Evening Brief – 06.14.23

The stock market has rallied significantly from its October lows, with many of the major indices at new highs for the year. The PHLX semiconductors index is up a whopping 62.5%. The Nasdaq 100 is up nearly 36%, and the S&P 500 IT sector has rallied more than 44%.

It may have “felt” right to sidestep the “pain” trade a few months ago, but now we’re in FOMO (fear of missing out) land as bears begin to capitulate. And if you’re still waiting it out, you may be caught flat-footed.

Despite the Fed hiking interest rates, regional bank worries, and a mixed bag of economic data since the end of January, the market has continued to rally, the most recent advance spurred by AI-mania.

Two weeks ago, we discussed the narrowing breadth in the equity markets, suggesting low participation, and the likelihood of failure unless other stocks / sectors began to participate in the rally. With only a few large-caps (GOOGL, AMZN, APPL, NVDA, META, MSFT) leading the way, the bears still had a leg to stand on – but the mood swiftly changed.

There has been a broadening of participation, with small- and mid-cap stocks joining the rally, particularly over the past week. Growth sectors such as Technology and Discretionary are still pulling the heavy weight, but there has also been significant buying in every S&P 500 sector lately, which is supportive of a bull market.

Even energy has seen a comeuppance, partly in response the expected Saudi output reduction. Staples, healthcare and financial stocks, which have been lagging, suddenly seem reinvigorated.

Macroeconomic concerns have not materially changed, and those concerns can still limit further equity strength in the months ahead. But despite the apparent weight of evidence to the contrary, markets can frequently defy rationality.