S&P 500 Index Surges to New Highs, Reflecting Positive Track Record in Re-election Years

Key takeaways:

• Equity markets rose for the sixth time in seven weeks, with the S&P 500® Index hitting a record high.
• Nonfarm payrolls beat expectations, though macro data is sending mixed signals.
• Seasonality is a tailwind for markets, with a strong track record for re-election years.

Drivers of market movement

Equity markets withstood mixed economic data to deliver the sixth weekly gain in the past seven, with the S&P 500® Index breaking through to a fresh record high, registering a 13% return for the year. Daily volatility has been calm, with no move greater than 1% in nearly three weeks, and no decline greater than 1% since April. The bond market continues to trade with the volatility normally reserved for equity markets, with the 10-year Treasury yield jumping on the strong payroll report. Seasonality is an increasing tailwind for markets, with the S&P 500 gaining in July for nine straight years (3.6% average) and the NASDAQ Composite Index has been positive for 16 consecutive years (4.6% average). The first two weeks of July have been the best on the calendar. Analysts expect a wave of technical buying by allocation funds (Goldman Sachs estimates $26 billion in rebalancing), with an additional tailwind from near-record money market assets of $7.3 trillion.

Details on performance

Market momentum is undoubtedly strong despite returns remaining notably top-heavy, with the S&P 500 Index closing at a record high on Wednesday despite only 5% of the Index making a new 52-week high. The market-cap-weighted S&P 500 has outperformed the equal-weight Index by 7% this year. The largest five companies in the S&P 500 (Microsoft, Apple, Nvidia, Alphabet, and Meta) account for 24% of the Index and account for more than half of the year-to-date move for the Index. The Russell 1000 Growth Index has returned 16% for the year, while the Russell 1000® Value Index has gained 6% and the Russell 2000® Index just 1%.

The labor market is sending mixed signals as we received a wave of data this week. Nonfarm payrolls grew much faster than expected in May, adding 272,000 jobs versus the estimate of 180,000 and 165,000 in April. Despite the strength, the unemployment rate ticked higher to break above 4% for the first time since January 2022. Wage growth was also ahead of expectations, growing 4.1% from a year ago versus the consensus of 3.9%. The bond market reacted to the news with surging short and long-term rates, while equity markets had little reaction. Earlier in the week, the JOLTS report showed job openings at 8.1 million, the lowest level in more than three years, down from 8.4 million in March, though it is 1.2x the number of unemployed individuals. Weakness was evident in job growth across health care, manufacturing, and government sectors. The “quits rate” (people who voluntarily left their jobs) was at the lowest level since the early stages of the pandemic.

Economic data reflect slowing macro conditions, led by clear signs of an exhausted consumer. First-quarter economic growth was revised lower due to weak consumer spending, while the Atlanta Fed’s GDPNow™ model outlook for second-quarter growth eased to 3.1% from more than 4% a month ago. The Citigroup Economic Surprise Index remains below neutral at -10, but has improved over the past two weeks. Consumer-focused companies have noted not only slowing spending but increased price sensitivity in what is purchased, challenging the pricing power that has allowed companies to maintain margins. ISM data sent a mixed picture, with ISM Manufacturing disappointing at 48.7 (below 50 reflects contraction) and new orders weak at 45.4. ISM Services, however, was impressive at 53.8 (the highest level since last August), with new orders of 54.1.

Global politics continues to be a focus of investors, as 40% of the world’s population heads to the polls this year. Presidential election years have been strong for the S&P 500, with positive returns in each presidential re-election year since 1944, by an average of 16%, including an 18% return in 2020. The S&P 500 performance in re-election years has outperformed open election years by an average of 13%, as re-election years have generally seen fiscal and monetary stimulus, per Strategas. Current fiscal policies reflect this tendency, including the infrastructure bill, the CHIPS Act, and the Inflation Reduction Act. President Biden is also forgiving student loans, changing mortgage rules for government-sponsored enterprises, and keeping oil production high. Globally, equity and FX markets have had cautious reactions to results in South Africa, Mexico, and India.

Investors hope for a Fed rate cut are diminished following higher-than-expected job gains in May. The S&P 500® Index gained 1%, while the Dow gained less than 1%, and the NASDAQ Composite Index added 2%. Growth indexes outperformed value by 1%, while large caps outperformed small caps by 3%. Leading sectors for the week included tech, communication services, and health care, while utilities, energy, and materials lagged. Volatility remains low with the VIX closing under 13, while trading volume was average.

Domestic markets outperformed global markets, with the MSCI EAFE® Index and MSCI Emerging Market® Index both underperforming the S&P 500. Asian markets reacted divergently following mixed economic data, with South Korea up 3% Taiwan up 2%, and China down 2%. European markets were also mixed, following higher than anticipated May inflation data, with Switzerland and Netherlands up 2%, while the UK, Spain, and Italy were down 1%. Latin America was weak, with Mexico down 7% and Brazil down 1%. The trade-weighted dollar index was up by less than 1% and remains up by 3% for the year.

Despite unemployment ticking up to 4%, more jobs were added in May than expected, with the 10-year Treasury yield up 0.3% to 4.43%. The 2-year yield is up as well by 0.06% to 4.86%, with little movement of the spread between the two yields. Credit spreads remained tight. Commodity prices were lower with the S&P Goldman Sachs Commodity Index down 1% for the week but up 6% for the year. Crude prices are down 2% following softening demand. Precious metals, both silver and gold, were lower by 2% and 1%, respectively. Agricultural commodities were mixed.

Investors continue to allocate across the risk spectrum, with global equity funds gaining $11 billion, led by US equity funds attracting $5 billion, the seventh week of inflows, per EPFR data. Bond funds also saw inflows of $18 billion, led by investment-grade gaining $6 billion, the 32nd week of inflows. Money market funds attracted $47 billion, the largest inflow in four weeks. Investor sentiment is mixed, with the CNN Fear & Greed Index down modestly to 45 on a scale from 0-100 from 48 last week. The AAII Sentiment Survey saw bulls flat at 39%, while bears rose to 32% from 27%.

What to watch

Inflation and the Fed will be in focus next week, with CPI and the FOMC meeting on Wednesday and PPI on Thursday. Additional data includes the NFIB Small Business Index on Tuesday and the University of Michigan’s consumer sentiment report on Friday.