June 9, 2023
US equities are mostly higher after the S&P 500 ended yesterday up more than +20% from its 52-week low in October, meeting the technical definition of a bull market as the index attempts to break above the August high near 4305.
Yesterday’s higher-than-expected jobless claims pushed bond yields lower, which led to some reversion in recent cyclical and small cap outperformance. One week of data isn’t enough to confirm a trend, and there’s some concern the claims data may have been impacted by the Memorial Day holiday. Two more weeks of claims running above +260,000 will put the focus on an imminent recession or slowdown. This would pull forward most economists’ expectation for a mild recession to begin in Q4’23. The best time to add cyclical stocks is ~6 months before the end of a recession. Adding cyclical stocks in June would make sense if a mild recession starts in Q3’23.
The S&P 500 (SPX) pushed through technical resistance at 4200 last week with cyclical and small cap participation. Until last week, the market advance to 4200 was characterized by narrow breadth and thin leadership, which gave us confidence in our tactically bearish outlook. That all changed when cyclical groups and small cap stocks responded to a sudden improvement in the US Economic Surprise Index (ESI). At this point, a decision to abandon our tactically bearish call is unnecessary given the proximity to 4305 and next week’s heavy macro calendar. The jury is still out, and it’s best to view the move merely as a position squeeze after an improved ESI took investors out of cyclical underweights. It’s important to keep in mind that cyclical stocks are lifting off multi-quarter lows, so adding exposure doesn’t require a huge commitment. Nonetheless, a sustained move through 4305 with continued cyclical and small cap participation would be a convincing bullish development. On Wednesday, we were encouraged by strength in the S&P 600 small cap index (SML) as it broke through the top end of its March-May range. Yesterday’s jobless claims number provided a small setback for the index, but we may be at levels where investors become willing to look through the valley to a future recovery.