SPY: Unpacking Market Swings - What Lies Ahead for Investors?

The S&P 500 index has had a decent run this year, gaining 14.2% year-to-date. Despite the overall gains, the index has undergone periods of volatility due to the uncertain macroeconomic and geopolitical environment, as is evident from the index’s 1.9% decline over the past three months.

The SPDR S&P 500 ETF Trust (SPY), which closely tracks the S&P 500 for returns, could be a solid buy now for reasons explained throughout this article.

Last week, something rare occurred as the SPY saw back-to-back gap-ups for the fourth time in thirty years. The SPY, also known as Spider, had previously seen such gap-ups on March 13, 2019, October 12, 2020, and March 31, 2023.

The SPY’s recent run is fueled primarily by the investors’ belief that the Federal Reserve has ended its tightening campaign this year. Also, the falling treasury yields, a decline in crude oil prices, and the lower-than-expected rise in nonfarm payrolls have driven the S&P 500’s run. According to the CME FedWatch Tool, 85.4% of traders are betting on the Fed keeping rates steady at its December policy meeting.

The S&P 500 had rallied up to 4,600 in late July before entering a range-bound territory over the past three months. During this time, the yield on the 10-year Treasury reached 5% for the first time in 16 years.

In September, the consumer price index (CPI) grew 0.4% sequentially and 3.7% year-over-year, coming in higher than economists’ estimates of 0.3% and 3.6%, respectively. However, the expectations of the U.S. economy experiencing a soft landing rose after the recently released jobs data that showed nonfarm payrolls rose less than analyst estimates.

Nonfarm payrolls rose 150,000 in October, coming in below the consensus forecast of 170,000. The rise in nonfarm payrolls was lower than September’s 297,000 gain. The unemployment rate also rose to 3.9%, the highest since January 2022.

The Fed left interest rates unchanged for the second time in a row following 11 consecutive rate hikes since March 2022, including four this year. The Fed has held the benchmark interest rates steady between 5.25% and 5.5% since July. The S&P 500 also saw a sell-off following Hamas’ attack on Israel on October 7.

The consequent Israel-Hamas war led investors to drop risky assets like equities and seek the safety of safer assets such as gold. Despite signs of the Fed managing to slow the economy, central bank officials insist that the incoming macroeconomic data should shape their policy decisions. Many central bankers have said that additional rate increases could be in the offing.

Minneapolis Fed President Neel Kashkari believes that the central bank likely has more work ahead to control inflation. Additionally, Fed officials are still trying to assess whether the rise in long-term Treasury yields will help cool the economy enough to remove the need for more interest rate hikes.

Here are the factors that make SPY a solid buy now:

Fund Stats

As of November 8, 2023, SPY's AUM stood at $410.17 billion and a Net Asset Value (NAV) of $437.22. Its expense ratio of 0.09% is lower than the category average of 0.37%. SPY’s fund inflows reached $4.74 billion over the past month.

Top Holdings

SPY’s top sector is Information Technology, with 28.73% weight, followed by Health Care, with 12.97% weight; Financials, with 12.69% weight; and Consumer Discretionary, with 10.77% weight.

SPY’s top holdings include Microsoft Corporation (MSFT), with a 7.29% weight; Apple Inc. (AAPL), with a 7.27% weight; Amazon.com, Inc. (AMZN) with a 3.53% weight, and NVIDIA Corporation (NVDA), with a 3.09% weight. It has a total of 503 holdings currently.

Attractive Dividend

SPY has a trailing-12-month dividend of $6.51, which yields 1.49% on the current share price. The fund has a four-year average yield of 1.54%. Its dividend payouts have increased at 4.6% and 5.4% CAGRs over the past three and five years. Moreover, the dividend has grown for 13 consecutive years.

POWR Ratings Reflect Promising Prospects

SPY has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The ETF has an A grade for Buy & Hold, consistent with the relatively safe margin between its current price and its 52-week high price of $459.44. Its recent price performance has earned it an A grade.

SPY is ranked first out of 280 stocks in the Large Cap Blend ETFs category. Click here to see all the POWR Ratings of SPY.

Bottom Line

Despite the S&P 500’s decent returns this year, the index is likely to continue witnessing volatility as the Fed assesses the incoming macroeconomic data. There’s uncertainty over when the Fed will start cutting rates and whether the Fed will need to hike rates again. Moreover, the rising Treasury yields continue to be a key market risk.

Despite all the uncertainty, one cannot deny the long-term prospects of SPY. Given its diversification and exposure to quality blue chips, SPY holds immense potential for long-term wealth creation. Therefore, it could be wise to invest in the ETF now.

How Does SPDR S&P 500 ETF Trust (SPY) Stack Up Against Its Peers?

While SPY has an overall grade of A, equating to a Strong Buy rating, you may also check out these other A (Strong Buy)-rated ETFs within the Large Cap Blend ETFs industry: iShares Core S&P 500 ETF (IVV), Vanguard 500 Index Fund (VOO), and Vanguard Large Cap Index Fund (VV).

What To Do Next?

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SPY shares were trading at $437.40 per share on Thursday morning, up $0.15 (+0.03%). Year-to-date, SPY has gained 15.64%, versus a % rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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