(Bloomberg) — Surprised that the S&P 500 turned into Green Friday? Don’t worry. just wait. It will fall again after the next opening bell.
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This was the trend in August, at least, which frustrated any effort to revive the US stock market’s rally since it stalled earlier this month.
Nineteen trading sessions have passed in August without any consecutive gains for the S&P 500. If this continues, it will be the first month without two consecutive bullish days since April 2002, during the bear market that followed the financial crisis. The dotcom bubble burst and the September 11 terrorist attacks.
The pattern illustrates a lack of conviction among investors after a sharp rally fueled by AI breakthroughs, better-than-expected earnings, and speculation that the Federal Reserve will turn to cutting interest rates once the economy cools. By the end of July, the S&P 500 was up nearly 30% from its October lows.
The mood has changed since then as the economy’s surprising resilience and steady inflation have markets expecting the Fed to keep interest rates high. On Friday, Bank President Jerome Powell reinforced this conviction during a much-anticipated speech in Jackson Hole, Wyoming, where he emphasized that the central bank is ready to continue raising interest rates, if necessary, to further reduce inflation.
“The stock market was very hot until late July, and it’s in this cooling off phase, what’s next,” said Todd Son, ETF and technical strategist at Strategas Securities LLC. “Some clarity on interest rates would definitely help. Is the Fed done? Maybe that’s the next catalyst.”
It’s easy to see why the rally has stalled. By the beginning of the month, the S&P 500 was less than 5% away from correcting its record high, despite deep uncertainty about the economy. Then a combination of rising yields, interest rate worries and weak seasonal patterns gave the skeptics the upper hand.
Many had hoped for help from Nvidia Corp., a major force in the AI-fueled tech stock boom. But even explosion predictions from the chipmaker on Wednesday weren’t enough to reignite it. Michael Wilson, strategist at Morgan Stanley, pointed to this as a sign that this year’s rally has been “exhausted”, which portends further declines to come.
Other times the S&P 500 has gone long without two consecutive days of rally have occurred during turbulent times. This happened during the first wave of the pandemic in March 2020 and before that in October 2018, when concerns about slowing growth worried investors. In 2015, the first true down year for the S&P 500 since the Great Financial Crisis, a streak of at least 25 days without consecutive days occurred twice.
“It’s a less clear case for the bulls at this point,” said Chad Morganlander, senior portfolio manager at Washington Crossing Advisors. “Valuations are less convincing, and a lot of the positives are priced in with the S&P 500 near the 4400 line.”
Mark Newton, Head of Technical Strategy at Fundstrat Global Advisors, is eyeing the 4400 as well. This is a threshold that is being watched closely by technical analysts – who are looking for insight into historical trading patterns – since a sustained push above this level could indicate that the stock market is gaining renewed traction. It closed slightly higher than Friday, after gaining 0.7%.
But the overall trend this month has been to the downside, with the S&P 500 rising for only six days this month. And September doesn’t tend to be a good time for stocks: In the past three decades, the benchmark index has posted a 0.4% loss for September, making it the worst month of the year, according to data compiled by Bloomberg.
For Newton, the trajectory of stocks in the coming weeks will depend on how much further a rise in bond yields — and how fast.
This has a particular effect on technology and so-called growth stocks whose expected dividends are delivered years in the future, which means that the present value of those future earnings becomes less valuable as the returns rise. The yield on the 10-year Treasury note rose in five out of six weeks.
“The markets appear to be at an inflection point as investors evaluate various cross-currents,” said Sofia Drosos, economist and strategist at Point72 Asset Management.
“Since the beginning of the summer, the resilience of the US economy has led forecasters to agree – somewhat reluctantly – to abandon the view of an imminent recession,” she said. “But going forward, there is a lot of uncertainty about the outlook.”
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