Don't Fight This Trend

Investors,

Congratulations.

Yes, congratulations are in order for every single one of you who is reading this.

Hopefully, if you’ve been following my research, you’ve trusted my conclusions about the resilient & dynamic nature of the U.S. economy, the persistence of disinflation, and that rate cuts would come no sooner than Q3’24.

For 16+ months, I’ve used macro & technical analysis to justify a bullish bias.

For 16+ months, asset prices (notably stocks and Bitcoin) have trended higher.

The S&P 500 has recorded its highest monthly close of all time in 8 of the past 9 months, including setting a new record with the highest monthly close ever in August, marking 4 consecutive months of new all-time highs.

Since 1999, there have only been 7 other instances where the S&P 500 closed at new all-time highs for 4 consecutive months:

• June 2014

• February 2017

• July 2017

• November 2017

• January 2020

• May 2021

• March 2024

Unsurprisingly, this is a characteristic of a bull market, though it should be noted that the January 2020 signal was just before the exogenous shock of the COVID recession.

Aside from that one “invalid” signal, new ATH’s continued to be made in the subsequent months, quarters, and years ahead.

So as we think about this latest cluster of signals, which occurred in March & August 2024, I think it’s wise to recognize that we’re currently in one of the strongest bull markets in history.

Why do I think this is such an important point to understand?

Because it immediately tells us who we should listen to and how we should position ourselves in the market today!

If someone has constantly cast doubt and negativity on the market for the past 2 years, calling for a top every other month, why should we listen to them today if they’ve been bearish during the entirety of the bull market?

If someone is constantly encouraging you to be defensive, jump at shadows, and question the validity of the uptrend, what kind of results has that produced?

I’m not saying to abandon risk or ignore potential threats to the bull market…

But I am saying that being bullish has worked and those who respect trend-following techniques should, at the very least, recognize that the broad-based uptrend is intact.

I mean, hey, of the 11 sectors in the S&P 500, 7 of them had their highest monthly close of all-time (industrials, financials, communications, utilities, healthcare, staples, and materials).

Even in the individual sectors that didn’t close at new all-time highs in August, like technology ($XLK), the equal-weight version of the sector ($RSPT) did!

Why is all of this happening? For the same reasons that I’ve outlined for 16 months:

• Persistent disinflation

• Resilient & dynamic consumer

• Resilient & dynamic labor market

• Resilient & dynamic macroeconomic data

• Modest softening in all three categories

• A shift in the monetary policy regime

• Better than expected S&P 500 earnings

So long as these dynamics persist, so will the bull market, particularly if credit spreads remain low and remain in a downtrend (which they have been).

It’s been that simple & it will continue to be that simple.

As far as I’m concerned, new inflation data from this past week (July PCE) confirmed that disinflation is intact and that the Fed will be cutting interest rates in September.

The chart below tracks the 3M annualized, 6M annualized, and 12M inflation rate of the PCE, which continues to show that recent disinflationary trends are firm:

This will give the Fed sufficient ammo to cut in September, barring a sudden and material spike in the CPI data, set to be released a few days before the next FOMC meeting in mid-September.

Meanwhile, initial unemployment claims are cooling down for the past month while estimates for Q3 2024 real GDP growth are getting revised higher, now expecting +2.5% annualized growth for the current quarter (from the prior estimate of +2.0%).

This upward revision came on the back of Q2 2024 real GDP growth being revised higher from +2.8% annualized to +3.0%, further highlighting the resilience of macro trends. This revision also means that the YoY rate of real GDP growth was also revised higher, from +3.0% YoY to +3.14%, the highest rate of growth since Q1’22 during the growth deceleration.

You’ll notice that each of the prior recessions since 1980 (barring COVID) were preceded by a deceleration in real GDP growth, which is important given the fact that GDP growth is currently accelerating since Q4’22 (when stocks bottomed).

The data is clear — the U.S. economy is chugging along at a “good, not great” pace while asset prices continue to trend higher.

That’s the trend.

I’m not fighting the trend.

Those who have fought it have paid the price.

Stay focused on what matters, what drives returns, and controlling risk.

The rest will take care of itself, so long as our process is thorough.

Best,

Caleb Franzen,
Founder of Cubic Analytics

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