3 Reasons Why a Spring Rally May Be Just Around the Corner
There’s no doubt that this year has already witnessed its fair share of volatility. The recent U.S. bank failures in Silicon Valley Bank and Signature Bank certainly added to the enhanced selling pressure in the first half of March. And while we are not out of the woods just yet, there are several reasons why a broad market rally may be getting underway.
The current part of the calendar has the bulls beaming, as the back half of March along with April are historically bullish. Dating back to 1950, March is typically a strong month in pre-election years, up about 2% on average. April is the second strongest month in pre-election years (after January), up better than 3% on average.
Earlier this year, the S&P 500 spent over a month above its 200-day moving average (not something you normally see in bear markets). In fact, dating back to 1950, there are zero recorded instances where the S&P 500 reached bear market territory (down 20% from its closing high), rebounded above its 200-day moving average for at least a month, and then went back down to make new lows. This is another compelling reason in favor of the recent pullback from February into mid-March acting as a huge buying opportunity.
Remember, pre-election years are the strongest year of the entire 4-year presidential cycle (up nearly 17% on average since 1950). And don’t forget that in the years that follow >25% declines from peak to trough like last year, the following year tends to see large gains (38% average since 1962). The historical statistics along with a green part of the calendar clearly favor the bulls.
Image Source: Zacks Investment Research
Aggressive Sectors Are Outperforming This Year
During last year’s bear market, we saw outperformance in sectors such as energy and consumer staples. This year has flipped the script, with the more aggressive pockets of the market leading the charge off the lows.
Information technology, communication services, and consumer discretionary are the top-performing sectors year-to-date, with returns of approximately 12%, 10%, and 9%, respectively. Meanwhile, the more defensive sectors such as utilities and consumer staples are negative on the year, while energy has also taken a backseat. We can see below the Technology Select Sector SPDR ETF XLK is leading the way in black, with communication services in blue and consumer discretionary noted in green:
Image Source: StockCharts
This performance is in stark contrast to last year, which saw these sectors lead the downside as is typical in bear markets. XLK acting as a leading sector serves as another reason that points to most of the downside associated with any earnings decline being mostly priced in at this point. As we know, markets are forward-looking, and likely already have their sights set on future quarters where companies in sectors such as XLK will return to more favorable growth metrics.
Another area that has witnessed significant outperformance this year is semiconductor stocks. These companies were particularly hit hard by supply chain disruptions and weakening demand last year. The outlook is more favorable now that supply chain issues have largely evaporated. Companies such as Lattice Semiconductor LSCC, a Zacks Rank #2 (Buy), have risen sharply this year. In fact, LSCC just recently hit a 52-week high. LSCC stock is up nearly 45% this year at the time of this writing. Strength in this area serves as yet another reason why the worst of the bear market is likely behind us.
Image Source: StockCharts
Less Hawkish Fed Stance
Stocks became temporarily oversold with this recent down move, as the level of fear in the market rose significantly. Treasury yields have also come down substantially over the last few weeks after a massive flight to safety. Inflation measures have also continued to come down, and the path for future rate hikes has become less concerning. Markets are now pricing in about an 70% chance of a 25-bps hike, and a 30% chance of no hike at all for the upcoming March Fed meeting.
Image Source: CME Group
A spring rally may be just around the corner, as positive seasonality, strong sector performance, and a less hawkish Fed all bode well for returns moving forward. Be sure to take advantage of all that Zacks has to offer so that you can take full advantage of the potential momentum.
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