Don’t Let Rate-Cut Confusion Fool You

The S&P 500 Index closed at a record high on Monday. It’s up more than 3% in the past month.

Put simply, we’re still in a bull market. And this bull market turned two years old on October 12.

According to JPMorgan Private Bank, the median bull market since 1950 has lasted about three years and 10 months… with a median return of 110% versus the current 63% gain since October 12, 2022.

So, I see more upside ahead. But there’s a problem…

You see, the Federal Reserve is cutting interest rates with no recession in the U.S. economy and inflation under control. And the market isn’t quite behaving the way the Fed had hoped.

The 10-year Treasury bond yield has actually risen about 40 basis points (“bps”) to around 4% since the Fed’s 50 bps rate cut in September.

The bond market looks at the employment number… September job creation of more than 250,000 jobs (with July and August numbers adjusted higher by 70,000) indicates a strong economy with no recession looming.

Beyond that, third-quarter earnings season began last week when JPMorgan Chase (JPM) and Bank of New York Mellon (BK) reported strong numbers.

Earnings season should be positive for stocks, as analysts have set a low bar by cutting estimates. And GDP forecasts for the third quarter are now up to 3.2% growth.

That makes for rate-cut confusion. Will the Fed pause its rate cuts? Will inflation come back?

Well, don’t get hung up about whether there will be a pause in rate cutting in November, as so many folks are. I’ll explain why…

Those years were 1985, 1989, 1995, 1998, and 2019. Stocks were up more than 26% for the year in all of them. And stocks posted more gains into the following year.

As I said earlier, the median length for bull markets since 1950 is about three years and 10 months, with a median return of 110%. Factoring that in, my conclusion is clear…

This bull market has more room to grow over the next 12 months.

As I’ve said numerous times this year here at Chaikin PowerFeed, my 2024 target for the S&P 500 has been 5,800 to 6,000.

Looking at the shorter-term outlook, third-quarter earnings season has begun with a bang after the major banks beat expectations.

Analysts have been cutting their third-quarter earnings estimates for the past two months. That’s because second-quarter results were disappointing – particularly in the tech sector.

Analysts have also been downgrading their ratings on more stocks than have been upgrading.

Now, take those two negatives and turn them on their heads… because they are contrary indicators.

The bottom line is that stocks rally overall during the roughly six weeks of each earnings season… when analysts have been “bearish” on earnings trends.

This is another reason to expect a strong market after the presidential election into year-end.

I also continue to believe that the market will rotate into the other 493 stocks in the S&P 500 beyond the so-called “Magnificent Seven” tech mega caps. And I expect the market to rotate into more small-cap and mid-cap stocks as well.

Friday’s more than 2% rally in the small-cap Russell 2000 Index is an indicator of that trend.

Putting it all together, I’m still “bullish” on stocks…

And I expect strong third-quarter earnings reports and the strong period of the election-year cycle will propel the stock market to continuing new highs into year-end.

Good investing,

Marc Chaikin