9 months ago • 2 mins
This recent bounce in the S&P 500 appears to be more than just a one-hit-wonder. This chart looks at trends all the way back to 1950, and shows that the S&P 500’s average monthly returns have been pretty robust in March and April (yellow box). And they’ve been particularly muscular during pre-election years (white bars) – and, well, this happens to be one of those. But that doesn’t mean history will definitely repeat: one of the problems with averages is that they can be distorted by significant outliers in the data – and the current investment environment is unique, to put it mildly.
Seasonality – the recurrence of a pattern each year – is important, but the bigger driver of stocks right now is the economic data and the Federal Reserve’s (Fed) likely reaction to it. A recent flurry of stronger-than-expected US economic activity has suggested that the Fed’s almost yearlong series of interest rate hikes might be falling short of its goal of restraining the country’s super-high inflation. So investors are keeping a close eye on the red-hot labor market and still-lofty inflation data for hints as to whether the Fed will have to keep on, hiking on. If so, that makes for a tougher scene for stocks.
This brings us to another pattern worth watching.
Stocks usually start to move higher off their lows six to nine months before earnings hit their lows. And, since Morgan Stanley believes earnings will hit bottom in September, chances are, we’re sitting in that window right now. Mind you, Morgan Stanley does acknowledge that there’s a chance that stocks actually hit bottom several months ago and that earnings could be hitting their lows right about now. But the bank cautions: in previous earnings troughs, the Fed was in the process of lowering interest rates, not raising them, as it’s still doing now.
And that, ladies and gentlemen, is why the data like jobs and inflation are so important in determining stocks' next move.
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