February 7, 2024
The S&P 500 (SPX) is approaching what could be a psychological resistance level at 5000, while the median sell-side strategy target for ’24 sits at 4950 (Bloomberg survey from mid-January). Most technical resistance levels have been broken with the exception of channel resistance near 5040. Valuation is a dull instrument from a market-timing perspective, but it’s important to acknowledge the SPX currently trades at 20.5x consensus ’24 EPS.
February has been the second worst month of the year over the last decade and the last two weeks are generally considered one of the worst periods of the year. Seasonality is mostly just low-hanging fruit for content-starved strategists, but there’s no harm in being aware. Annual CPI revisions on Friday and January CPI due next Tuesday are the upcoming macro catalysts to watch.
A recently benign macro environment characterized by declining rates of inflation, resilient labor markets and resilient growth has resulted in very low levels of realized equity volatility. Lower equity volatility always results in higher valuations with today’s 20.5x forward multiple on the SPX mostly consistent with similar episodes from history. Unfortunately, benign macro environments don’t last forever and are quickly replaced by macro uncertainty, rising equity volatility and lower multiples. Volatility measures like the VIX will be the most reliable indicator of rising macro uncertainty. Also note that compressed equity volatility, identified by a flat or inverted VIX futures curve can become a problem by itself. Fortunately, the 6-month VIX futures curve is still upward sloping, which tells you that equities still carry a risk premium. A VIX level north of 20 and/or flat forward curve would be the early warning signals.