“You can’t afford to be out of this market.”
So said colleague Teeka Tiwari in a chat with your editor last evening.
Does that make Teeka a bull?
Hmmm. Yes… kinda. But not the CNBC type of bull who tells you to “buy stocks and don’t worry about it.”
Teeka is more in the camp of saying you must own stocks because if you don’t, you will be left behind.
The caveat is you must also expect volatility… a lot of it.
So how do you manage that? And how can you ensure you don’t allow the market to “panic you out” of stocks just when you should be buying?
It’s not easy. But we’ll share our thoughts below, following this…
Market Data
The S&P 500 closed up 0.6% to end the day at 4,768.37… the Nasdaq added 0.7% to close at 15,003.22.
In commodities, West Texas Intermediate crude oil trades at $73.58, up $1.43…
Gold is $2,053.7 per troy ounce, up $13.20…
And bitcoin is $42,275, up $319 from yesterday.
Now, back to our story…
Two Years of Bull Market Gains Coming
The long story is that Teeka believes the market is setting up for a big run through 2024 and 2025. This will culminate in a market top in late 2025 or 2026.
After which, Teeka says the market will return to a long-term sideways market… last seen in the years after 2000.
Over that time frame, the S&P 500 traded as high as 1,561 and as low as 666. So it’s not as though stocks didn’t move.
But overall, for a long-term buy-and-hold investor, it was a “lost decade.” The market was grinding up and down without seeming to go anywhere.
But we’re not there yet. Before that, there are the next two years to deal with.
And according to Teeka, we’re in for two years of strong market action with a peak around 2025 or 2026. That at least, gives us something to look forward to.
And a big driver of that market will be tech innovation, especially AI (artificial intelligence).
[Editor’s note: We won’t get into the nuts and bolts of AI today. We’ll leave that for another day. But you can check out Teeka’s favorite way to play the AI boom right here.]
Now, despite his bullishness, he warns don’t think for one minute that means it will be a straight line up for stocks.
Due to the influence of government spending, debt, and the Federal Reserve, you should expect those gains to come with a lot of volatility.
The next instance of that is likely around March.
Why March? Simply because it lines up with the Federal Reserve meeting on March 20.
As you’ve likely seen reported in the press, investors are already betting the Fed will cut rates in 2024. The whole “Fed pivot” storyline.
But how likely is that?
After all, the Fed has only just finished… or we assume it has finished… increasing interest rates. Can we really expect rates to begin falling again so quickly?
The market thinks so. According to the futures market, traders have priced in a 73% chance of a rate cut at the March Fed meeting.
That means no increase or decrease at the next meeting in January and a 0.25 percentage point cut coming at the following March meeting.
Of course, that also assumes inflation is low enough to allow for a cut. And given the Fed’s poor record forecasting inflation, we wouldn’t bank on that.
If, as Teeka suspects, the Fed doesn’t cut rates at the March meeting, you can expect a big short-term market sell-off.
And that, says Teeka, will give investors the opportunity to add to your portfolio. Helping you build a position as the market heads for the 2025/2026 peak.
So how do you do that exactly?
Two-Thirds Now, One-Third Later
Teeka says the best approach is when you next buy a stock for your portfolio, only buy two-thirds of your usual position size.
For instance, if you normally buy $5,000 for a large-cap stock, only buy $3,333 instead (two-thirds of $5,000). Then, when the market goes through periods of extreme volatility and stocks fall, buy the remaining one-third of your position. In this example, that means buying $1,666 worth of stock.
Now, these volatile events won’t all be based on what the Fed does or doesn’t do. Although it could be tied to what the market thinks the Fed could do based on certain economic data. Such as weekly jobs or unemployment numbers. Or even the latest inflation data.
But other factors will likely play a part too.
Each quarter we go through earnings season. How the market responds to earnings results can cause stocks as a whole to rise or fall. Especially if we’re talking about influential stocks, which the market views as a bellwether for the economy.
The market often sees Amazon (AMZN) and Walmart (WMT) earnings results as a sign of the strength (or otherwise) of consumer spending. Likewise, the auto industry and housing stocks.
They can give the market a clue about how willing consumers are to buy “big ticket” items, or their willingness to borrow.
And with that kind of data hitting the market almost every day, there are plenty of potential setups for volatility if things don’t go as the market expects.
But the interest rate story will be the biggest influence on what will happen. Looking a little further ahead, the futures market has priced in a 96% chance of an interest rate cut at the Fed’s June meeting.
The market is going all-in on the whole “Fed pivot” story. If the market is right… we guess that should be good news. If the market is wrong, expect more volatility.
As it happens, Teeka’s view is that (given everything we know now) the Fed will likely cut rates at either the May or June meeting… perhaps both.
But what about the alternative? Can’t an investor just sit on the sidelines and wait to see what happens?
That, Teeka says, is impossible. You just can’t afford to do it.
The rate rise cycle does appear to be over. Unless there is something else that causes a sudden increase in price inflation, there’s little chance you’ll see further rate increases.
That means investors (rightly or wrongly) are looking at rate cuts… and if they expect rates to fall, they’ll look for assets that promise the potential for a better yield than cash-in-the-bank.
The result is a flow of money back into stocks. And both growth and income stocks are set to benefit from that. Dividend stocks should benefit as they can promise the potential for dividend growth in an improving economy… and lower interest rates mean lower interest costs for businesses.
And for similar reasons, it should spell good news for growth stocks. Having more stable – and then lower – interest rates should make it cheaper for growth stocks to raise funds, either through capital or debt, to help grow their business.
So all up, a positive outlook. But as we’ve highlighted in recent weeks, investors should never go into any market or investment completely “blind”.
If Teeka is right about the next two years – the volatility and then the end of the bull market – risk management will be even more important than ever.
Betting on winners is great… but only if you put measures in place to keep those winnings. We’ll continue to help you do that in 2024.
AI Coin
Remember to check out Teeka’s latest AI special situation report here.
More Markets
Today’s top-gaining ETFs…
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U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) +3.2%
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SPDR Kensho Clean Power ETF (CNRG) +3%
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Pacer US Small Cap Cash Cows 100 ETF (CALF) +2.7%
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VanEck Gold Miners ETF (GDX) +2.7%
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Invesco S&P SmallCap Value with Momentum ETF (XSVM) +2.5%
Today’s biggest-losing ETFs…
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iShares MSCI Turkey ETF (TUR) -0.8%
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Krane Shares China Credit Index ETF (KBND) -0.8%
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First Trust Flexible Municipal High Income ETF (MFLX) -0.7%
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Global X MSCI Colombia ETF (GXG) -0.2%
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iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH) -0.2%
Mailbag
If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.
Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.
Cheers,
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Kris Sayce
Editor, The Daily Cut