The Weekend Edition is pulled from the daily Stansberry Digest.
We're "officially" in a bull market...
The S&P 500 Index had already risen 20% above its previous lows from 2023. But last Friday, it closed above its previous all-time high from January 2022... and moved higher again this week.
Based on the most widely recognized (and even more conservative) Wall Street definitions, the S&P 500 is now "officially" in a bull market. So you've likely started seeing the claim in mainstream financial news.
Curiously, small-cap stocks – which have historically led the way higher coming out of bear markets – are still lagging in terms of hitting new all-time highs. But they have been leading on the broad market's "up" days lately.
Some "Magnificent Seven" stocks have been going higher than others... But the bullishness isn't limited entirely to popular tech companies or names linked to the artificial-intelligence buzz.
Market breadth is relatively strong. Roughly 60% of New York Stock Exchange-listed stocks are trading above their 200-day moving averages (a technical measure of a long-term trend).
So, why all the bullishness lately?
As my colleague and Ten Stock Trader editor Greg Diamond wrote last Monday, the short-term moves in the market appear to be linked to expectations about the Federal Reserve.
From the macro view, it seems more and more investors have been reconsidering the previously popular idea that the Fed would cut rates in early 2024...
I recently wrote that retail spending was stronger than expected in December and homebuilders are confident amid a recent turn lower in mortgage rates. Meanwhile, initial jobless claims had fallen.
And while I've previously written about the pockets of deflation in the U.S. economy, higher gas prices and sticky high housing prices have kept the pace of headline inflation accelerating over the past few months.
Putting it all together, the thinking is that the central bank will be more likely to keep its benchmark lending rate for banks right where it is.
Fed officials have also been sending signals that they won't be lowering rates at their upcoming meeting on January 30 and 31. Here are Atlanta Fed President Raphael Bostic's thoughts from January 18, for example...
My outlook right now is for our first cut to be sometime in the third quarter this year, and we'll just have to see how the data progress.
For now, all of this has led to choppy market action and slightly higher Treasury bond yields (with the 10-year yield bouncing above 4%)... but not a massive stock sell-off.
That lack of bearish reaction might surprise you. "Aren't rate cuts good for stock prices? Isn't that why the market rallied by double digits to end 2023?"
Yes and no...
For starters, yes, lower short-term interest rates can be better for stock prices over time...
It makes business life and credit flow easier. Investors like that.
But a central bank that's cutting rates (or signaling that it plans to) is a central bank that sees problems in the economy. That, historically, has been terrible news for stocks until the rate cuts stop.
As I wrote in a December Digest...
In the past 50 years, after the Fed has started a rate-cutting cycle, the S&P 500 has dropped by an average of 20% after the bank's first cut before hitting a low, according to data from Bloomberg and global institutional brokerage and advisory firm Strategas Research.
The most recent example was in March 2020. After the central bank announced an "emergency" rate cut to near zero on March 3 as "novel coronavirus" panic began to grip the market, stocks fell 25% and didn't bottom until March 23.
Only after the Fed did more, including making massive bond purchases and even buying equities, and after Congress decided to mail debit cards and checks directly to Americans, did the market start to sharply rebound.
Then came the inflation and... where we are today.
That "where we are today" included the Fed drastically misreading the path of inflation.
But overall, the economy is "good"...
The backward-looking economic data that the Fed uses to make policy decisions has shown that the economy is strong and the pace of inflation hasn't cratered.
In other words, the Fed "pause" will continue, and historically – and perhaps counterintuitively – that's bullish for stocks. As our Dr. David "Doc" Eifrig wrote in a recent issue of his Retirement Trader advisory...
Typically, 12 months following the end of a rate-hike cycle, stocks go up. Take a look at the one-year returns of the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite Index after the end of a rate-hike cycle...
In short, when rates hold steady after a string of hikes, it means the Fed thinks the economy is chugging along fine and dandy with no tinkering needed. That's what investors like to hear.
Futures traders are shifting their thinking, too...
Fed-funds futures traders never thought a policy move at the central bank meeting later this month was in the cards. But now, many traders are betting on rates to remain where they are in March as well. According to the CME Group's FedWatch Tool, the odds are around 53% today compared with 12% a month ago.
In other words, the expectation for a rate cut has been bumped down the road a few months.
In 2022, our team at the Digest used the market's reaction to potentially delayed rate cuts as part of our bearish argument during the "bear market rallies" that ultimately led to lower lows that year...
The difference now is that the annual rate of inflation is still generally falling (even if the month-over-month numbers have ticked higher lately). It was rising at 40-year highs back in 2022.
Remember, the market bottomed in October 2022 when Wall Street started believing that the pace of inflation had peaked. At the same time, fears of a recession were growing because of the expected impact of higher rates.
Today, inflation numbers are within the range of historical "norms" of monthly growth. The Fed's labor-market data is still strong. So, the economy is "good."
If we add it all up, it's a bullish backdrop...
However, time may be running out on this sentiment in the short term – especially if you're a believer in history and cycles.
As Doc recently wrote in Retirement Trader, the time between the start of the Fed "pause" and its end – which has come with rate cuts over the past several decades – has usually been less than eight months...
The Fed stopped hiking rates in August 2023. Eight months later would be this April. That said, you might notice there was a 15-month pause before the financial crisis. And the circumstances are different today than in past pauses, with the threat of high(er) inflation on the table.
So it's probably worth thinking about a scenario where rates go higher before they go lower if the economy heats up again or inflation picks up (the disruptions in the Red Sea could play a role).
Now, before I sign off, I want to discuss a breakthrough that has been years in the making...
This is not hyperbole.
Stansberry Research is celebrating its 25th year of business this year. And on Thursday, we unveiled one of the biggest investment breakthroughs in company history.
It started nearly a decade ago when our founder, Porter Stansberry, began systematically scanning thousands of companies using computers to find "capital efficient" stocks. Little did he realize that he would end up building a system that could deliver an easy-to-digest grade on nearly 5,000 stocks...
And in recent years, our team has been working on taking this tool to a whole new level, with tests to get everything just right. The result has been something that has outperformed the market by up to 10-fold even through the sell-off of 2022.
If you missed the chance to see this tool in action on Thursday, don't worry. You can now watch a replay of the demo right here. Those who watch or listen will get two free recommendations... So make sure you check it out while you can.
All the best,
Editor's note: The S&P 500 just hit a new record high. And yet, some experts are calling for a crash. Our colleague Whitney Tilson went on camera last week to reveal his own prediction for 2024... Plus, he shared why our never-before-seen strategy can help you navigate what's coming – with access to the kind of "quant" system that wealthy Wall Street pros normally keep for themselves. Click here to get all the details.