Be Ready to Buy on a Pullback

The S&P 500 Index has just kept shaking off all the “noise” and churning higher…

It made another new all-time high at 5,254 on the final day of the first quarter (March 28). That capped one of the best first-quarter performances in 20 years (up about 10.2%).

But then, things got a little choppy…

The index closed at 5,147 on Thursday – about 2% below its peak. Then, it rallied about 1.1% on Friday to close at 5,204.

After the recent turbulence, the S&P 500 is now up around 9% in 2024.

The two questions I’m now hearing the most from our Chaikin Analytics readers are…

  1. Can the stock market go up if inflation stays stubbornly higher and the Fed doesn’t lower interest rates?
  2. And if so, what catalyst will propel stock prices higher?

Here’s the thing…

Friday’s 1.1% rally occurred after the Labor Department released a blockbuster jobs report.

The data showed 303,000 jobs added in March. And the unemployment rate fell to 3.8%. It was the 26th straight month with the unemployment rate at less than 4%. That’s the longest streak since the 1960s.

To me, that provides a clear-cut answer to the second question…

A strong economy with a strong consumer driving it.

Right now, the economy is strong. And consumer spending can (and will) continue to fuel the economy.

The University of Michigan’s latest Surveys of Consumers report supports that idea. In early March, the surveys’ creators said succinctly…

The latest reading confirmed the remarkable improvement in consumers’ economic views that began in December 2023.

U.S. gross domestic product (“GDP”) grew 3.2% in the fourth quarter of 2023. And the Atlanta Fed’s GDPNow model forecasts 2.5% GDP growth in the first quarter of 2024.

Corporate earnings are expected to rise as well in 2024. Investment bank Goldman Sachs projects that S&P 500 companies’ earnings will climb 8% this year – with profit margins rising as well.

That brings us to my main point…

With such a strong economy, we might not need rate cuts to sustain the bull market.

Inflation has remained somewhat stubborn. Meanwhile, gasoline prices are up about 16% since late January.

And frankly, as I’ve said previously, negative surprises in economic data releases can trigger even more volatility in the short term.

But the thing is, a host of Federal Reserve governors took “hawkish” stances last week. Those moves have already somewhat cushioned the blow. So we’ll see how it all plays out.

In the end, we still may see one or two rate cuts later this year. That will fuel a post-election rally into the end of the year.

It’s important to remember, though…

Rising earnings and expectations drive stock prices higher – not interest-rate cuts.

My outlook remains “bullish” over the longer term. But I would see any pullbacks of 3% to 5% over the next couple months as buying opportunities.

Good investing,

Marc Chaikin

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