Dear Reader,
Today I want to check in with you on where we are on the markets…
There’s something funny going on right now in the markets.
I discussed this in Takeover Targets last week, but I felt it was important enough to share with my Diary readers, too…
So, obviously the market is roughly at all-time highs. Things look rosy.
But there’s an indicator called the advance/decline line –
It shows how many stocks are participating in a market rally or decline.
The advance/decline line has fallen the last seven trading days…
Meaning there are a lot more stocks going down than going up.
By last count 376 of the 500 stocks in the S&P 500 were going down.
And the ones that are going up, mega-cap tech, make up such a big proportion of the market that we’re seeing a distortion…
We see, oh, the market’s going higher! The market’s going higher!
Since 2006, this has happened only two other times – 2020 and 2021 – and both times were right before a market correction.
As we’ve been saying, the market is lifted up by immense amounts of fiscal stimulus this year in Biden’s last year in office.
The market rose 29%… and then another 7% since Trump won the presidency.
And that’s fabulous.
But a lot of that recent rise is due to the fact that Trump’s going to lower the corporate tax rate.
At the end of the day, if you lower the corporate tax rate, that means a better P/E ratio, where money goes down to earnings, so of course, it expands the stock price.
This is the reason the stock market has continued to rise.
But really, where does earnings growth come after that?
We’re an economy that grows about 3% a year.
So the S&P 500 earnings growth approximates that, plus or minus maybe 5%, in aggregate.
So where are you going to find real earnings growth?
We’ve already seen the pop up because of the belief Trump’s going to lower the corporate tax rate.
But very smart investors are starting to sell stocks.
They are saying, okay, now what?
And you can see that the argument is starting to change.
So we have that big pop up in the market.
And also, this last week, an inflation print came out that said inflation is still sticky – still around 3%, and that is 50% higher than the Fed’s stated goal of 2%.
And what does inflation at 3% mean?
It means we’re losing 3 cents out of every dollar every year.
You don’t want to keep your money under a mattress, that’s for sure, losing 3% a year.
Look, at the end of the day, we are at a “transition” market, at the very least.
The market has digested Trump’s victory, the fact that he’s going to lower corporate tax rates, meaning more profits go down to the bottom line, stocks pop up.
We are now at that transition.
And now that we’ve digested that, new facts are coming in getting investors to alter their playbook.
So now it’s, okay – if inflation keeps up like this, how likely is it that the Fed’s going to lower rates?
Everyone thinks they’ll lower rates a quarter point, but not much more because inflation is still sticky with Trump’s spending policies that are going to come in 2025.
They’re going to blow out the budget and the deficit, probably to historically the largest in American history by far. We’ll see.
But that’s what it’s looking like.
I hate to say these things before they happen, but we will see.
That would be very dangerous. It would push up yields on bonds.
So my point is, if you don’t see something super, super special you must own TODAY – I would avoid doing anything this week and just see how things shake out. Play it safe.
Remember something: the stock market is like a pitcher and you’re the batter. You don’t have to swing at every pitch.
They don’t call strikes on you if you don’t swing at a pitch.
Sometimes, the best decision is to say, nah, I’m not going to do anything right now. I’m just going to hold and wait for that special opportunity.
And that’s this kind of market we find ourselves in.
Super special opportunities only.
At least this week.
Let’s keep our eyes open.
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“The Buck Stops Here,”
