The S&P 500 Index just made a new 52-week high…
It closed yesterday at 4,707. That’s a roughly 14% gain off its late-October low.
Notably, the S&P 500 hasn’t been at this level since early 2022. And as regular readers know, it was on the way down at that point.
The S&P 500 is up around 23% this year. And it’s only about 2% from its all-time high at nearly 4,800.
Technology and communications services have been the standout sectors in 2023. They’re both up at least 45%. In fact, the Technology Select Sector SPDR Fund (XLK) is now up a whopping 53% this year.
That’s significant…
The tech sector has surged more than 40% in a single year seven times since 1990. And according to data from Bespoke Investment Group, tech stocks continued to rally the following year in six of those seven instances. They made an average gain of nearly 22%.
That’s a big reason why I expect the current rally to continue. And large-cap cash-flow machines like Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) will keep leading the way.
Microsoft looks strong in the short term as well…
The tech giant is entering into a strong seasonal period. Over the past 15 years, it has traded higher more than 75% of the time in the final two weeks of December.
Now, with all that in mind, let’s focus on two factors today…
The first factor is the obvious one – interest rates.
Financial stocks have rallied since late October. By that, I’m talking about major and regional banks, as well as insurance companies and brokerages.
As rates and inflation keep falling, these financial stocks have extended their rallies. The Financial Select Sector SPDR Fund (XLF) is up 20% since late March.
Meanwhile, the yield on the 10-year U.S. Treasury bond has now dropped sharply to around 4%. You’ll likely recall that it climbed as high as about 5% in mid-October.
At the same time, 30-year mortgage rates have dropped from their recent highs at more than 8%. That change is helping homebuilding stocks make new highs as well.
The Federal Reserve just wrapped up its final policy meeting of the year yesterday afternoon. And as expected, it didn’t change the benchmark federal-funds rate again.
The central bank’s next move will likely be a rate cut. But the timing is still uncertain…
Fed Chair Jerome Powell didn’t commit to a time frame in his post-meeting comments.
But we do know that the Fed’s own projections suggest three rate cuts in 2024. And the market currently prices in three to four rate cuts of 75 to 100 basis points next year.
Since Powell hasn’t surprised anyone, we haven’t seen a lot of market turbulence.
The second, less-discussed factor has to do with market inflows. And more specifically, it deals with how that concept continues to push interest rates as well.
Put simply, cash from bond sales is flooding back into stocks.
We’ve now experienced eight straight weeks of inflows into U.S. equity funds. At a total of around $64 billion, these inflows have helped fuel the ongoing rally.
At the same time, $62 billion went into money-market funds.
The simultaneous inflows of cash into stocks and money-market funds came from folks selling U.S. Treasury bonds as interest rates continued their six-week decline.
Now, I realize this stuff is a little in the weeds. But the long and the short of it is simple…
The market is making higher highs today. And I expect higher highs in the coming weeks.
Good investing,
Marc Chaikin
