Why You Shouldn’t Panic if the Market Takes a Breather

For the first time ever, the S&P 500 Index closed above 5,000 earlier this month…

And despite a brief pullback early last week, it went on to hit a new all-time high just two days later.

Meanwhile, the U.S. economy is surprisingly strong…

The American consumer and the knock-on effects of the artificial-intelligence (“AI”) boom are a big reason for that strength. And it’s pushing many large-cap stocks to new highs.

We can see the enhanced productivity through rising profit margins. And in turn, companies are reporting earnings surprises and generally positive forward guidance this quarter.

In the end, as I’ve stressed previously, everything matches up with the price action of stocks in prior presidential-election years. That’s great news for the year ahead.

So, the reality is that I’m not worried about a bit of a pullback in the short term.

In fact… I’m looking forward to it.

Hopes of interest-rate cuts sooner rather than later – along with other factors – have propelled stocks higher over the first six weeks of 2024. And the mainstream financial media led some market participants into unrealistic expectations of five to seven interest-rate cuts this year.

The prevailing narrative was that these cuts could start as soon as next month.

Well, the market just got a reality check.

Last week, the U.S. Bureau of Labor Statistics released the January update of the Consumer Price Index (“CPI”). It showed an unexpected (but minor) uptick in the core inflation rate.

Notably, it dashed hopes of an imminent rate cut.

That means an early rate cut is effectively off the table now. A more realistic scenario is three to four rate cuts starting in the second half of the year.

Now, the market will need to process this “later than hoped for” rate-cut timeline. That could play out in the days and weeks ahead. But when the dust settles, it means one thing…

We’re likely going to get another great entry point into this market.

And remember, we’re in a special environment this year with a presidential election looming. Since 1950, the S&P 500 has rallied in 14 of 18 presidential-election years.

The strength was concentrated in the back half of the year, too. It was up from the end of May through year-end in 16 of those 18 years – with an average gain of 10% over that six-month period.

But we haven’t gotten to June yet.

In other words, the next three to four months are historically the most challenging period in a presidential-election year. And this year will be no exception…

I expect to see volatile and choppy price activity until we get closer to the Democrats’ and Republicans’ national nominating conventions. They’ll both happen later this summer.

Don’t let any brief profit-taking scare you. Keep your eye on the ball and stay “bullish”… I certainly still am for 2024.

Good investing,

Marc Chaikin

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