Why You Should Be a Cautious Bull

For my trading service Marijuana Profit Alert, I analyze investment opportunities among pot stocks. However, my preferred psychoactive compound for personal consumption isn’t tetrahydrocannabinol. It’s caffeine.

Today, as I guzzle coffee (it’s legal in all 50 states!) and write this issue of Mind Over Markets, my caffeinated synapses are focused on rising risks to the equity rally.

The stock market over the past two weeks has hit multiple all-time highs, but the 12-month forward price-to-earnings (P/E) ratio for the S&P 500 currently hovers at about 23, above the five-year average (18.9) and above the 10-year average (17.6). Stocks have gotten pricey, especially among the Big Tech players.

Persistent robustness in the labor market, coupled with falling inflation and resilient consumer spending, are supportive factors for the bull market. On the other hand, worsening geopolitical turmoil, stretched equity valuations, dysfunction in the U.S. Congress, uncertain Federal Reserve policy, and rising bond yields should make you cautious.

In the coming days, corporate earnings will occupy center stage. Though the economic data calendar appears sparse this week, over a fifth of the S&P 500 constituents are poised to unveil earnings.

About half of the index’s companies have already reported fourth-quarter 2023 results, which have been generally promising. Most of the mega-cap technology companies, in particular, have beaten expectations on the top and bottom lines.

WATCH THIS VIDEO: Will The “Magnificent Seven” Ride High in 2024?

For Q4, the blended year-over-year earnings growth rate for the S&P 500 is 1.6%, according to the latest data from FactSet. “Blended” combines actual results with those that are projected.

During earnings conference calls so far, key themes expressed by management include projections for demand, net profit margins, capital expenditure strategies, monetary policy, and the implications of artificial intelligence (AI).

While fourth-quarter earnings are on a trajectory for a modest uptick from the previous year, the crux lies in the outlook for 2024 earnings expansion. Consensus estimates anticipate a year-over-year growth rate of about 11% for full-year 2024, a pivotal support level for market performance.

I anticipate that economic softness could pose challenges to the rally, but the fact remains, the U.S. economy has averted a recession (for now) and its growth rate is the strongest of any major world economy.

The market’s breadth remains healthy, as evidenced by the rise of the New York Stock Exchange Advance/Decline line (NYAD). The following chart depicts a favorable trend:

Recently improving breadth underscores the wisdom of diversification across sectors and asset classes. For example, utilities performed poorly in 2023 but they’re poised to shine in 2024 as interest rates fall and the economic recovery continues.

Uncertainties abound, especially overseas where strife persists in the Middle East and Eastern Europe. Terrorist attacks in the Red Sea threaten world shipping, which in turn puts supply chains at risk. There’s little ambiguity, though, that the Fed will continue to exert paramount influence on both stock and bond market dynamics in 2024.

Last week’s Fed announcement to stand pat on rates assumed significance not due to any policy alteration but for its role in recalibrating market expectations concerning the timing of forthcoming rate adjustments. Previous expectations for aggressive rate cutting were skewed and needed to be brought in line with reality.

Accordingly, the benchmark 10-year U.S. Treasury yield (TNX) has risen in just the last few trading days from 3.80% to 4.09% (as of market close Tuesday). That’s a worrisome omen that bears close scrutiny. A tailwind for stocks would be the TNX’s sustained decline below the threshold of 4.0%.

Through his press conference last week and subsequent public remarks, Fed Chair Jerome Powell his reiterated the inclination of the central bank to await further evidence of waning inflation before contemplating rate cuts, a communication strategy that appears to have moderately tempered market optimism on rates. Powell has taken a March rate cut off the table.

While longer-term interest rates have exhibited an upward trajectory in response, equity markets have thus far absorbed this message reasonably well.

After closing in the red Monday, the main U.S. stock market indices bounced back Tuesday and closed higher as follows:

  • DJIA: +0.37%
  • S&P 500: +0.23%
  • NASDAQ: +0.07%
  • Russell 2000: +0.85%

You should anticipate bouts of market unease, but the overarching implication is that monetary policy will become more accommodative later this year, a development that will fortify the bull market’s longevity.

Cashing in on the “green rush”…

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That’s why you should consider my investment service, Marijuana Profit Alert.

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John Persinos is the chief investment strategist of Marijuana Profit Alert.

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