We are entering the “digestion” phase for this bull rally. That is after stocks go on a big bull run and then run out of steam. But instead of a pullback or correction, stocks just kind of linger in a tight trading range.
The hallmark is stocks not pressing higher. And all dips are shallow and short lived.
This begs the question as to what comes next?
That will be the focus of our Reitmeister Total Return commentary today.
Market Commentary
The digestion phase is clearly shown in this 6 month chart for the S&P 500 (SPY).
The gains from the end of October lows are impressive. But coming into mid March the market has run out of steam.
Instead of the classic 3-5% pullback we are just kind of trending sideways. Digestion phase is one name for this. Consolidation is another. And trading range is yet another.
Granted we all love when the market just keeps pressing higher and our net worth is on the rise. However, we can also appreciate that pace of rapid gains is unsustainable. Especially when you consider the long term average annual gain for stocks is closer to 8% and we are up about 50% from the market bottom just 18 months ago.
With no recession in sight, then the main focus for investors has been when the Fed will start cutting rates. We will get some more clues on that front in coming days including the CPI report on 4/10 followed by PPI on 4/11 and then the Fed’s favorite inflation indicator, PCE, on 4/25.
There is absolutely nothing that could show up in these reports that would get them to cut rates in May. The focus is on whether June or July is the starting point.
Right now, CME measures the probability based on investor actions at 58% chance of a cut in June increasing to 75% chance for July. Given the facts in hand, plus conservative nature of the Fed I would bet on July. But honestly its kind of irrelevant.
Investors have been wrong about the start of rate cuts for about 8+ months. And yet it has not stopped them from bidding up stocks to record highs.
This fits in with a potential “buy the rumor, sell the news” narrative. Meaning that we all know at some point that rates will be cut. So that allows us to buy stocks in advance. But it also means that there may not be much juice left to squeeze after the cuts are finally announced.
That is why I am on record with a year end price target of 5,500 for the S&P 500. Less than 5% above the recent highs.
I have not put out a target for 2025...but given the tremendous gains in hand I expect fairly tepid results for the large cap index. This fits in with the historical pattern that year 3 of a bull market is generally a little bit sleepy.
Here is some evidence from other recent bull markets:
+28.36% in 2003
+10.74% in 2004
+4.83% in 2005
And then after the Financial Crisis bear market we see:
+25.94% in 2009
+14.82% in 2010
+2.10% in 2011 (almost all of those gains were dividends)
So now as we consider the new bull market that started in 2023 we see the following:
+24.23% in 2023
+10.16% end of Q1 2024...probably +15% by year end if hits 5,500 target
This points to 2025 as being set up as a bit of a sleeper. But I sense that sleepiness really starts after any initial boost from rate cuts. And then I see a hefty round of profit taking before end of the year rally pushes stocks higher once again.
This should upset NO ONE.
That’s because the average bull market lasts a little over 5 years. They always come roaring out of the gate...then tire...then have a nice push into the finish line before the next bear comes out of hibernation.
Long story short, it is wise to stay bullish. Just consider that the easy money has been made and investors would have to look longer and wider to find stocks with more attractive upside potential.
That is not a problem for those of us using the POWR Ratings which has beaten the S&P 500 by nearly 4X annually since 1999. And yes, that advantage stayed true during those tame years.
For example, 2005 only produced +4.83% for the S&P 500 and yet our A rated stocks rose +28.61% that year. 2011 was not as spectacular, but still a nice edge with better than 3 to 1 result above the broader market.
The point is that the time for stock pickers has arrived. And I very much like our odds to enjoy strong performance thanks to the clear advantage of our exclusive POWR Ratings system.
What To Do Next?
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Wishing you a world of investment success!
SPY shares were trading at $518.64 per share on Tuesday afternoon, down $0.08 (-0.02%). Year-to-date, SPY has gained 9.46%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
Does the Stock Market Have Indigestion? StockNews.com
