Stock Market This Week – 05/11/24

Get Over It. The Fed Won’t Lower Interest Rates This Year

Many investors and economists are waiting for the United States Federal Reserve to lower interest rates. The logic is that if the Fed does, the economy and market will surge. However, this viewpoint has an inverse logic because the economy and market are already performing well.

The Fed increased interest rates because inflation and the economy’s strength were high. The Fed’s dual mandate is maintaining price stability and maximum sustainable employment. The unemployment rate has been 4% or less since January 2022. Moreover, hiring continues to be robust, beating expectations in most months. However, inflation soared in 2022, and the Fed responded.

That said, high interest rates have brought inflation down, but it is still above the 2% target at 2.7% in March 2024. Prices are still rising and may accelerate because of a tight labor market. Moreover, the economy ended 2023 strongly and slowed somewhat in 2024, but the trend is still upward.

The combination means the Fed is probably pushing a rate reduction announcement to the end of 2024 and, more likely, into 2025. Also, this is an election year, and the Fed may only want to make changes if necessary. Chairman Powell’s recent statement indicated the Fed’s new mantra is higher for longer. He stated, “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” in a panel discussion.

Furthermore, Americans are not behaving as expected regarding higher interest rates. Conventional wisdom is that higher rates mean more personal savings and less spending. However, the opposite is true. Retail sales remain healthy. The bottom line is that a robust job market has allowed Americans to spend, meaning inflation will likely be more than 2% for some time. Consequently, rates will be higher for longer.

That said, I have been buying because high interest rates have made some sectors and equities deals.

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Stock Market This Week

Stock Market This Week – 04/20/24

Data from Stock Rover* showed an excellent week in the stock market. All the main indexes were positive. The Dow Jones Industrial Average (DJIA) had the best return. It was followed by the S&P 500 Index, the Russell 2000, and the Nasdaq Composite.

All 11 sectors had positive returns this week. The Utilities, Financial Services, and Basic Materials sectors were top performers. However, the Energy, Technology, and Consumer Cyclical sectors were the worst performers. Sentiment has seemingly turned against Technology.

Oil prices fell to ~$78 after several weeks of gains. We should expect gas prices to drop some. The VIX declined ~7.5% to 12.5, below its long-term average. Risk perceptions rose until the United States passed the aid bills for Ukraine, Israel, and Taiwan. Gold ended the week at ~$2,370 per ounce.

Despite a few bad weeks, the markets continue to move upward because of the American economy’s strength and the bull market’s continuation. The S&P 500 leads the way, followed by the Nasdaq, the DJIA, and the Russell 2000. Ten of the 11 sectors have positive returns. The top performers in 2024 have been Utilities, Communication Services, and Energy, while the Healthcare, Consumer Cyclical, and Real Estate sectors are trailing.

The dividend growth investing strategy started the year down but has recovered. Larger market capitalization stocks are performing better than smaller ones. The table below shows their performance by category. Dividends and passive income streams continue to grow.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 27.14X, and the Schiller P/E Ratio is about 34.18X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

Despite the recent correction, bear market, and rebound, the market is still overvalued. Based on historical data, earnings multiples of more than 30X are overvalued.

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