So, Now What?
Folks, it’s a bull market. The recovery began in October of ’22 and ran all the way through ’23. But for some skeptics, myself included, it wasn’t really official until we pushed to new, all time highs. Check. Mission accomplished. The Dow stands above 39000 as of this writing, and the S&P 500 over 5000. Must be that lousy economy everyone’s talking about.
For some, it may seem like the time to sell. Buy low, sell high, right? Maybe not. In previous instances where the market has made a new high after not making one in over a year, 13 of 14 times the market was higher a year later. It looks like the market will have been up in November, December, January and February. Every single time that’s happened, the market has been higher a year later.
What could derail this? The most obvious cause would be a recession. Recessions are generally not good for stock prices. The good news is that we don’t appear to be in any danger of that near term. Growth is strong and labor markets look good as well. The opposite worrisome event would be a resurgence of inflation. There does seem to be risk of that, as inflation has drifted slightly higher the last three months, which in turn has pushed out the expectations for a first rate cut from March to May or June. My sense is, as long as we don’t see actual rate hikes by the Fed, the market will likely be ok with that.
My theory is that many economists are using the wrong model for the cycle we’re going through now. They believe it’s the ‘70’s, I believe it’s more like the ‘50’s. The inflation of the ‘70’s was born of stagnation, a unionized workforce, lack of competition and external oil shocks. The inflation of the ‘50’s derived from transitioning a wartime economy to a consumer-driven economy. The pandemic (remember the pandemic?) was more akin to a world war than it was to the’70’s. Whole economies were shut down, and supply chains permanently disrupted. As after WWII, consumers came out of the pandemic with pent up demand and money in their pockets and met with a system that was unable to meet strong demand. Hence, higher prices. In either case, once inflation was subdued, it led to a long period of growth. Look for the same to happen this time.
Of course, the elephant in the room is the election. There really has never been an election cycle quite like this one, with one candidate facing 91 felony indictments, and the other showing some signs of age, to put it politely.
How will the market handle that? Time will tell. Although it’s no secret there’s an election coming, it could be that the market is not focused on that just yet. For now, the Fed, earnings and the AI revolution have its full attention.
What to do next? Small caps are showing signs of life. That’s a segment of the market that has lagged so far but could be explosive if it gets some momentum. Finally, there’s nothing wrong with bonds and CD’s. Interest rates are at reasonable levels. For a change, you don’t need to be in the market to earn a competitive return.
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