Bull Market Momentum Is Gaining Strength

A phenomenal first quarter of performance for the major market averages bodes extremely well for the remainder of 2024. Barron’s indicated that when the S&P 500 rises 10% or more in the first quarter of a year, dating back to 1950, the index has finished higher 91% of the time over the remaining three quarters for an average gain of 6.5%. The good news on the quantitative front does not end there, but before I build that case for additional market gains, let me review why I think the momentum behind this bull market is gaining strength.

Financial conditions are easing again on multiple fronts, which is tremendously bullish for risk asset prices in the months ahead, as well as supportive of the economic expansion. We are starting to see positive rates of change in the manufacturing industry and housing market, which is why the Conference Board’s Leading Economic Index is starting to turn up from extremely negative levels. This is also why consumer sentiment rose sharply in March to reach its highest level since 2021. Consumers’ inflation expectations for the year ahead fell to 2.9%, while the 5-10 year expectation edged lower to 2.8%. Again, these are moving in the right direction and with more certainty, which is why consumers’ views about their personal finances and their outlook for the economy improved to levels not seen in two years, according to the University of Michigan survey.

Affirming these views, we had more good news on the inflation front with the Fed’s preferred measure falling for a twelfth consecutive month on an annualized basis. The core Personal Consumption Expenditure (PCE) price index declined from 2.9% in January to 2.8% in February, which is the lowest rate in three years. Most importantly, the supercore rate for services that excludes energy and housing rose just 0.2% in February. Many analysts erroneously asserted last month that the 0.7% spike in the supercore for January was the end of the disinflationary trend. Instead, it was an anomaly, due to seasonality associated with the start of new year. The disinflationary trend is clearly intact, which is why Chairman Powell stated on Friday that the most recent report is “along the lines of what we want to see.”

With financial conditions looser today than before the Fed starting to tighten short-term rates in March 2022, many investors are overly concerned about reigniting inflation. We need financial conditions to loosen for the economy to land softly later this year, but I think those concerned about inflation fail to recognize that the upswing in productivity, which is helping to lower the cost of labor per unit of output and sustain economic growth, is also disinflationary. This is what occurred during the mid-1990’s to deliver our last soft landing. I think that artificial intelligence may be serving us today in the same capacity that the internet did back then.

These similarities, along with the stellar trailing performance of a handful of mega-cap technology stocks, is raising the specter of a stock market bubble, especially among those who failed to see this bull market beginning in earnest in 2023. Yet today’s market is nothing like that of the late 1990s. It looks far more like the mid-1990s. That does not mean we may not approach bubble territory for parts of this market or its entirety at the end of this year or in 2025, but for now breadth is improving as more undervalued stocks start to join the bull market. That is a sign of strength.

Bespoke notes that when the S&P 500 has gained 1% or more for five consecutive months, as it has over the past five months, the forward returns have been stellar for the six- and 12-month periods that followed. Pullbacks in the one- and three-month periods that followed are a clear possibility, but that should come as no surprise given the 25% increase in the S&P 500 since last October. Most impressive is the 100% win rate over the 12-month period that followed this rare performance development, which has occurred for just the 13 th time since 1945.

I can’t be any more optimistic about my outlook for the market and the economy at this point in the cycle, but the opportunity to gain is obviously not as great as it was 12-18 months ago. As certainty grows, market prices reflect that development. One thing that keeps me optimistic is the amount of pessimism still prevalent from pundits and strategists who keep trying to poke holes in the vitality of this expansion and bull market. They clearly can’t see the forest for the trees. Until the rates of change in high-frequency economic indicators begin to collectively become a headwind, I see a soft landing ahead, along with higher levels for the major market indexes.