U.S. stocks bend, don’t break after 30% rally from lows

Aug 1, 2023

Rita Nazareth, Bloomberg News

Stocks lost a bit of steam at the start of August as a rally that pushed the market up about 30 per cent from its lows spurred calls on a near-term pullback.

Just a few days ahead of the all-important jobs report, data suggested some softening in demand for workers in a still tight labor market. The numbers weren’t enough to entice investors, who also grappled with a mixed bag of corporate earnings. The S&P 500 finished the session with a loss of just 0.3 per cent. Bonds fell, with the 30-year yield hitting its highest since November as the Treasury prepares to ramp up issuance of longer-dated securities.

“Markets are starting August on the wrong foot, with investors concerned that incoming earnings reports may not yet reflect the cycle’s trough,” said Jose Torres at Interactive Brokers, who also cited a “seasonally unfriendly period for equities.”

Bank of America Corp. strategist Savita Subramanian noted there’s no reason to fret just yet even as everyone piles in. BofA’s Sell Side Indicator — which tracks sell-side strategists’ recommended stock allocations — is still in neutral territory despite increased allocations and stands closer to a “buy” rather than a “sell” signal.

“Rising equity allocations and falling bond allocations mark a reversal from the bond love and equity hate that built during 2022,” Subramanian added.

Equities have come a long way in a short period of time, but looking at different time frames, the gains don’t look quite as impressive, according to Bespoke Investment Group. In the case of the S&P 500, over the last 12 months, it’s still up over 11 per cent, but on a two-year basis, performance looks much less attractive at just 4.4 per cent.

“That hardly looks like a market that has become unanchored from reality,” Bespoke strategists wrote.

Oppenheimer Asset Management’s Chief Investment Strategist John Stoltzfus lifted his target on the S&P 500 index to a Street high, a day after Morgan Stanley’s Michael Wilson, one of the market’s leading doomsayers, sounded less bearish than usual.

Stoltzfus now sees the S&P 500 index hitting 4,900 by the end of the year, leaving room for another 7 per cent gain. The target would mark a new record for the gauge, and one that plays out against bearish predictions by bigwigs such as Wilson, JPMorgan’s Marko Kolanovic and Bank of America Corp.’s Michael Hartnett. They were all blindsided by the resilience of the US economy and the sudden emergence of the artificial intelligence-driven tech rally.

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