The S&P500 Has Set a New All-Time High, But… 🤔

🐺 Hi pack-mates,

This is Howling Markets, the newsletter that takes you through the high and lows of the financial markets!

Today we will be covering:

• Education: How Are Market Indexes Composed? 📊

• Investment Grade Companies Sold More Than $150 Billion in Bonds 💰

• The S&P 500 Has Set a New All-Time High, But… 🤔

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

How Are Market Indexes Composed?

Market indexes are hypothetical portfolios that are created to track the performance of a segment of the market overtime. However, how these market indexes are composed is a whole another story.

Each market index decides their preferred rule to determine the proportions in which the underlying stocks will be represented in the index and there is no set rule.

For example, indexes like the S&P500 and the Russell 2000, respectively tracking the performance of the largest 500 and 2000 companies in the US stock market, are based on free-floating capitalization weighting.

Just as a reminder, the free-floating capitalization represents the market value of all the publicly traded shares of the company. Because of this, it can be simply calculated by multiplying the share price times the number of free-floating shares.

On the other hand, the Dow Jones Industrial Average (DJIA) is a market index that tracks the 30 largest companies in the US stock market, and it can be defined as a price-weighted index. In this case, the 30 stocks are included in the index proportionally to their share price, not their market capitalization.

So, to find the weight of each stock in the DJIA you would have to divide the share price of each stock by the sum all the prices of the top 30 stocks.

As a result of the weights, in the S&P 500 companies with a larger market capitalization will have a stronger impact on the index, whereas the DJIA will be more impacted by the companies with a higher share price.

Investment Grade Companies Sold More Than $150 Billion in Bonds

During the first three weeks of 2024 investment grade companies have rushed to the bond market to sell bonds and refinance their debt.

The phenomenon caused $153 billion worth of bonds to be issued by US companies, achieving the highest year-to-date issuance since the 90s.

Many analysts believe that this rush has been originated by the sharp drop in corporate yields caused by the recent dovish announcements made by the Federal Reserve. During October the rates peaked at around 6.50% before sharply falling to the current 5.3% level.

Additionally, even though interest rates are expected to be cut this year, many companies have decided to go ahead and secure a relatively low long term rate without incurring the risk of a potential hard landing in the future and a subsequent increase in rates.

Finally, another determinant is the spread between corporate and government yields, which has reached the lowest point since the start of the bear market during the beginning of 2022.

Today’s Howling Question

And now, it is time for our howling question!

While the SPX has surged almost +35% since its 2022 low, how do you think the equal weight index has performed over the same time frame?

a)  +10%

b)  +15%

c)  +20%

d)  +30%

e) +35%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

The S&P500 Has Set a New All-Time High, But…

Finally, after weeks of back and forth the S&P 500 has reached its all-time high, after more than two years of a financial roller coaster!

Since it got close to its all-time high on the 19^th of December, the Index has taken exactly one month to add the extra +1.5% needed to surpass its previous all-time high set on the 3^rd of January 2022.

During these last two years the market has taken us on a wild ride starting with a steep -25.43% drop from the all-time high over just 10 months. However, from there, the market has surged by +34.78% to the newly set all-time high at $4839.82.

But now what?

Well, historically whenever a longstanding all-time high is broken, the price tends to increase slightly more before falling between 5%-10%. Such a correction is usually nothing to worry about, because it usually is just a signal of a healthy market that is recovering from its overextension caused by the rapid surge to the all-time high.

Aside from the RSI divergence that we have been looking at in the past weeks, there is also another signal that might be pointing towards this short term correction.

At the beginning of today’s newsletter, we saw how the major market indexes are weighted, and we have concluded that the S&P 500 is more sensitive to changes in the price of companies with a large capitalization.

Because of this, it is always interesting to check the S&P 500 equal weights index (Ticker: RSP) which, instead, attributes the same relevance to all the stocks. By doing so we can notice that the performance of the RSP index has been pretty poor, and that instead of gaining, the price of this index has been falling over the past month.

This signal indicates that over the last month the SPX has been carried higher just by a few high-cap companies while most of the other stocks have been moving down.

This is a general sign of weakness that foreruns a reversal. What do you think will be the most likely market development over the short/medium term?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

As we have extensively covered in today’s newsletter, SPX’s performance on Friday was exceptional, ending the day with a +1.23% increase.

On the other hand, the bond market has reacted much less decisively to the performance of the stock market, with the 10 US government bond yield closing just -0.48%. However, the long wick up indicates that the yield could continue to fall and retest 4% level in the short term.

Answer

The correct answer is c) +20%

More specifically, the RSP index has risen +22.42% since its 2022 low.

The lower return can be explained by a few factors:

• During the 10-month-long fall at the beginning of 2022 the price of RSP decreased less than the price of SPX

• RSP didn’t set a new all time high during the last month

• RSP’s price has been decreasing over the last few weeks

Howl-Worthy Memes 😂

🐺 See you next time!

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