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Have We Landed the Plane?

by Keith Gangl, CFA


Posted on March 1, 2024

The U.S. large stock market indices, the S&P 500, Dow Jones Industrial, and Nasdaq, are all creating new all-time highs on a regular basis and have displayed significant strength since last September. While the investment discussion in this group has largely been centered around the “Magnificent Seven” (MSFT, AAPL, NVDA, AMZN, GOOG, META, and TSLA) and their size and influence, many other stocks outside that group are rallying significantly as well.   

From an economic perspective, concerns that have been at the forefront of investors have slowly been eroding. High inflation levels are coming down which has led to the Federal Reserve discussing interest rate cuts instead of increases. The job market has remained historically strong and incredibly resilient, and this has facilitated both the willingness and ability of the U.S. consumer to continue to spend money (the lifeblood of our economy). Further, at this time last year, there was an overwhelming consensus that a recession was a near certainty. This has been replaced by greater confidence in a soft landing / no landing scenario where we could avoid a recession and even potentially accelerate GDP growth.

From a business perspective, corporate earnings continue to grow, and while expectations for the magnitude of growth have moderated slightly, there is no sense of impending doom. Significant initiatives like artificial intelligence (AI) and re-shoring industrial production back to the U.S. have gone from the planning stage to broad implementation. This has led to sizable growth for companies that benefit from these trends.

While stocks have performed well year to date, bonds have been laggards. The primary reason is the change in sentiment regarding interest rates. At the end of 2023, when the Federal Reserve first signaled that they may stop raising rates, bond investors placed aggressive expectations on interest rate cuts. Throughout 2024, this sentiment has shifted toward “high for longer” and interest rates have risen while bond prices fell. Despite the negative returns year to date, bond investors are achieving higher yields than they were a few years ago and that is typically a good backdrop for better future bond performance. 

While all the above paints a rosy picture, investment concerns never go away, they just pivot to other areas. The price-to-earnings (P/E) valuation of the S&P 500, or what we are paying for the stocks in that index, is now above the 5-year and 10-year averages. This has led many investors to draw parallels to the late 1990s and ask questions like “when will the bubble burst?” The next concern, brewing but not yet bubbling over, is the upcoming election. The time from now to November is likely to be filled with pundits and predictions of impending doom given the upcoming victory of one party over the other in what will likely be a very close and highly contentious race all the way to the end.   

At Gradient Investments, we consistently preach prudent investing. In October 2023, prudence meant staying invested and avoiding the temptation to “sell everything” to achieve the more certain, but ultimately much lower, returns from cash. Investors who have maintained prudence have been rewarded for their patience. In February 2024, we are in a different place. The S&P 500 has experienced a significant rally and will likely experience a 5% or even 10% correction some time in 2024. This isn’t prognostication but rather an acknowledgement that corrections happen nearly every year, even in high returning stock market years. 

So, a prudent investor understands that while a future correction is likely, selling out of stocks or avoiding investing at all-time highs to “wait for a better entry point” is an extremely difficult proposition and not a recommended strategy. Further, despite their concerns, prudent investors will avoid emotional decisions that deviate from their long-term plan based on short-term issues like corrections or election results. A prudent investor understands that protecting assets while also participating in rallies may sound like opposites, but their tailored investment plan allows for those opposing ideas to work together to achieve their objectives in a way that fits their risk tolerance.


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