The S&P 500 (SPY) continues to make new highs...and the rest of the market looks pretty anemic.
This has been the main investment story in 2024. Especially since the April pullback. This replicates much of what we saw in 2023 til the bull run that started in November that finally broadened out to smaller stocks.
This creates a difficult environment for the average investor to get ahead. Let’s discuss why this is happening along with a game plan to navigate our way to a more profitable outcome.
Market Commentary
The economy is slipping. In just 2 weeks’ time the Atlanta Fed’s GDP Now model fell from 3% expected GDP growth for Q3 down to 1.5%.
The weaker than expected ISM Services reading of 48.8 last week vs.53.8 the previous month was a big part of that reduction.
Some would point out the positives in this weakening of the economy in that it further reduces inflationary pressure paving the way to the first Fed rate cut. On the other hand, some investors may wonder if the Fed will overstay their welcome leading to a future recession.
This morning’s increase in the unemployment rate to 4.1% is an interesting data point to consider. That’s because history shows that once the unemployment rate rises 0.4% it will typically go up another 1.5% from there. And that has just taken place.
Many think of this as a good, but by no means perfect, recessionary indicator. Yet others would point out that the Fed is on purpose trying to slow demand in order to tamp down inflation. Even by their own estimates they saw the unemployment rate climbing to this level, or even a notch higher, and yet still stick a soft landing.
I am not particularly worried about a recession at this time. That’s because any further softening of the economy will beget lower inflation...the Fed will see that forming...and then lower rates to spark the economy.
Investors will play on the side of “Don’t Fight the Fed” when that happens keeping share prices aloft even if there are a few bad rounds of economic data.
Right now most signs point to the September 18th Fed meeting as when the first rate cut will take place. Over the past 12 months I have pointed out that investors didn’t appreciate the patience of the Fed and thus I was one of the few who was not surprised on no rate cuts on the books so far.
Yet now I see things lining up for September 18th like the others. Or November 7th at the latest.
Remember that the Fed likes transparency. So, the first thing they will do is provide a shift in their language that opens up the possibility of the rate cut...and then they will follow through on that action.
Powell’s recent comments on seeing notable improvement in the inflation picture (most likely because of better than expected PCE report) was a step in that more positive direction. Yes, he said more data and patience needed, but he was opening the door wider to the notion of cuts on the way.
Since then, economic data has softened more...and we see Average Hourly Earnings (aka wage inflation) ebbing lower this morning. These are all more facts that will lead the Fed to want to cut rates in coming months.
When those rate cuts arrive, I expect the market to react like it did last November when the Fed’s “dovish tilt” first started. That would be abandoning the safe haven of the Magnificent 7 and other mega cap stocks. Those profits would then be shifted to more Risk On positions.
Like smaller stocks...higher growth stocks...more cyclical stocks that benefit from a pick up in the economy. Or to overly simplify...a reversal of what has been working so far this year.
I like our odds for the POWR Ratings to line us up for ample outperformance in that environment.
Read on below for my favorite POWR Ratings stocks at this time.
What To Do Next?
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Wishing you a world of investment success!
SPY shares were trading at $553.46 per share on Friday afternoon, up $2.00 (+0.36%). Year-to-date, SPY has gained 17.18%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
Investor Alert: Should We Be Worried About Recession? StockNews.com
