An Object in Motion (Can) Stay in Motion

Apr 16, 2024

It’s been a good run. The stock market (S&P 500) since its low in October 2023 is up nearly 30% as of the end of March. With this much momentum, it leaves investors wondering: “how long will this last?”

Being skeptical is OK – we’re conditioned to think the stock market behaves irrationally, moving from exuberance to panic in irregular, but frequent phases. Just think about it, in our recent history, the party of strong returns was called off by meaningful market selloffs, to the tune of about 20% or greater, three times– 2018, 2020 and 2022.

A pattern like this makes you think that we’re due for another. Layer in the rumor that there’s an elusive “recession” hiding around the corner and it’s easy to say this is reasonable. However, pervasive thoughts like this can help fuel rallies, rather than end them, as cautious sentiment keeps investors on the sidelines, and that means more potential momentum when the tide changes.

Think of it like kerosene for a fire. Cash that is uninvested is potential fuel for the fire when FOMO (Fear Of Missing Out) starts to take off.  Rallies like this start when the consensus is negative about the future direction of stock prices. Then it takes off when the rest of the world realizes that it’s not as bad as they thought. The final stage of a rally is when the most nervous investor finally gives in and starts buying. When there aren’t any more “bears,” you know there’s a problem.

Remember what Buffett once said: “what the wise do in the beginning, fools do at the end.” Until this healthy amount of skepticism changes into a mantra of “to infinity and beyond,” then it’s possible the market can continue to move higher. Historically speaking, strength begets strength, and it’s common to see multiple years of positive returns without a major market correction of 20% or more, which normally happens every three to five years rather than every other year.

There is one caveat. A correction of 5-10% (and even a bit more), or what we would consider a “minor” selloff, is easily in the cards at some point this calendar year. In fact, even in years where the stock market does well, a selloff to this degree is entirely possible, and frankly, to be expected.

With that being said, the bias is likely that stocks will continue to go up for a while even with a bit of a temporary cooldown included. But there are some things that need to be monitored…

First, which we discussed last quarter, we need corporate earnings to continue to grow – and that means that the US economy must stay on solid footing. So far, so good. But we will have to read the tea leaves from the recent quarter end. It’s possible the consumer is losing some “spending” steam, but if jobs are plentiful for those that want to work and they feel comfortable with their level of wealth (i.e. high house prices and stock market values), then this can carry on for a while, as over two-thirds of the US economy is driven by consumer spending.

Second, we need to side-step major economic shocks. Geopolitical conflicts risk impacting energy and food prices and we all know what surprises in inflation can do. At this point, the market is likely handicapping for these types of events in current prices. However, as we’ve said before, it’s usually the risks that the market hasn’t anticipated or appropriately assessed, that can take it by surprise (the “unknown, unknowns”). The more “unpredictable” risks are the reason we advocate for an appropriate long-term asset allocation of stocks and bonds for a client to manage volatility, knowing that it’s not “if,” it’s “when” we will experience bumps along the way.

Lastly, it is an election year after all, so we should mention this. We will likely talk about this more in coming quarters, but for now we will remind you that political parties in the White House matter a lot less than you think for longer-term market performance. It doesn’t mean that the market won’t experience some bouts of volatility leading into and following the election; but again, this is something that we will prepare for appropriately with asset allocation and security selection.


Speaking of spring, we’re all excited here in Michigan to start seeing some warmer days ahead. Hopefully you had a nice winter season, whether that was up here in the north, or in a much warmer climate. We are grateful to be your guide through all the seasons and appreciate the trust that you have in us to help you navigate the financial markets. Please reach out to us if you have anything you would like to discuss.

Sincerely,

NPF Investment Advisors

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