Investors have been pouring money into US stocks. According to this week’s fund flow update from EPFR, equities received a massive $56 billion influx of capital – that is the biggest inflow since March of 2021, a period marked by intense fiscal stimulus along with an accommodative Federal Reserve. Today, the Effective Funds Rate is 5.32%, and the prospect of rate cuts keeps getting pushed out – we’ll touch more on that later.
Let’s run through a series of key market charts to determine the outlook of the S&P 500. I reiterate a hold rating on the Vanguard S&P 500 ETF (NYSEARCA:VOO) as sector rotation evolves and emerging weakness is seen among some of the leaders of the recent bullish stretch.
EPFR Weekly Equity Fund Flow Data: Massive Inflow Last Week
Big picture, recent economic data has been hanging in there despite continued soft manufacturing survey data and a weak February Retail Sales report, which came after a disappointing spending snapshot from January.
It’s becoming increasingly clear that consumers, particularly those on the lower end of the wage spectrum, are reining in their outlays. On Friday, Goldman Sachs lowered its Q1 GDP tracking forecast to just 1.6%, below the Atlanta Fed’s GDPnow model. Still, VOO sports a share-price momentum ETF Grade by Seeking Alpha of an A, an improvement from three months ago and the same bullish rating compared to September 2023.
Citi Economic Surprise Index: Off the Highs, But Still Positive
But are risks emerging that could threaten the rally? One concerning data point is what’s happening with gasoline futures. The prompt month of RBOB is now approaching $2.70 – the highest since Q3 of last year. Tack on 95 cents to that price to arrive at an approximate national retail average price for a gallon of regular in a few weeks’ time. Thus, as the spring break season kicks into high gear and with the long Easter weekend later this month, drivers will be doling out more to fuel their trips and work-day commutes.
A generally bullish trend in energy commodities has been a boon for the S&P 500’s Energy sector, however. Sector ETFs tracking oil & gas names are now at fresh all-time highs on a total return basis. I view that as a positive for VOO so long as consumer-oriented sectors and high-growth tech groups hold up.
RBOB Gasoline Futures Rally Toward $2.70 – A Multi-Month High
Another headwind? Interest rates. The benchmark 10-year Treasury note yield is now above 4.3%. It is poised to print its highest weekly closing rate since September last year, too.
Often during inflationary regimes, interest rates and commodities move in tandem – that’s what we saw during the first half of 2022. Recall that VOO struggled during that stretch.
10-Year Treasury Rate Jumps Above 4.3%
More near-term, domestic large caps have fared fine in the last month, though the pace of the upside that we saw over the final 10 weeks of last year has certainly ebbed.
In fact, it’s foreign equities that have caught the eye of the bulls. Developed market stocks outside of the US are up significantly from a month ago while the Nasdaq 100 has relinquished some of its early-year advance.
1-Month Equity Performances: EFA Leads SPX
Sector-wise, the leading S&P 500 stock group year to date is indeed the Energy sector ETF (XLE). Communication Services (XLC) has been tied, for all intents and purposes, with the oil & gas ETF since the start of 2024.
Rising interest rates continue to leave their mark on yield-sensitive sectors like Real Estate (XLRE) and Utilities (XLU). While it is a mixed bag in some respects, we are definitely seeing a broadening out of the rally, with cyclical and value sectors at or near all-time highs as a reshuffling of the “magnificent” stocks continues.
YTD S&P 500 Sector Performances: Energy Now Leads
Turning to the volatility view, the VIX Index has been drifting higher all year. Few strategists are talking about this, but it should be a concern among the bulls. The cost of protection is modestly on the rise, and that could portend more volatile price action in the weeks ahead, further leading me to remain a bit cautious on stocks for the time being.
Cboe Volatility Index: Creeping Higher As Stocks Rally
Of course, seasonality becomes a tailwind for VOO right about now. It was 52 weeks ago when the S&P 500 bottomed out amid an abbreviated bout of regional banking turmoil. Since then, VOO has returned about 35%, dividends included.
Looking ahead, April through July has been a very bullish period for VOO over the past decade, averaging an aggregate gain of nearly 7%. April has been positive in all but one of the past 10 years, as well.
VOO: Bullish Seasonal Trends April Through July
No VOO analysis would be complete without a mention of the latest monetary policy outlook. Following more warm inflation data this week, namely the February CPI and PPI reports, there’s now less than 70 basis points of cuts priced into 2024.
Some pundits assert that the FOMC may not raise rates at all this year – we would need to see continued robust growth readings and a more pronounced hook in inflation charts for that to happen, in my view. Truflation and other real-time gauges of consumer prices, including one by Jeremy Schwartz at WisdomTree, show subdued inflation.
Fewer Rate Cuts Expected in 2024
The Technical Take
With VOO now trading close to 21x forward operating earnings estimates and prevailing market interest rates above 4%, the value case is getting harder to make. But what does the chart suggest? Let’s work through it together.
Notice in the graph below that not a whole lot has changed over the past couple of months, but I have annotated a potential area that VOO could pull back to. The 38.2% Fibonacci retracement level from the low in October last year to the peak earlier this month comes into play just below $440. That spot has confluence with the former all-time high from the start of 2022 at $441. A garden-variety 10% correction would bring VOO to $428 – right near the lows seen at the beginning of this year.
VOO remains 12% above its long-term 200-day moving average, which is stretched. Considering ongoing bearish RSI momentum trends as price has climbed, at least a partial retreat closer to the 200dma would make sense.
VOO: Eyeing Key Areas of Interest on the Downside
The Bottom Line
Overall, I reiterate my hold rating on VOO. I see the valuation as at premium levels, but ongoing sector rotation has proven to be a bullish force as mega-cap tech struggled somewhat. Higher gasoline prices and borrowing rates are macro risks while bullish seasonal patterns would support higher prices for VOO. Keep the technical levels on your radar as the start of Q2 approaches.