The bull keeps raging
Solid earnings, diminishing worries about inflation and hopes for Fed rate cuts are keeping the rally on track.
Cue the Energizer Bunny. The bull market keeps going and going and going…
Stocks continue to build on 2023’s big gains so far this month. The Dow and S&P 500 are at record highs and the Nasdaq isn’t far from its peak either. Earnings from Dow component American Express helped boost sentiment Friday. The credit card giant issued an upbeat outlook for consumer spending.
Investors were also jazzed to see that inflation pressures continue to subside. The Federal Reserve’s preferred inflation gauge…the core PCE index…slowed to 2.9% growth in December. That’s the smallest increase in nearly three years. So the market is betting that the Fed, which meets next week and is not expected to change its key interest rate, could signal that the first rate cut of an easing cycle is coming as soon as March and no later than May.
But is the market ahead of itself? Sure, sentiment is high for both consumers and investors. Many on Wall Street and Main Street seem convinced that there will be a so-called soft landing for the economy this year. Consumer confidence is at its highest level in more than two-and-a-half years. More importantly, retail sales are surging as well. That’s key because it shows that Americans aren’t just saying they feel good about the economy, they are showing this by spending.
As for the market, the VIX, a key gauge of volatility, has slid to about 13 (near multi-year lows) and the CNN Business Fear & Greed Index (which I helped create during my two+ decades there) is back in Extreme Greed territory. The CNN index looks at the VIX and six other measures of investor sentiment. In other words, the bulls clearly outnumber the bears right now. Optimism > pessimism….and it’s not even close.
Still, investors need to be cautious.
When the Fed meets next week, it will be interesting to see what Jerome Powell says in the press conference, particularly about inflation. Any hawkish signs from the Fed chair could put a dent in this rally. The jobs report could also move the markets and change the narrative about inflation and the economy. Wage growth has slowed but remains above historical norms. If that trend continues…especially if jobs gains come in higher than expected…then that could deflate (tongue planted firmly in cheek here) some of the hopes about imminent rate cuts.
Investors also need to pay very close attention to earnings. There’s a data deluge next week. Tech giants Apple, Microsoft, Alphabet, Amazon and Meta are on tap to report fourth-quarter results. (That’s five of the so-called Magnificent 7 of the market.) Earnings are also due out from AMD, Pfizer, Starbucks, Novo Nordisk, GM, Mastercard, Qualcomm, Boeing, Exxon Mobil, Chevron and many other large caps/blue chips/bellwetthers. Keep an eye on guidance. If these companies are upbeat about 2024, that could extend this rally. But any signs of caution could lead investors to start wondering just how much life this bull has left.
It’s not hyperbole to suggest that what happens on Wall Street next week will have ramifications for the market for the remainder of 2024.