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You can’t produce a baby in 1 month by getting nine women pregnant

January 23, 2024

’: Buffett says successful investing is about patience — not great talent or effort. The Oracle hath spoken. 

Do We Chase the Market Here? 

That’s a question I was asked on Friday by a client, and I want to provide a clear answer here, and that answer is this: I’m not, but that doesn’t mean I think the rally can’t continue. I say that because, for the second straight week, the actual news was more bad than good, yet stocks rallied, and that tells us that momentum is still on the bull’s side, technicals are positive, and the path of least resistance is higher. 

But because my time horizon is months and quarters, I don’t buy markets that are moving higher just on momentum. Instead, I simply enjoy the ride until I think the facts of the market are more supportive of a longer-term move. Based on that practice, if I look at actual facts in this market, to buy the market here, it means I’m buying a market that: 

  • It is trading at 19.9X next year’s earnings, a near “max” multiple and not exactly proportionate to the current level of interest rates or general macroeconomic risk/reward setup. 
  • Has priced in extremely dovish rate cut assumptions. March expectations have cooled (it’s about a 50% probability at this point) but the market is still pricing in between four and six rate cuts in 2024. That’s more than double the Fed’s expectation, and Fed officials are now actively and directly pushing back on these aggressive assumptions (as we saw last week). 
  • Isn’t pricing in any slowing of economic growth and is vulnerable to a “growth scare.” 
  • It is lacking, at least to me, a clear and material upside catalyst other than just continued momentum (earnings expectations aren’t likely to rise materially above the $245-ish level; the Fed has already pivoted, and if they get really dovish from here it’s because of growth concerns and there’s no identifiable corporate catalyst like AI looming). 

In reality, the best “reason” I can give anyone for why stocks would rally is simply because it’s the status quo, and it’s the path of least resistance and higher prices beget higher prices until something negative actually occurs. So, while it’s entirely possible the S&P 500 rallies towards 4,900 on essentially “nothing” happening, I’m not a fan of buying stocks, with that being the main reason for the rally. Instead, I’d prefer to allocate more capital once at least one of the aforementioned conditions has been removed (meaning the market prices in the chances of at least one bad thing happening). 

Regarding resilient price action, outside of Friday’s melt-up, last week was impressive but not quite as impressive as it seems. Expectations for a March rate cut were reduced, and that did hit stocks, but the S&P 500 was still resilient, but the reason was tech-related. The TSM earnings boosted semiconductors, which in turn boosted tech (aided by the AAPL upgrade and positive META AI comments) and that lifted SPY. The “market”, however, didn’t do nearly as well. Case in point, SPY rallied 1.1% last week, but RSP declined slightly while the Dow Industrials rose a more modest 0.7% and Russell 2000 declined 0.3% on the week. 

The bottom line is that it’s entirely possible the S&P 500 keeps rallying from here, and this market’s resilience and momentum must be respected. And in no way am I hinting that I’m bearish or advocating substantially reducing equity exposure. But as far as chasing the market at these levels, I don’t think it’s the best time to do so based on the fact that I can’t point to much that will push stocks higher in the medium term other than momentum, and I can point to numerous events that could cause a 5%-ish correction, quickly. It’s at that point I’d be more interested in adding exposure. 

If one must allocate, I continue to want to allocate to lower-volatility names and sectors along with more sector diversification. That strategy worked the first two weeks of the year but not last week. But if growth does slow (which I believe it will in the coming months) then being more defensive should be a strategy that outperforms. 

Now, if that confuses you, here is the bottom line. I believe the markets will be up this year from 10% to 15%. I don’t know exactly how that is going to happen or when. We are 1/3 in dividend stocks as a move responsive to the interest rate cuts by the Fed and as a hedge on our growth positions. We are positioned for a longer term, as Warren Buffet recommends, and we believe the upside is quite good moving forward. 

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