Broker Check

“Analysis Paralysis” and Six Reasons for Bullishness

| March 18, 2024

There was a consequential consumer price index print last week, given the “hot” January CPI that triggered a deluge of market top callers. That January report was reflected in the bond market to an extent, as 10-year Treasury yields surged and held steady around 4.0%.

Resulting equity investor weariness suggested the market would be vulnerable to another “hot” print. However, we at Cornerstone think that was already baked in due to an understanding of early-year seasonality.

It appears that was the case as markets rose despite a slight upside surprise with inflation. We think the market was smart enough to take in the residual seasonality that should eventually fade. Remember, the two biggest inflation drivers continue to be housing and auto insurance, which historically lag and should show improvements later this year.

Additionally, market resilience was reinforced by the latest Federal Reserve employment report, with unemployment figures at a two-year high:

That may seem odd, but it supports interest rate cuts. In fact, Fed Chair Jerome Powell reiterated a commitment to cutting rates a little over a week ago.

Furthermore, market breadth continues to improve, particularly for small-cap stocks. Smaller stocks picking up steam is helpful and supports the market’s current resilience.

Debating and Waiting

The consternation leading up to the last CPI report somewhat reflects a broader issue. That is, many investors haven’t trusted this market (many still don’t). But this is a bull market:

The disbelief and lack of trust created significant inaction for many investors. But the debating and waiting caused them to miss out on some big opportunities.

A record amount of cash still sits on the sidelines. Some estimates say it’s $8.8 trillion. More than $6 trillion sits in money market accounts alone:

As these investors sat idle, equities markets roared. Since Oct. 27, 2023, every index we monitor gained ground:

For perspective, the S&P 500 jumped almost 26% since October 2023’s lows (as of this writing). The index was positive in 59 of the past 90 trading sessions (a 65.6% success rate). The average daily gain was 0.25%. If that rate held, the S&P 500 would gain 87.5% in a year.

Of course, markets fluctuate, making such yearly performance unrealistic. Still, this underscores the dangers of “analysis paralysis.” As some investors wondered, others made money.

In the meantime, MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” investor buys and sells, fell from overbought territory. However, the BMI is holding steady around a healthy 70.0% clip:

This is because of continued buying and minimal selling. There has been some selling though, and that’s a positive. Markets need to ebb and flow. It would be concerning if there was only buying and no selling – the market would go extremely overbought and be ripe for a significant correction. But that's not happening now:

Since 1990, MAPsignals data shows the ratio of “big money” buying to selling as 63.0% buys versus 37.0% sells. Since the October 2023 lows, it’s 75.6% buys against 24.4% sells.

Obviously, the latter buy figure is significantly higher and thus caused the BMI to go overbought. But since it fell from overbought on Feb. 5, the buying average is a more reasonable 71.6%.

What does that mean?

We think buying retractions led to a “perfect storm” of healthy buying and healthy selling. We aren’t seeing outsized selling pressure to indicate a crack in this bull market yet.

Investors can debate on whether the market should be rising, why it's rising, or why certain stocks seem to gain daily. These are all valid discussions. In the meantime, stock values are undisputably increasing.

Investors should want to be in stocks while they rise until there are convincing reasons otherwise. We’re always looking for them, but to be clear, we don’t see much on that front – we still see plenty of encouraging data.

Six Reasons for Bullishness

We’ve spoken before about a possible short-term course correction post the most recent earnings season. That may still materialize. But if we’re wrong, we won’t be sad.

Our outlook for 2024 remains bullish. The next six charts show why.

With the economy growing steadily, the Fed delayed easing. But that hasn't ended the rally. If the economy is expanding and rate cuts occur, it doesn't matter whether they start in March or July.

As you can see, the chart above details how Fed cuts will eventually dovetail with the cooling inflation.

Next, stocks don't follow headlines, they follow earnings. Despite all the bearish handwringing, earnings outpaced expectations, with FactSet showing net margins at a healthy 11.8%. This contributed to the 12-month forward S&P 500 earnings per share figure being revised higher:

Notice how equities and earnings historically move in lockstep. There may be some overheated individual stocks currently, but the above chart provides an argument that the S&P 500 overall is undervalued.

Is there evidence that earnings will keep climbing? Well, a company's biggest cost is usually labor. Since the 2020 peak, annual unit labor costs have fallen sharply from 14.0% to less than 1.0% today:

Right now, corporate America is efficient. If a big corporate cost is falling, it will benefit shareholders eventually.

Next, since 1963, when labor costs dropped sharply, corporate profit margins expanded by an average of 6.0% over the ensuing year:

Earnings growth drives share prices!

Another bullish datapoint is when inflation is falling, the economy and productivity grow faster than when inflation is rising, historically:

Higher costs obviously hurt growth. But inflation is falling. Later this year we expect it to drop more as lagging housing and auto insurance costs decrease.

Finally, earnings data today is more like 1995’s bullishness, not the 1999 bubble. Here’s why:

Technology’s 12-month forward earnings growth rate was revised up to 17.3%. It surpasses every other sector and the S&P 500 as a whole. Thus, technology’s valuation is justified by huge earnings growth. And despite some frothy pockets, the overall market valuation remains reasonable as dozens of leading, non-tech stocks hit all-time highs.

Again, we're always on the lookout for contrary data. But it’s not there right now. So, we continue to believe the wisest move is to stay invested until data points in another direction.

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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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