Can Stocks Keep Rallying?

In his 1605 classic, Don Quixote, Miguel Cervantes wrote, “No limits but the sky.” In 2023, market participants worried that increasing interest rates would increase recessionary pressures, causing corporate profits to decline. Moreover, higher rates on fixed-income investments traditionally cause capital to move from stocks to bonds.

Market sentiment was not all that bullish for stocks in 2023, but the leading indices posted significant gains. Last year, the Dow Jones Industrial Average rose 13.7%. The tech-heavy NASDAQ composite posted an impressive 43.4% gain, and the S&P 500, the most diversified U.S. stock market index, moved 24.2% higher. Even the small-cap Russell 2000 was 15.1% higher last year. The DIA, QQQ, SPY, and IWM ETFs reflect the price action in the four leading U.S. stock market indices. After a little over two months of price action in 2024, the bullish price action continues.

The indices are performance benchmarks. Money managers and financial experts who cautioned about the risks of a recession last year are now primarily bullish on stocks because they have no choice.

New highs in the DIA and QQQ ETFs

• At $390.18 per share on March 4, the Dow Jones Industrial Average ETF, DIA, was 3.5% higher since the end of 2023.
• At $443.54 per share on March 4, the NASDAQ Composite ETF, QQQ, was 8.3% higher since the end of 2023.
• The QQQ was at new record highs in early March 2024.

 SPY and IWM experience bullish price action

• At $511.98 per share on March 4, the S&P 500 ETF, SPY, was 67.7% higher since the end of 2023.
• At $205.51 per share on March 4, the Russell 2000 ETF, IWM, was 2.4% higher since the end of 2023.
• The SPY was at a new record high, while IWM was below the November 2021 record peak.

 The volatility index is steady but reflects the higher S&P 500

• The VIX measures the implied volatility of put and call options on S&P 500 stocks.
• Options are price insurance- The demand for price insurance tends to rise in bear markets and fall in bull markets.
• The VIX index was at the 13.49 level on March 4, 8.4% higher than the 12.45 level at the end of 2023.
• The higher VIX indicates that stock market participants remain cautious despite the bullish price action.

 Rates are not rising, but they are not falling either

• The Fed has kept the short-term Fed Funds Rate steady at a midpoint of 5.375% since the second half of 2023.
• After falling to the lowest level since 2007 at 107-04 in October 2023, the U.S. 30-Year Treasury Bond futures recovered to 125-30 at the end of 2023. The long bonds were rangebound at the 119-120 level on March 4, 2024.
• Bonds are searching for direction as the Fed turned slightly dovish in late 2023 but is waiting for inflation to fall toward its 2% target in 2024. The latest inflation data was slightly hotter than expected, curbing the market’s enthusiasm for lower interest rates.

 The factors that could derail the current stock market rally

• More inflationary data over the coming months will delay rate cuts, and any significant increase in the economic condition could cause the Fed to tighten credit, weighing on stock prices.
• The geopolitical landscape remains a tinderbox of potential problems. The stock market hates geopolitical surprises that could cause a sudden downdraft in the leading indices.
• The U.S. election remains highly contentious and a toss-up in early March 2023. The election will likely be a rematch of the 2020 contest. Any surprises could cause volatility in stock prices over the coming months.

The stock market’s trend is bullish in early March 2024, and bonds were trading sideways. The market’s bearish sentiment was wrong in 2023 and is more bullish than negative in early 2024. The most bearish factor for the stock market could be the capital chasing stocks higher over the past months.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!