OVERVIEW
Markets pulled back last week, with modest declines across most major asset classes. The S&P 500 dipped 0.31%, while the Dow Jones Industrial Average lagged with a 1.02% loss. The NASDAQ held up better, easing just 0.08%. Mid- and small-cap stocks also declined, as the S&P 400 fell 0.59% and the S&P 600 lost 0.27%. Value slightly underperformed growth, with the Russell 3000 Value Index down 0.55% versus a 0.20% decline for Growth.
International equities also slipped. Developed international markets (EAFE) declined 0.24%, and emerging markets fell 0.20%. The U.S. dollar strengthened, gaining 0.89% on the week.
Bond markets were mixed. Short-term Treasuries inched up 0.10%, while intermediate and long-term Treasuries dropped 0.61% and 1.40%, respectively. High yield bonds slipped 0.22%, and investment-grade corporates fell 0.62%. Municipals also declined, down 0.31%.
Commodities were a bright spot. Oil climbed 2.79%, and gold rose 1.96%. Corn, however, tumbled 5.77%. Real estate edged down 0.29%, while the VIX ticked slightly higher by 0.12%.
KEY CONSIDERATIONS
New Highs Beget New Highs – The stock market hit another new high last week. On Thursday, the S&P 500 index closed above 6,280.
Not bad. To paraphrase Rita Coolidge, “We’re at an all-time high!”
But new highs? That feels a bit risky, right? Don’t you want to buy low and sell high? If we’re at the highest levels the market has ever been, wouldn’t now be a good time to sell?
Not so fast. BNY Wealth did some interesting research this past week about what happens to the stock market’s forward returns right after notching new highs versus any other trading day. The results—shown below—are quite interesting, to say the least.
As you can see, the returns for investors who bought the S&P 500 right after the index hit a record high were slightly better than those for investors who bought the index after any other trading day. This was the case one year out, three years out, and even five years out.
In other words, you don’t need to be afraid of buying at new highs. In fact, the historical data reveals that buying into rallies can be just as lucrative—if not more so—than buying at any other time.
But of course, one to five years is a long time. A lot can happen in the interim. So it’s important that we still adhere to our model-driven process, where we focus on price movements, investor sentiment, and the economic environment.
Where do those stand? Well, fairly bullish at the moment. Price movement indicators look really good, and that’s what’s doing the bulk of the work keeping our overall model positive. The economic environment looks good too, although not quite as bullish as the price-based indicators.
So, what’s lacking? That leaves investor sentiment. This is the contrarian piece of our model, where extreme levels of optimism are actually a bad thing for future stock returns. As you can see below, the recent rally in stock prices off the April lows has pushed the NDR Daily Trading Sentiment Composite—a composite measure of investor sentiment—into extremely optimistic territory.
Now, normally I’d say this would mean caution toward the stock market. However, as I pointed out in this week’s Indicator Insights blog post, if we adjust this measure of sentiment for financial conditions, the indicator falls more in the “neutral” camp than in the “bearish/excessive-optimism” camp.
So where does that leave us?
It puts us in a bit of a balancing act. On one side, price trends and economic momentum continue to support a constructive view on stocks. On the other, sentiment is flashing some yellow lights—but not the full-blown red flags we’d typically expect at this stage of a rally.
The takeaway? While we’re mindful of rising optimism, the broader environment doesn’t suggest it’s time to hit the brakes just yet. Instead, we’ll continue to lean on the data, stay grounded in the process, and let the market guide our next move.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.