Stay Sharp

The S&P 500 is making new all-time highs… The apparent bullish catalyst… The Fed ‘pause’ could keep going… Stay sharp… What to watch the rest of this week…

We’re ‘officially’ in a bull market…

It has only been two trading days, but on Friday, the U.S. benchmark S&P 500 Index closed above its previous all-time high from January 2022… and moved higher again today. The Dow Jones Industrial Average, which made new highs in mid-December, and the Nasdaq 100, an index of leading tech stocks, are doing the same.

Using the most widely recognized (and even more conservative) Wall Street definitions, the S&P 500 is now “officially” in a bull market, with new all-time highs and at least a 20% gain from previous lows. So you’ll likely start seeing the claim in mainstream financial news.

Curiously, small-cap stocks – which have historically led the way higher coming out of bear markets – are still lagging in terms of hitting new all-time highs. But they have been leading on the broad market’s “up” days lately. Today, the Russell 2000 Index closed more than 2% higher, leading all the major indexes.

Some “Magnificent Seven” stocks, like Nvidia (NVDA), have been going higher than others… The chipmaker is up 24% since January 2. But the bullishness isn’t limited entirely to popular tech or names linked to artificial-intelligence buzz.

Market breadth is relatively strong, with roughly 60% of New York Stock Exchange-listed stocks trading above their 200-day moving averages, a technical measure of a long-term trend.

Our colleague Brett Eversole recently shared a few other indicators of the market’s strength. He said…

The healthiest market rallies are ones where lots of stocks participate. When more stocks are winning than losing, it means the boom can keep going.

If the Magnificent Seven really were the only stocks going higher, that’d be bad news. But that’s not what we’re seeing today.

Regular Digest readers also might notice that our 52-week high list (representing current recommendations in our editors’ portfolios – which doesn’t necessarily mean they’re “buys” at current prices) has been consistently populated lately. The list ranges from tech names to insurance companies (which our team has long loved).

Why all the bullishness?…

As Ten Stock Trader editor Greg Diamond wrote today, the short-term moves in the market appear to be linked to expectations about the Federal Reserve.

From the macro view, it appears more and more investors have been reconsidering the previously popular idea that the Fed would cut rates in early 2024.

We wrote last week that retail spending was stronger than expected in December and homebuilders are confident in business amid a recent turn lower in mortgage rates. Meanwhile, initial jobless claims have fallen.

And while I have previously written about the pockets of deflation in the U.S. economy, higher gas prices and sticky high housing prices have kept the pace of headline inflation accelerating over the past few months.

Putting it all together, it’s looking more and more unlikely to investors that the Fed will cut interest rates sooner rather than later. The thinking is that the central bank will be more likely to keep its benchmark lending rate for banks right where it is.

In the short term, this has led to choppy market action and slightly higher Treasury bond yields (with the 10-year yield bouncing above 4%), but not a massive stock sell-off.

The reaction appears appropriate. After all, as we wrote last month about “new highs,” the year-end rally was setting the stage for “some disappointment” about the expectation of rate cuts early this year.

Fed officials have also been sending signals that they won’t be lowering rates at their next policy meeting on January 30 and 31. Here’s Atlanta Fed President Raphael Bostic last Thursday, for example…

My outlook right now is for our first cut to be sometime in the third quarter this year, and we’ll just have to see how the data progress.

Now, this might sound like bearish news to you. “Aren’t rate cuts good for stock prices? Isn’t that why the market rallied by double digits to end 2023?”

Yes and no.

As we’ve said in the past, lower short-term interest rates than before can be better for stock prices over the longer term because it makes business life and credit flow easier. Investors like that.

But a central bank that’s in the process of cutting rates (or signaling that it plans to) will be doing so because it sees things going wrong with the economy. That, historically, has been terrible news for stocks until the rate cuts stop.

As I wrote on December 7…

In the past 50 years, after the Fed has started a rate-cutting cycle, the S&P 500 has dropped by an average of 20% after the bank’s first cut before hitting a low, according to data from Bloomberg and global institutional brokerage and advisory firm Strategas Research.

The most recent example was in March 2020. After the central bank announced an “emergency” rate cut to near zero on March 3 as “novel coronavirus” panic began to grip the market, stocks fell 25% and didn’t bottom until March 23.

Only after the Fed did more, including making massive bond purchases and even buying equities, and after Congress decided to mail debit cards and checks directly to Americans, did the market start to sharply rebound.

Then came the inflation and… where we are today.

That “where we are today” included the Fed drastically misreading the path of inflation.

The economy is ‘good’…

The backward-looking economic data that the Fed uses to make policy decisions has shown the economy looking “good” lately and that the pace of inflation hasn’t cratered.

In other words, the Fed “pause” will continue, and historically – and perhaps counterintuitively – that is bullish for stocks. As our Dr. David “Doc” Eifrig wrote in a recent issue of his Retirement Trader advisory…

Typically, 12 months following the end of a rate-hike cycle, stocks go up. Take a look at the one-year returns of the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite Index after the end of a rate-hike cycle…

In short, Fed-dictated rates staying where they are after a string of hikes means that the Fed thinks the economy is chugging along fine and dandy with no Fed tinkering needed.

Futures traders are shifting their thinking…

Fed-funds futures traders never thought a policy move at the central bank meeting later this month was in the cards. But now, these traders are increasingly betting on rates to remain where they are in March as well, with odds near 60% today compared with 12% a month ago, according to the CME Group’s FedWatch Tool.

In other words, the expectation for a rate cut has been bumped down the road a few months.

If you’ve been with us for a while, we used the market’s reaction to potentially delayed rate cuts as part of our bearish argument during the “bear market rallies” in 2022 that ultimately led to lower lows.

The difference now is that the annual rate of inflation is still generally falling, as opposed to rising at 40-year highs back in 2022, even if the month-over-month numbers have ticked higher lately.

Remember, the market bottomed in October 2022 when Wall Street started believing that the pace of inflation had peaked. At the same time, fears of a recession were growing because of the expected impact of higher rates.

Today, even if the inflation numbers have rebounded slightly, they remain within historical “norms” of monthly growth in our fiat currency system. The Fed’s labor-market data is still strong. The economy is “good.”

Add it all up, and it’s a bullish backdrop…

However, time may be running out on this sentiment – especially if you’re a believer in history and cycles.

As Doc recently wrote in Retirement Trader, the time between the start of the Fed “pause” and its end – which has come with rate cuts over the past several decades – has usually been less than eight months.

The Fed stopped hiking rates in August 2023. Eight months later would be this April. That said, you might notice there was a 15-month pause before the financial crisis. And the circumstances are different today than in past pauses, with the threat of high(er) inflation on the table.

So it’s probably worth thinking about a scenario where rates go higher before they go lower if the economy heats up again and/or inflation picks up (the disruptions in the Red Sea could play a role).

What’s up next…

Uncle Sam will publish its first crack at a fourth-quarter GDP estimate on Thursday and an updated personal consumption expenditures (“PCE”) index – the Fed’s preferred inflation gauge – for December on Friday.

Mainstream economists (who need to drink more) are expecting annualized GDP growth of less than 2% for the fourth quarter of 2023. That’s not rip-roaring growth, but it’s not recession territory, either.

In the meantime, the headline PCE index has been trending below 3% since October, and monthly growth was negative (deflation) in November. But any big surprises in these numbers could quickly change the prevailing market narrative.

We’ll keep watch. Remember, though, that the broad U.S. stock market’s most recent lows were in late 2022, and indicators don’t suggest this bullish trend breaking imminently. So own shares of high-quality companies. And stay sharp. A continued Fed “pause” is bullish. Anything else might not be.

New 52-week highs (as of 1/19/24): Abbott Laboratories (ABT), Autodesk (ADSK), Applied Materials (AMAT), Advanced Micro Devices (AMD), Amazon (AMZN), AutoZone (AZO), Costco Wholesale (COST), Salesforce (CRM), CyberArk Software (CYBR), Dell Technologies (DELL), D.R. Horton (DHI), Alphabet (GOOGL), Home Depot (HD), Intuitive Surgical (ISRG), McDonald’s (MCD), Microsoft (MSFT), Micron Technology (MU), Oaktree Specialty Lending (OCSL), O’Reilly Automotive (ORLY), Palo Alto Networks (PANW), Parker-Hannifin (PH), PulteGroup (PHM), ProShares Ultra QQQ (QLD), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sprouts Farmers Market (SFM), VanEck Semiconductor Fund (SMH), S&P Global (SPGI), ProShares Ultra S&P 500 (SSO), Stryker (SYK), Travelers (TRV), Trane Technologies (TT), Tyler Technologies (TYL), Sprott Physical Uranium Trust (U-U.TO), Visa (V), Vanguard S&P 500 Fund (VOO), Waste Management (WM), and W.R. Berkley (WRB).

In today’s mailbag, more of your feedback on our reporting on Argentine President Javier Milei’s speech at the World Economic Forum in Davos, Switzerland last week… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“Regarding Argentina’s new leader Milei, I have a sign that has hung in my office for 40 years that says ‘Men may doubt what you say, but they will believe what you do.’ The leaders in Davos may not have listened, but they will have to recognize what Milei does if it succeeds.” – Subscriber Michael K.

“Outstanding presentation. I can only hope that it landed on open ears.” – Subscriber John E.

“I hope that when we look back on the speech given by President Milei to the Davos ‘elites’ we will see it as a turning point and an about-face in the collective West’s march toward collectivism. I am sure that the Davos committee that invited him must now be wondering if it was a ‘good idea.’ I hope that every one of your readers takes the time to listen to the YouTube video or read the transcript of his speech.

“Long live freedom DAMNIT!” – Subscriber Brook M.

“I am 92 soon to be 93. I helped build this country like many others. Milei told the ABSOLUTE TRUTH to those who listened. The real enemy is GREED and will destroy the whole world if allowed to survive.” – Subscriber Dutch M.

“I’m not saying I agree with all his proposed policies, but at least he’s willing to shake up the status quo. Hopefully, he’s planted some seeds in some of the other leaders’ minds that will start to germinate and take hold.

“We need more leaders like him out there to start being more innovative and showing the world it’s not only OK to initiate so-called ‘radical ideas,’ it’s necessary to initiate change.

“Thanks for publishing his speech excerpts.” – Subscriber Brian H.

“Thank you so much for publishing [Thursday’s] Digest.

“It is encouraging to see Javier Milei stand bravely in front of the world’s shadow casters and boldly speak the truth. He is one brave soul to make that journey.

“The world needs more brave souls like Mr. Milei. Thankfully, those of us subscribing to Stansberry publications get a good dose of the truth, and I am sure I am not alone in my gratitude for your perseverance in that regard.” – Subscriber Jeffrey H.

All the best,

Corey McLaughlin
Baltimore, Maryland
January 22, 2024