S&P 500’s busted winning streak was a mirage anyway

The S&P 500 fell 0.8% on Thursday, ending the streak at 8 days.

The bond market giveth and the bond market taketh away. The S&P 500 Index closed in the red Thursday, blowing its widely-hyped chance at a nine-day winning streak, which would have been its best run since 2004. Of course, it was always going to be a meaningless superlative about an otherwise anemic stock market fueled by trends in bonds, not expectations about profits. Fittingly then, it was ultimately spoiled by a lousy 30-year bond auction.

First, consider the drivers behind the now-busted streak. Suffice it to say that of the eight up days, four or five were primarily driven by sharp gains in Treasury securities. Wall Street’s outlook for index-wide 2024 earnings has drifted slightly lower in recent weeks and has more or less been flat since April, with fixed-income markets overwhelmingly holding sway. When yields fall, the discount rates we use to value stocks decline as well, pushing stock prices reflexively higher.

For their part, bonds were — at least for a brief while — in a mini-snapback rally after investors got carried away predicting fiscal doom, enduring inflation and perhaps permanently higher neutral rates. I’ve been modestly optimistic about bonds recently, but there was never a whole lot of fundamental news behind the rally. At the margin, I might have cited a less-bad-than-contemplated quarterly refunding plan announced by Treasury this month and a Fed that’s sounded ever-so-mildly more dovish. But mostly it was just a temporary shift in sentiment, and Thursday’s session showed that’s a temperamental factor that could easily turn. All it took was a weak $24 billion 30-year auction, which drew surprisingly high yields, fanning the narrative that there isn’t enough demand for all the debt Treasury is selling to finance the government’s large deficits.

Breadth has also been less than stellar. From Monday to Wednesday this week, more S&P 500 stocks declined than advanced and overall returns were essentially carried by Microsoft Corp., which benefitted from a reported rebound in cloud growth, and Apple Inc., whose stock defied weak revenue from China to go on a bit of a tear.

In many disciplines, streaks are thought to be self-sustaining phenomena. Listen to press conferences with professional basketball or football players, and they’ll repeatedly allude to their efforts to get the ball to the player with the “hot hand.”

But even in sports, the significance of streaks is up for debate. In a now-famous 1985 paper “The hot hand in basketball: On the misperception of random sequences,” researchers Thomas Gilovich, Robert Vallone and Amos Tversky found that the widespread belief among players and fans in the hot-hand phenomenon was ultimately misplaced; it was a fallacy.

Since 2015, a string of interesting research — including Joshua Miller and Adam Sanjurjo’s work on coin flips and, more accessibly, sports journalist Ben Cohen’s book The Hot Hand: The Mystery and Science of Streaks — has reopened the debate and suggested that, yes, there may well be something behind streaks in sports. Further complicating matters was Robert M. Lantis and Erik T. Nesson’s analysis of the hot hand in the NBA 3-point contest from 1986-2019, where they found the following:

Even making three shots in a row has no effect on making the next shot if a player moves locations. Our results suggest that any hot hand in basketball is only present in extremely similar shooting situations and likely not in the run-of-play.

In other words, there’s some evidence for the hot hand, but it’s more nuanced than we usually think. If it’s that hazy in basketball, imagine how unhelpful it must be to focus on streaks in the stock market. Ball players would seem to benefit from the adrenaline kick that comes from sinking a few shots and hearing crowds cheer them on; the S&P 500 is just an inanimate collection of stocks traded, often by cold, heartless computers. (If I’ve piqued your interest, my Bloomberg colleague Barry Ritholtz has spoken with protagonists in the debate including Gilovich, Miller andCohen for his podcast.)

When the dust settled, the S&P 500 fell 0.8 percent on Thursday, ending the streak at 8 days — merely the best since 2021. But extending the run was never going to be the great accomplishment some had made it out to be, with bonds driving the moves. Unsurprisingly then, it was the volatile bond market once again that played the spoiler.

Jonathan Levin is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg