Will the Stock Market Find a Higher Bottom in 2024?

It always amazes me how many market pundits become overly bullish when the market rallies and desperately bearish during downside corrections. Fear and greed are the emotions that drive market prices. Ironically, misinterpreting these emotional components can lead to unfortunate and avoidable losses. Warren Buffett captured emotional responses best when he said, “Be fearful when others are greedy, and be greedy when others are fearful.” Market pundits and analysts do an excellent job highlighting the fear/greed cycle.

On Friday, April 26, the 2.8% rise in PCE, the Fed’s favored inflation gauge, was higher than the forecast 2.7% level. This increase in PCE suggests a potential rise in inflation, which could impact the stock market. The U.S. central bank will likely leave interest rates higher for longer as inflation remains above its 2% arbitrary target. Meanwhile, stocks and bonds rallied after the PCE release, a sign of underlying strength. 

The stock market has been on a bullish path since the early 2009 low. Even the most aggressive bull markets rarely move in a straight line, as periodic corrections are typical. In early May 2024, the stock market remains in a long-term bullish trend, but that does not mean that a downdraft could be on the horizon.

The S&P 500 is the most diversified U.S. stock market index

• The S&P 500 is the leading index reflecting the overall U.S. stock market.
• The S&P 500 moved over 24% higher in 2023 and gained over 10% in Q1 2024 as of May 13.
• The most recent record high was 5,264.85 on March 28, 2024.
• After falling to 4,953.56 on April 19, the S&P 500 recovered to over 5,200 in mid-May 2024.

Every correction since 2007 has been a buying opportunity

• There have been a half dozen significant S&P 500 corrections since the 2007 peak.
• The 2008 global economic crisis, the 2020 worldwide pandemic, and the 2022 Russian invasion of Ukraine triggered the most significant price corrections, but the S&P 500 has always come back to make new highs.
• Buying on dips on a scale-down basis has been optimal for stock market trading and investing.

Higher interest rates have not stopped the stock market’s ascent

• Rising interest rates tend to weigh on stocks as capital flows from equities to bonds, offering increasing yields.
• Inflationary pressures have caused the Fed to shift from an accommodative to a hawkish monetary policy stance in 2022.
• The Fed Funds Rate rose from zero in March 2022 to 5.375% and quantitative tightening has increased yields further along the yield curve.
• The S&P 500 rose to new highs despite rising interest rates.

A volatile period ahead- A highly contentious November U.S. election

• The U.S. electorate is divided over the 2024 U.S. presidential election, with polls showing a very close contest.
• Passions are running high on both sides of the political spectrum.
• S. domestic and international policies could change dramatically as they did after the 2020 election.
• The incumbent has historically low approval ratings, and the former president faces a slew of felony charges.
• Half the U.S. will be unhappy with election results.

Geopolitics can fuel price variance

• The war in Ukraine continues, threatening to escalate beyond its current borders into NATO countries.
• The war in the Middle East poses a threat to world peace.
• China’s reunification plans with Taiwan threaten Asia.
• The bifurcation of the world’s nuclear powers is a clear and present danger to future stability.

While many factors will likely cause increased stock price volatility in 2024, the long-term prospects for the U.S. stock market remain bullish. The trend is always a trader’s or investor’s best friend. Corrections over the past years have been buying opportunities. While scary, price declines have reached significant bottoms, leading to higher highs. There is no reason why this trend will end soon. When the analysts and pundits begin screaming sell-sell-sell, sit back and wait until the dust settles and buy-buy-buy, confident in the stock market's proven resilience and ability to bounce back. Since markets reflect the economic and geopolitical landscapes, uncertainty could fuel lots of volatility over the coming weeks and months.

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