This is What History Shows After Big Stock-market Jumps Like This One

On Tuesday, the stock market reminded investors that gains don’t always go up in a straight line. The Dow Jones Industrial Average dropped by 382 points, showing that markets can still be volatile. On Wednesday, however, market sentiment was largely shaped by the release of the latest Consumer Price Index (CPI) report, which met expectations, helping to stabilize investors’ outlook.

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The bullish momentum in the markets has been undeniable recently. Bank of America’s latest survey of fund managers found that after the recent election, respondents who answered post-election had the highest net overweight to U.S. stocks seen in 11 years. This raised the question of whether the stock market’s pace might be too aggressive and whether it could be setting up for a correction.

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To address this question, the research firm Birinyi Associates examined data on the S&P 500’s performance, particularly what tends to happen after the index climbs by 36% over a 52-week period, a milestone it reached earlier this week.

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Historically, since 1995, there have been eight instances of the S&P 500 experiencing similar large gains over a year. In half of those cases, the market continued to rise in the following six months, while the other half resulted in losses. On average, the S&P 500 saw a 1% increase over the subsequent month and a 4% gain over the following six months.

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However, the market is also quite expensive by historical standards, with trailing price-to-earnings (P/E) ratios at 27.7. MarketWatch added some context by comparing current valuations to previous periods when P/E ratios were high. In some cases, like in 1999 and 2021, stocks continued to rise even at elevated valuations, though there was a slight decline in 1998. The key takeaway here is that a high-performing market does not necessarily guarantee a reversal to average returns; the path forward can vary.

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Following the inflation data, futures for the major U.S. stock indexes turned positive, and the yield on the 10-year Treasury bond fell by 4 basis points to 4.39%. This yield drop indicated that investors had some reassurance from the inflation report, which suggested inflationary pressures were in line with expectations rather than surging higher.

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Meanwhile, economic data for October showed that CPI and core CPI rose by 0.2% and 0.3%, respectively, matching economists' expectations. This accuracy in forecasting was encouraging, as it indicated that inflation trends were being effectively monitored and factored into investor decisions. The inflation numbers also alleviated some worries about the Federal Reserve needing to aggressively raise interest rates in the near term.

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In other news that affected markets, President-elect Donald Trump announced significant personnel changes. Tesla CEO Elon Musk and Vivek Ramaswamy were tapped to lead a newly formed Department of Government Efficiency, which will focus on providing advisory services outside the traditional government framework. Trump also nominated Pete Hegseth, a well-known Fox News personality, as defense secretary, a decision that sparked mixed reactions across political and business circles.

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In corporate news, Spirit Airlines was reportedly nearing bankruptcy after merger talks with Frontier Group collapsed, according to sources including the Wall Street Journal and a recent filing with the Securities and Exchange Commission. This turn of events marks a setback for Spirit as it struggles with financial stability in a competitive airline market.

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Also making headlines, Just Eat Takeaway.com has decided to sell its food-delivery service Grubhub for $150 million in cash, despite purchasing the company for a staggering $7.3 billion just two years ago. This steep loss highlights the challenges facing the food delivery industry, where profitability remains elusive amid high competition and shifting consumer demand.

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In another earnings-related development, Instacart provided a downbeat outlook for the current quarter, causing its shares to take a hit. Conversely, Cava, a fast-casual restaurant chain, raised its financial guidance, reflecting optimism about its recent performance and growth prospects. Similarly, Rivian Automotive and Volkswagen announced they are expanding their partnership, aiming to develop advanced electric vehicle technology in a joint venture that could bolster their positions in the EV market.

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There were also intriguing stories beyond the usual financial updates. In Spain, a late flood warning was reportedly caused by a prolonged lunch break taken by a regional government official, leading to criticism over the handling of disaster response. Meanwhile, a drug gang in another part of the world pulled off an elaborate heist, making off with three tons of gold in a scheme that’s still under investigation.

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Additionally, the VIX index, a gauge of market volatility, suggested that the current stock rally remains “healthy” for now. However, the VIX’s signals are also a reminder for investors to watch for signs of overheating, as elevated levels could indicate a potential bubble forming in the market.

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Finally, according to Bank of America’s global fund manager survey, inflation has now surpassed geopolitical tensions as the top perceived risk to markets. This shift highlights growing concerns over inflation’s potential impact on corporate profits and consumer spending. As inflation takes center stage in investors' minds, attention will remain on economic data releases and Federal Reserve statements to gauge the longer-term outlook for the U.S. economy and the stock market.

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In summary, Tuesday’s pullback in the stock market served as a reminder of the ups and downs inherent in investing. While current market enthusiasm is strong, investors are keeping a close watch on inflation and valuations as they weigh the potential risks and opportunities in the months ahead.

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