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

Doc's note: Lately, the market can't seem to do anything but go up... The S&P 500 Index continues to hit new highs.

But we'll eventually see some hiccups in this bull market. Today, Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – explains why he's actually looking forward to a pullback in stocks...

For the first time ever, the S&P 500 Index closed above 5,000 early last month...

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

The American consumer and the knock-on effects of the artificial-intelligence ("AI") boom are big reasons for that strength. They're both boosting productivity. And many large-cap stocks are soaring 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.

Everything matches up with the price action of stocks in previous presidential-election years. That's great news for the year ahead.

So, I'm not worried if we see a bit of a pullback in the short term.

In fact, as I'll explain today... I'm looking forward to it.

Hopes of interest-rate cuts sooner rather than later – along with these other factors – have propelled stocks higher in 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 month, the U.S. Bureau of Labor Statistics released the Consumer Price Index ("CPI") for January. It showed an unexpected (but minor) uptick in the core inflation rate.

Notably, it dashed hopes of an imminent rate cut.

We also saw the Personal Consumption Expenditures ("PCE") Price Index release a couple of weeks ago. That's the Federal Reserve's preferred inflation gauge. And while it showed the slowest annual increase since March 2021, core PCE rose 0.4% on a month-to-month basis. That's the biggest rise since January 2023... and an increase from December's inflation growth.

So the news on inflation is mixed. And all told, 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.

You see, with lower interest rates and a resilient domestic economy, we'll likely see a resurgence in small-cap stocks. And I also expect the strength of the S&P 500 will broaden out into the other 493 stocks beyond the "Magnificent Seven" tech mega caps.

That doesn't mean tech stocks will suffer, though. I still expect big things from this space as demand for AI chips and software keeps growing...

Based on the Technology Select Sector SPDR Fund (XLK), tech stocks surged more than 50% in 2023. It was a massive climb.

Since 1990, this sector has surged more than 40% in a single year seven times. According to data from Bespoke Investment Group, tech stocks continued to rally the following year in six of those seven instances. And they produced an average gain of nearly 22%.

That points to even more possible upside ahead for tech stocks.

And remember, another potential driver for stocks in general is that 2024 is a presidential-election year...

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.

Why is the market so strong in presidential-election years?

Well, it comes back to the power of the president to pump up the economy and make voters feel good in November. And 2024 shouldn't disappoint on that front...

Interest rates and inflation are still down significantly from their highs. Meanwhile, wages are still on the rise. And consumer sentiment is already on the upswing.

A less visible (but equally as important) factor is the end of the Fed's quantitative-tightening efforts – policies designed to reduce its balance sheet. The January meeting minutes showed that the Fed is still wary about the risks of cutting rates too soon.

So with the Fed unlikely to consider approving rate cuts until June, it's crucial for investors to remain patient as we navigate the first half of 2024.

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, which will both happen 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

Editor's note: According to Marc, a presidential election offers unique moneymaking opportunities (or money pits if you don't know what to invest in). He recently shared all the details of this crucial market cycle and why millions of folks could lose money.

Click here to learn more.