Why You Shouldn't Panic if the Market Takes a Breather

Editor's note: We have a looming presidential election... a slow battle against inflation... and stocks at new all-time highs. But according to Marc Chaikin, founder of our corporate affiliate Chaikin Analytics, all this uncertainty is setting up a unique opportunity. In this piece – adapted from two recent issues of the Chaikin PowerFeed daily e-letter – Marc explains why the upcoming election is good news for the stock market... and shares how to prepare for the second half of the year.

For the first time ever, the S&P 500 Index closed above 5,000 early last month...

Meanwhile, the U.S. economy is surprisingly strong...

The American consumer and the knock-on effects of the artificial-intelligence ("AI") boom are big reasons for that strength. They're both boosting productivity. And many large-cap stocks are soaring to new highs.

We can see the enhanced productivity through rising profit margins. And in turn, companies are reporting earnings surprises and generally positive forward guidance this quarter.

Everything matches up with the price action of stocks in previous presidential-election years. That's great news for the year ahead.

So, I'm not worried if we see a bit of a pullback in the short term.

In fact, as I'll explain today... I'm looking forward to it.

Hopes of interest-rate cuts sooner rather than later – along with these other factors – have propelled stocks higher in 2024. And the mainstream financial media led some market participants into unrealistic expectations of five to seven interest-rate cuts this year.

The prevailing narrative was that these cuts could start as soon as next month.

Well, the market just got a reality check.

A couple of weeks ago, the U.S. Bureau of Labor Statistics released the Consumer Price Index ("CPI") for January. It showed an unexpected (but minor) uptick in the core inflation rate.

Notably, it dashed hopes of an imminent rate cut.

We also just saw the Personal Consumption Expenditures ("PCE") Price Index release yesterday. That's the Federal Reserve's preferred inflation gauge. And while it showed the slowest annual increase since March 2021, core PCE rose 0.4% on a month-to-month basis. That's the biggest rise since January 2023... and an increase from December's inflation growth.

So the news on inflation is mixed. And all told, an early rate cut is effectively off the table now. A more realistic scenario is three to four rate cuts starting in the second half of the year.

Now, the market will need to process this "later than hoped for" rate-cut timeline. That could play out in the days and weeks ahead. But when the dust settles, it means one thing...

We're likely going to get another great entry point into this market.

You see, with lower interest rates and a resilient domestic economy, we'll likely see a resurgence in small-cap stocks. And I also expect the strength of the S&P 500 will broaden out into the other 493 stocks beyond the "Magnificent Seven" tech mega caps.

That doesn't mean tech stocks will suffer, though. I still expect big things from this space as demand for AI chips and software keeps growing...

Based on the Technology Select Sector SPDR Fund (XLK), tech stocks surged more than 50% in 2023. It was a massive climb.

Since 1990, this sector has surged more than 40% in a single year seven times. According to data from Bespoke Investment Group, tech stocks continued to rally the following year in six of those seven instances. And they produced an average gain of nearly 22%.

That points to even more possible upside ahead for tech stocks.

And remember, another potential driver for stocks in general is that 2024 is a presidential-election year...

Since 1950, the S&P 500 has rallied in 14 of 18 presidential-election years.

The strength was concentrated in the back half of the year, too. It was up from the end of May through year-end in 16 of those 18 years – with an average gain of 10% over that six-month period.

Why is the market so strong in presidential-election years?

Well, it comes back to the power of the president to pump up the economy and make voters feel good in November. And 2024 shouldn't disappoint on that front...

Interest rates and inflation are still down significantly from their highs. Meanwhile, wages are still on the rise. And consumer sentiment is already on the upswing.

A less visible (but equally as important) factor is the end of the Fed's quantitative-tightening efforts – policies designed to reduce its balance sheet. The January meeting minutes showed that the Fed is still wary about the risks of cutting rates too soon.

So with the Fed unlikely to consider approving rate cuts until June, it's crucial for investors to remain patient as we navigate the first half of 2024.

In other words, the next three to four months are historically the most challenging period in a presidential-election year. And this year will be no exception...

I expect to see volatile and choppy price activity until we get closer to the Democrats' and Republicans' national nominating conventions, which will both happen later this summer.

Don't let any brief profit-taking scare you. Keep your eye on the ball and stay bullish... I certainly still am for 2024.

Good investing,

Marc Chaikin

Editor's note: Last night, Marc sat down to deliver an urgent warning for 2024. You see, millions of investors are about to be blindsided by one dramatic market event that could rock U.S. stocks. It hits every four years... with 90% certainty. Yet most folks don't understand what it means for their investments.

Marc explained why this cycle is so important to your financial success. He also revealed the details behind a system that's guiding his investment outlook this year... Plus, he shared the name of one stock he thinks will soar very soon (and one he believes will crash in the weeks ahead).

If you missed Marc's conversation, don't worry. You can watch a replay of the event right here.

Further Reading

"The biggest elections of all tend to be great news for stocks," Sean Michael Cummings writes. It might feel dangerous to invest ahead of the presidential election. But according to history, the opposite is true. Elections are notably bullish periods for the market... Read more here.

The latest "national distraction" is already playing out in the U.S. But don't let the noise fool you. Acting on every political headline is a surefire way to miss out on great opportunities – and make the wrong investments... Learn more here.