs data have also contributed to investor optimism. Furthermore, disruptions in the Red Sea have caused shipping costs to increase, but Allen notes that these costs have started to ease, providing further support to the rally.
However, Allen also raises concerns regarding the narrowness of the rally. Over the past few years, the index has been propped up by big tech names, creating an imbalance in the market. This imbalance has continued into 2023, with the index rising 24.2% last year compared to an 11.6% rise for its equal-weighted counterpart. Allen warns that this narrow focus could become problematic if it persists.
Inflation is another potential risk that investors should be cautious of. The unexpected jump in consumer prices in January served as a reminder of how inflation can impact stocks. With another important inflation data release imminent, investors are keenly watching for any signs of a resurgence in inflation that could negatively affect the market.
Despite these concerns, investors remain optimistic about potential interest rate cuts by the Federal Reserve. However, Allen cautions against being too quick to price in a dovish pivot, as optimism has been premature in the past. The market will eagerly await further guidance from the Fed regarding interest rates and their impact on the stock market.
In conclusion, the current stock market rally, as indicated by the S&P 500 index, is truly remarkable. It has achieved milestones and records that have not been seen in decades, highlighting its uniqueness. Factors such as blowout earnings, lower inflation, and positive economic data have propelled this rally, but concerns regarding narrowness and inflation persist. As investors navigate these uncertain times, they will closely monitor market indicators and Fed decisions to gauge the future trajectory of the stock market.
