Broker Check

Data Was Goldilocks and Powell Pointed Towards June Rate Cuts, So Why Didn’t Stocks Rally?

March 13, 2024

The S&P 500 was flat last week, which is a bit of a surprise given recent history (where the market seems to rally almost by default) and considering that:

1) The jobs report was mostly Goldilocks

2) Powell pointed towards a June rate cut and 

3) What inflation data we received pointed to a continued easing of price pressures. 

Indeed, all those events are positive. The reason they didn’t help stocks rally last week, however, is because they’re nothing new. Put differently, at 5,140-ish in the S&P 500, all those positives (Goldilocks data, June cuts, falling inflation) are already priced in. So, while reinforcing those concepts helps support the market, it’s not going to drive it materially higher from here. 

Meanwhile, there is virtually nothing bad priced into this market, not even a hint, and that’s why Friday’s jobs report, while it fell into the “Just Right” category, also showed an unemployment rate that had risen to 3.9%, the highest level since January 2022! That now joins a growing list of indicators that aren’t signaling weakness, but that are hinting at a loss of momentum. 

To be crystal clear, none of those mean the economy is slowing. Nor do they mean a recession is becoming more likely (it is not at this point). But they do mean that the economy could lose forward momentum and that is simply not priced into stocks at these levels, so that is something new and that’s why markets didn’t rally on Friday. 

Bottom line, I continue to think that slowing growth is the single biggest vulnerability for this market and while overall the economy remains strong and chances of a meaningful slowdown in the near term are low. However, chances of a slowing of growth that catches investors by surprise are not low, mainly because there is zero allowance for it with the S&P 500 at 5,100. And if data points towards a slowing of growth, then a decline of 5%-10% can happen easily due to overextended sentiment and valuations—and that doesn’t even mean we actually get a slowdown, just that investors must acknowledge one may be more likely than expected. 

This is why I continue to remain in favor of a position in dividend stocks because this sector is lower volatility. If we do get any hint of a slowing, these styles and sectors should outperform. Conversely, if the rally stalls and churns, there’s room for these sectors to play “catch up” in a generally rising macroeconomic environment. Finally, even if AI tech continues to push the market higher, these sectors and ETFs will go along for the ride and while they won’t outperform tech, investors won’t be left behind, either. We are also exposed to the tech sectors in our portfolios so we should be at the cutting edge of any move in the market. 

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