S&P 500’s Rally is About to Enter Uncharted Territory

The US consumer continues to fire on all cylinders as evidenced by their voracious search activity for both ‘staying in’ and ‘going out’ topics. Savings are being spent on additional home improvements in addition to new apartment rentals and vacations for the summer.

In response, value equities have produced some of the highest risk-adjusted returns away from REITs since the election in November 2020. The S&P 500 Value Index’s rolling three-month Sharpe ratio shown below has entered uncharted territory relative to both risk and safe assets. 

In other words, value equities have never performed this well given losses among US Treasuries and gains among growth equities.

Bigger picture, US equities have room to run until major issues caused by the pandemic come to an end. In other words, when will bullish expectations become fully priced in? We are keeping a very close eye on three items: 

    1. Workers’ rate of return to offices and manufacturing sites
    2. Pace of non-farm payrolls gains
    3. Spending on ‘going out’ goods and services

US search activity suggests all three items will be quickly on the mend heading into the summer months. Consumers are actively seeking those services they lost during the pandemic. Additionally, workers are increasingly searching for bus routes, business clothing, office spaces, and train stations. 

These rosy conditions have helped produce one of the strongest bull runs in history. We use a very simple bullish/bearish breakout strategy by the S&P 500 using rolling 50-trading day highs and lows. The current bullish breakout triggered on May 20, 2021, has endured for 238 trading days for a whopping gain of 41%. Only four other bullish breakouts since 1950 have been so strong (Oct 1953, Jan 1958, Aug 1982, and Jan 1995).

The last chart shows the S&P 500’s returns following each bullish breakout from 50-trading day ranges. The current signal from May 2020 is about to enter uncharted territory of its own. The August 1982 signal ended at roughly the same time, while the October 1953 signal was the only in history to persist for longer and higher returns. Will we see a truly unprecedented rally for the history books or will something finally get in the way of this can’t miss stock market?

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