This rally, since the start of the year, has been given many names. The most consistent is the “Rally Everyone Hates.” The primary reason is last year’s doom-sayers assured us of a recession if the Federal Reserve implements an aggressive inflation-fighting rate hike campaign. I question if financial analysts, lending agencies, and bank CEOs (e.g., Greg Becker of Silicon Valley Bank) were concerned about the economy or their own business due to rising interest rates. Adding to the fears were prominent investment analysts appearing on major media objecting to Jerome Powell’s strategy to raise interest rates by way of reducing inflation and alarmed viewers of the potential of a 2023 recession.
In reality, they questioned Mr. Powell and his Federal Open Market Committee (FOMC) assessment of the strength and resiliency of the US economy. In their opinion, the economy was far more fragile, and any change in lending costs to consumers, credit agencies, and businesses would stall economic momentum or, worse, drive people and businesses into bankruptcy.
Now we are in August, and guess what….. no recession! As it turned out, Mr. Powell and his committee were right again, and the economy had the bandwidth to absorb additional lending costs. In fact, the Federal Reserve probably waited too long to start raising rates and should have started in mid-2021 to limit the shock to the economy of an aggressive campaign. However, 2021 had continued economic challenges from the pandemic that included supply chain challenges and the Ukraine war. So, the Federal committee waited as hyperinflation was becoming a real concern by late 2021.
Once the FOMC proceeded with its rate hike campaign in March 2022, investors who only wanted gains sold stocks to take profits after the S&P 500 rallied 71.6% from March 23, 2020, to the end of December 2021. The stock market needed a correction in 2022, whether the Feds raised rates or not after such a strong rally.
These events set the stage for a “surprised” rally in 2023. Surprise to only those not paying attention to Jerome Powell and consumers and hence the title, “Most Hated Rally.” As it turned out, the Feds were right about the bandwidth of the US economy and consumers who, on a national average, are in the best financial condition in decades. The 2022 correction brought stock valuations down and into an attractive buying range and set up institutional investors that sold in 2022 to aggressively buy the same stocks in 2023.
However, rallies will stall for many reasons. The issue to determine is if the rally is taking a reprieve to set up for another leg up or reversing into a protracted correction.
Our opinion is investors are taking profits and looking for new entry points for new investment, and here is why.
First, we have referenced the financial stability of consumers and households with more people working in history. Many homeowners have locked in sub 4% fixed rate mortgage rates that secure their largest expense to never increase. Consumers represent 66% of the US GDP and are a major factor in the stability of the economy. Second, the Federal Reserve did accomplish most of its goal by slowing inflation by more than 50%, which provides more buying power for individuals.
Lastly, the potential of a recession in the near term appears to be low probability. We referenced our research on this in our Weekly Brief titled, “Was There Supposed to Be a Recession?”
Below is a chart of the S&P 500 with its 20 Day Moving Average (DMA), 50 DMA, and 200 DMA.
Illustrated is the index is now below its 20 and approaching its 50 DMA. The good entry points for new money are typically when the index is below its 50 DMA, and best is below its 200 DMA. For reference, daily moving averages identify the trend of the market over the past periods, such as the past 20, 50, and 200 days. In this case, the index is dropping below its past 20 days' trend, meaning the index is declining faster than it has for the past 20 days. Now that it is approaching its 50 DMA means, it is also declining faster than it has for the past 50 days. This indicates the market has been slowing since it peaked on July 31.
The market taking a pause during the third quarter is not unusual, especially after a strong first half year as the market has done this year. Sometimes the bottom of a slowing trend can happen as late as September or October, with some of the most historic one-day declines have been experienced in these months.
What Does It Mean To Me?
We maintain our favorable view of the US economy and stock market. We had projected earlier this year that if the positive momentum continues for the first half year, the stock market and investors may slow their buying by the end of summer. This scenario seems to be developing, and this stall is being set up for good buying opportunities going into the fourth quarter. As mentioned, there is ample evidence of moderate to strong holiday retail sales, which would be good for retailers and set up a positive start for 2024.