The Equity Rally: Is The Market Pulling a Kramer?

Today for investment insights, instead of turning to super investor Warren Buffett, let’s consider hipster doofus Cosmo Kramer.

As the stock market rally forges ahead, I’m reminded of an episode in Seinfeld, when Kramer drives continuously to see how far he can go on an empty tank of gas. His experiment becomes increasingly absurd as he refuses to refuel, pushing the boundaries of common sense and automotive physics. He eventually gets stranded.

Last week, the Dow Jones Industrial Average and S&P 500 posted new record closes. Valuations are getting stretched, especially in the technology sector. Are investors continuing to drive the market further, even though the tank is running out of fuel?

Despite the warnings of pessimists, I think the broader bull market has plenty of gas left. Below, I’ll explain why. I’ll also show you how to position for portfolio for the year ahead.

The bull case remains intact…

The Federal Reserve is poised to trim interest rates later in the year, and the U.S. economy is racking up the best rate of gross domestic product growth among advanced economies. Consumers are showing signs of fatigue, but they’re still spending amid a strong but not overheated jobs market.

It’s amazing to me that most Americans still kvetch about the economy, even though the U.S. unemployment rate currently stands at 3.7%, a 50-year low.

Corporate profits are healthy, too. This earnings season, the operating results of S&P 500 companies are generally beating expectations on the top and bottom lines and profit growth is projected to accelerate in future quarters.

However, this formidable rally is not impervious to risks. Notably, market leadership has been concentrated among the mega-cap tech stocks, largely due to the frenzy over artificial intelligence (AI).

Political turmoil poses a risk, too. I usually counsel investors to ignore electoral drama as far as their portfolios are concerned, but not this year. The political zeitgeist is incoherent anger, and frankly, the U.S. presidential election could erupt into violence (again) and unsettle the markets. Meanwhile, Congress is paralyzed by polarization.

Although generally inflation has been falling, deflation hasn’t been moving in a straight line. The latest U.S. inflation reports have been hotter than expected; additional unpleasant surprises could await down the road.

Even the mightiest of rallies need to occasionally take a pit stop. Although I’m bullish over the long haul for 2024, we’re likely to experience pullbacks. However, you should view selloffs as buying opportunities to pick up quality stocks at bargain prices, especially among sectors of the market (e.g., cyclicals) that have gotten less attention than the well-hyped Silicon Valley story stocks.

As the following chart shows, we’re coming off another solid week:

Tailwinds are still in place, but I’m starting to hear analysts compare the current bull market in tech stocks to the dot-com bubble of the late 1990s. These comparisons are fatuous. The “Magnificent Seven” and other tech leaders are for the most part posting robust earnings growth, a stark contrast to their dot-com predecessors. Tech valuations are undeniably frothy, but they aren’t at nosebleed 1999 levels. There’s a big difference between chipmaker Nvidia (NSDQ: NVDA) and, say,

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

Market expectations for the timing of a Fed rate cut have been pushed from March to mid-summer, a calibration that’s more reasonable. And yet, despite the emergence of a less optimistic view on monetary policy, Wall Street hasn’t freaked out. That’s a sign that the rally is on firm ground.

The Fed is on course to slash rates at some point this year, and history shows that stocks soar after the central bank pivots.

As this chart shows, the benchmark SPDR S&P 500 ETF Trust (SPY) hovers well above its 50- and 200-day moving averages, which denotes strong momentum (data as of market close February 26):

At the same time, the New York Stock Exchange Advance/Decline Line (NYAD) has been rising, indicating greater market breadth as non-tech sectors (e.g., utilities and health care) play catch up. Small-cap stocks, which lagged in 2023, also are poised to rotate into leadership positions this year as the economy expands.

Let’s not mistake the tech sector’s ascendancy for a bubble. Yes, tech valuations are high, but the mega-trends propelling major tech stocks (e.g., AI and the Internet of Things) are ensconced for the long term.

The week ahead…

The following economic reports, scheduled for release in the coming days, warrant close scrutiny. We face a busy week of market-moving data:

New home sales (Monday); durable goods orders, S&P Case-Shiller home price index, consumer confidence (Tuesday); U.S. gross domestic product (Wednesday); initial jobless claims, personal income, personal spending, the personal consumption expenditures index (PCE), pending home sales (Thursday); S&P U.S. manufacturing PMI, ISM manufacturing, construction spending, consumer sentiment (Friday).

Keep a particularly close eye on the PCE. The PCE is the Fed’s preferred inflation measure because it covers a much broader range of spending than the consumer price index (CPI), which only reflects out-of-pocket spending. If Thursday’s PCE report disappoints, stocks might (temporarily) swoon.

As investors await these important reports, U.S. stocks closed slightly lower Monday as follows:

  • DJIA: -0.16%
  • S&P 500: -0.38%
  • NASDAQ: -0.13%
  • Russell 2000: +0.61%

I’m not necessarily expecting a correction over the near term, but it would be healthy if stocks consolidated. Regardless, three ingredients should keep the bull market going: increasing corporate profits, the avoidance of a recession, and a more dovish Fed. Unlike the show Seinfeld, this rally isn’t about nothing.

PS: If you’re looking for new growth opportunities, don’t ignore alternate investments…such as cryptocurrency.

Consider this fact: the “blue chip” of crypto, Bitcoin (BTC), gained 156% in 2023. BTC and the broader crypto realm are on the cusp of a new bull market in 2024.

Every portfolio should have some sort of exposure to crypto. But you need to be informed, to make the right choices. Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

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