Stock Market Rolls On

In March 2022, Jerome Powell, Federal Reserve Chairman, and his Federal Open Market Committee (FOMC) commenced with a rate hike campaign to reduce a quickly rising inflation rate.  Not a moment too soon as inflation as measured by the Consumer Price Index (CPI) was nearly out of control by late 2021 and didn't stop rising until its peak at an annualized rate of 9.1% in June 2022.

The Federal Reserve raised the discount interest rate 11 times since March 2022.  The last rate increase was in July 2023 as the CPI trended down from its peak, and currently, the CPI annualized rate for April was reported last week at 3.4% by the Bureau of Labor Statistics.

Even though the CPI is well down, it is 60% above the FOMC's target rate of 2.0%.  This means if the CPI annualized rate is not on track to decline to 2.0% by year-end, there may be more rate hikes. This point seems to be missed by investor analysts and major media who continue to hope for the Federal Reserve to begin lowering rates.  You may recall forecasts in January for as many as seven rate cuts in 2024.  These projections never made sense to us, especially since Jerome Powell has been so clear with the FOMC objectives and strategy.  These are evidently the same people who foretold of a recession in 2023.  Wrong then and most likely wrong now.

None the less, stock investors have remained bullish on the prospects of US public companies' ability to increase both top line (sales/revenue) and bottom-line earnings EBITDA (earnings before interest, taxes, depreciation, and amortization).  The stock market has been rewarding investors with solid account gains the ultimate proof of economic conditions.

The major indices continued the 2023 rally through the first quarter of 2024, with the S&P 500 gaining 10.16% and NASDAQ up 9.11%.  Beginning April 1, the major indices had a brief 19-day declining trend as investors were re-balancing portfolios or taking profits, giving up almost 50% of the year's gain.  For those paying attention, this was a short-lived buying opportunity, especially for hot stocks in AI (Nvidia, Super Micro Computer) that had even larger drops in stock prices. 

However, the declining trend was short-lived as bullish investors resumed their stock buy on April 19, pushing the Dow Jones Industrial Average to an all-time recorded close above 40,000 on May 17.  Lots of hoopla for an index that has underperformed the S&P 500 by 39%! 

The other major indices have also rallied since April 19, and, except for the S&P 600 (Small Cap Index), are all at new all-time record highs.  Below is an outline of the YTD returns of the major indices:

• S&P 500: 11.56%

• NASDAQ: 2.13%

• Dow Jones Industrial Average: 5.79%

• S&P 400 (mid-cap): 8.38%

• S&P 600 (small cap): 1.39%

We have mentioned the underperformance of the S&P 600 for almost a year in prior Weekly Briefs and sold our entire positions in the small-cap sector in our Up Capital Model Portfolios.  Currently, the S&P 600 is still below its previous peak, reached on November 8, 2021, and has had a cumulative return of -0.09% since then. 

What Does This Mean to Me?

The largest US companies, specifically in the technology sector, continue their rally that began in January 2023.  We anticipate the positive trend to continue through 2024.  Missing market rallies like the past 17 months can significantly impact your account's average annual total return.  In fact, we have discussed in previous Weekly Briefs that missing just a few key days a year can substantially reduce your account performance. 

Typically, in election years, investors may become quiet with their trading as November draws near.  Once the election is over, we believe investors will focus on retail holiday sales and year-end profit forecasts and potentially ignore election results.  However, at the beginning of 2025, it is unknown how investors will react to the new administration and proposed policies.  The biggest concern will be tax policies and how the new administration plans to reduce the significant federal debt and deficit.  Taxes are the number one most impactful event in reducing household and corporate income.  If everyone has less to spend, the economy will slow down.  It's simple math.   

We maintain a favorable view of the US economy and stock market.  However, even during positive economic cycles, there are winners and losers.  As mentioned in our Weekly Brief titled "Secrets to Building Wealth" one key is to verify that your investment allocation is current to market conditions and opportunities.  As in cooking, the difference between a great and horrible meal using the exact same ingredients is the allocation.  Too much or not enough of an ingredient can ruin any dish.  Pass the salt, please.

Give us a call or email us to request a no obligation evaluation of your 401k or personal investment accounts.  We welcome the opportunity to assist you in achieving your financial goals, possibly faster than you hoped.