📉 The Debate for a Bearish Q2

Hey everyone — it feels good to be sharing tailored analysis to the masses again!

It’s been a while since I’ve posted analysis besides The Investing Week Ahead or our Week in Review.

In this post, I want to dig a bit deeper into:

• Why the stock market is selling off so aggressively

• Where inflation sits today

• What the Federal Reserve is planning to do about it, and how their actions might impact your portfolio in 2024

⚡️ What’s Going on in the Stock Market?

The S&P 500 is decisively below the 60-day EMA, about -5% below it’s recent all-time-high of 5,275. Additionally, the Nasdaq-100 has also closed below its 60-day EMA — indicating a bearish medium-term set up for traders.

👉 Why Is This Happening?

First, let’s take a moment to zoom out — the S&P 500 Index delivered a +26% return in 2023, while the Nasdaq-100 delivered a +55% return during the same period of time.

This momentum continued into January and February of 2024 as investors were assuming the Federal Reserve would complete between six or seven rate cuts throughout the rest of the calendar year — bringing the Federal Funds Rate down to the 4% range (currently around 5.25%).

Below is a post shared to X by Kobeissi Letter explaining how the Fed Watch Tool was pricing in six cuts as recently as February 1st.

This was bullish for the stock market for many reasons — lower interest rates didn’t just mean “cheaper debt” for enterprises and corporations, but consumers as well.

🔊 Listen Up!

Before we jump into the next section of my analysis, I want to remind everyone that I’m hosting a live webinar on Wednesday, May 8th at 4p EST to teach you all about Direct Indexing. 

Specifically, how this investing strategy can help anyone save thousands (and potentially tens of thousands) on taxes by leveraging automatic tax-loss harvesting strategies through Frec — a platform I’ve become very excited about recently.

⚡️ Introducing… Sticky Inflation

The difference between January / February of 2024 and where we are today (mid-April) is inflation data — specifically how sticky inflation has been in 2024.

As you can see above, year-over-year inflation skyrocketed in 2021 and 2022. This was catalyzed by 1) the government shutting down the economy to “slow the spread,” and 2) the Federal Reserve printing $7 trillion in net new cash as Covid relief.

However, the acceleration in inflation began to subside in 2023 as the Federal Reserve began raising interest rates at the fastest pace in modern history (40+ years).

We were clearly headed for that “historical 2% inflation rate.”

But.. something happened?

During the month of January, inflation reaccelerated month-over-month — breaking a clear deceleration / stagnation in inflation since September of 2023.

After further digging, we learned much of this rise was due to an increase in shelter — so the markets ignored it thinking it would eventually subside like everything else. But then in February we saw much of the same…

Inflation accelerated again! Now the culprit was an increase in energy costs. This was weird, but as you saw from the X post above, the stock market didn’t care — it was still trading as if the Federal Reserve would cut interest rates.

Last week, we received March’s inflation report — and it increased just as much as it had in February, another +0.4% month-over-month.

At this point, equities begin to trade lower as investors come to terms with the fact inflation is stickier than we had originally anticipated.

👉 The Federal Reserve’s New Posture

Fast forward a few more days, and Jerome Powell stated on Tuesday (April 16th, 2024) …

This posture is a complete 180 from what the stock market was assuming just three short months ago.

Three months ago, the stock market was trading at new all-time-highs in anticipation of up to seven rate cuts (high profits for corporations = high stock prices) — now, the market is assuming the first rate cut doesn’t take place until November of 2024. This is very different than the “three rate cuts by November of 2024” narrative investors were hoping for in January and February.

👉 Fund Managers Surveyed by Bank of America Shared the Following:

Despite the hawkish posture the Fed has taken this week, 76% of fund managers are still expecting at least two Fed rate cuts in 2024.

These same fund managers are the most bullish they’ve been since January of 2022 — which is measured by cash levels (being invested / sitting on the sidelines), equity allocation (risk-on vs. risk-off sectors of the markets), and economic growth expectations.

Speaking of economic growth, 78% of these fund managers say a recessions is “unlikely” over the next 12-months — aligning with Jerome Powell’s posture surrounding strong economic growth and low unemployment.

👉 What Does This Mean for Your Portfolio?

Only you know the answer to that, as you’re the sole person responsible for constructing it in such a way that you’re comfortable with. Again, I’m just a guy on the internet.

With that being said, considering we’ve broken decisively below the 60-day EMAs for both the S&P 500 and the Nasdaq-100 … be careful! We very much could be headed toward our other notable moving averages (4,600 to 4,800 for the S&P 500).

I’m not a technical analysis wizard (Katie Stockton is, and if you’re not yet subscribed to her service on Substack you absolutely should be) — but I’m smart enough to know we’ve been riding this trend up and to the right for the last 4-months, and now we’re breaking below key support levels (green line).

Who knows what’s going to happen in the short-to-medium term — the S&P 500 and Nasdaq-100 very much could be taking a healthy and much needed “breather,” causing them to trade down -5% to -10% over the coming months.

Contrarily, a key thesis as to why the stock market has been so bullish over the last 3-4 months has been broken i.e. the Fed was going to cut interest rates six times in 2024.

Now that we might not see a single rate cut in 2024, the stock market could begin to trade with more caution and conviction — only rewarding the companies who are strict with their cash to ensure profits continue to print for shareholders. Specifically, this would mean unprofitable companies (net income, free cash flow, operating cash flow — both GAAP and Non-GAAP) could see continued pressure on their stock prices.

👉 This is What I’m Focused On Doing

As you all know, I’m a 27-year-old looking to retire in his 40s from passive income generated inside of my investment portfolio. If you want more information on my journey to building a $2M dividend growth portfolio from scratch, click here.

At the moment, this portfolio is broken up into four subcategories — the S&P 500, Big Tech, Dividend Growth, and Risky Ideas.

In my humble opinion, the Fed will continue their hawkish posture throughout Q2 and Q3 — but I optimistically don’t think the stock market will stay bearish throughout that entire time period. We’ll likely have a volatile Q2 as investors weigh their original investment theses against their new reality (rates remain higher for longer), but I’m hopeful that Q3 will bring relief.

I’m using the next 4-8 weeks as an opportunity to buy quality companies at fair prices. For those of you who read this edition of the Week in Review, you’ll know I called out five stocks I plan on buying…

• Google (GOOGL)

• Adobe (ADBE)

• Meta Platforms (META)

• Amazon (AMZN)

• Mastercard (MA)

• Costco (COST)

Considering we’re seeing more volatility than I was originally anticipating, below are the names I plan to purchase as well…

• CME Group (CME)

• Nvidia (NVDA)

• On Holdings (ONON)

• Axon Enterprises (AXON)

• A. O. Smith Corporation (AOS)

• Palantir (PLTR)

All of the names shared above operate inside of secular growth trends, pay a growing dividend, or will continue to see positive momentum from AI. Whatever the next 3-6 months bring, I know one thing for sure…

The stock market rises by +11.9% annually, on average, over long periods of time. Trying to time the market by buying and selling and buying and selling is a fool’s errand if you’re a long-term investor like myself.

If you’re a short-term trader, be my guest. I can only speak for my own investment objectives and time horizons. If you also identify as a long-term investor, use this volatility as an opportunity to be a net-buyer of quality companies — including the S&P 500 and the Nasdaq-100.

Do not be afraid of red. Do not be afraid of negative numbers on a computer screen. Unless you’re planning to retire in the next 3-5 years, you should be dollar cost averaging into the markets — both during the green months and the red months.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.