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Based on the flood of bearishness that Street insiders and far of the financial news media have been expressing until very recently, it’s hard to consider that the Nasdaq is literally on the cusp of a recent bull market. However it’s absolutely true.
On Feb. 1, the exchange closed at 11,816. That’s 17% above its 52-week low of 10,088. To get to the 20% increase considered the edge of a bull market, the Nasdaq just has to extend about 290 points or 2.4%. And before trading began on Feb. 2, futures indicated that the Nasdaq would open 1.3% higher. So the Nasdaq may literally be just 1% from entering a recent bull market.
There are a lot of reasons for this development. Firstly, as I’ve written for the last seven months, conventional wisdom underestimated the importance of a powerful labor market. (By the way in which, the strong labor market was created primarily by the largely forgotten Paycheck Protection Program enacted in the course of the pandemic). At the identical time, the traditional wisdom was overestimating the Fed’s power. Those miscalculations led to a situation during which stocks fell much further than they need to have, setting the stage for a bull market to emerge. And now, resulting from the strong labor market, many corporations report outstanding financial results.
And at last, although I don’t think that the Fed is the only determinant of the stock market’s direction (it’s time to bury the “Don’t fight the Fed” slogan once and for all), the incontrovertible fact that it’s easing up on its rate of interest hikes and can stop raising rates soon is positive for stocks.
Here’s more details about why we’re on the cusp of a recent bull market.
The Vastly Underestimated Importance of the Strong Labor Market
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While the Street’s focus was on inflation and the Fed, largely missed was that, for the primary time in generations, many working-class and middle-class Americans were getting big raises and will easily get recent jobs with much higher compensation.
In a June 2022 column, I wrote that “three aspects primarily determine the spending levels of most American families: their jobs, their wages, and the extent of their confidence within the outlook of the primary two items.” With those three aspects quite positive, I hypothesized that American consumers’ spending would remain elevated, stopping a recession from occurring.
As an example the situation’s impact on the spending habits of typical middle-class Americans, I created a hypothetical middle-class American family. To make a protracted story short, although the family needed to dip into its savings a bit due to inflation, members of the family’ wage increases and their strong confidence of their job security caused them to maintain their spending levels high.
Put one other way, high egg, bread, and gasoline prices is not going to meaningfully curtail the spending of middle-class American consumers who’re getting significant raises and consider that their jobs are very secure.
Validating my argument, the economy grew 2.9% last quarter and is widely expected to expand again this quarter, while the key bank card networks are reporting that buyers’ spending has remained relatively resilient.
Overestimating the Fed’s Impact
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Invented in 1970, the “Don’t Fight the Fed” slogan became a virtual religion on the Street, and that religion remains to be intact. However the Seventies and early Nineteen Eighties, when the slogan likely began becoming dogma, were a time of low growth, lousy job markets, extremely high inflation for a few years that had develop into deeply ingrained, and sky-high rates of interest.
For instance, in December 1976, the unemployment rate was 7.6%, and in Dec. 1981, it got here in at an enormous 8.5%. And in 1978, the Fed’s benchmark rate of interest was 20%, versus today’s rate of around 4.75%! If the Fed raises rates in such an environment, stocks will do horribly because a mix of a terrible job market and big rates of interest will crush consumers.
But in 2022, rates of interest were still historically below average for many of the 12 months, the labor market was great, and inflation had only been problematic for a 12 months or two. In such an environment, Fed rate hikes weren’t a giant deal. (Consider it or not, before 2022, it had been over five many years for the reason that economy was doing well, and the Fed had to boost rates to fight rising inflation).
Put one other way, the direction of the Fed’s benchmark rate needs to be seen as considered one of several elements that determine whether stocks are prone to go up or down, not the “end-all and be-all” for equities.
And the direction of rates of interest shouldn’t be probably the most crucial determinant of the direction of U.S. stocks. The latter distinction belongs, for my part, to consumer spending. So perhaps the brand new slogan needs to be “Don’t fight consumers.” And as an alternative of spending a lot time dissecting the Fed’s every word, the financial-news media, and Street analysts should intensively analyze the aspects prone to impact consumer spending.
Strong Financial Results
Unsurprisingly, given consumers’ overall strength, many corporations, defying the bears, have reported slightly positive fourth-quarter results. Along with the bank card networks, Tesla (NASDAQ:TSLA), GM (NYSE:GM), ServiceNow (NYSE:NOW), IBM (NYSE:IBM), Caterpillar (NYSE:CAT), casual-dining restaurant owner Brinker (NYSE:EAT), most airlines, General Electric (NYSE:GE), and AT&T (NYSE:T) are amongst the massive corporations that reported Q4 financial results which, for my part, can only be viewed positively.
And a high proportion of traditional banks., which in some ways signal the strength of the economy, also reported quite favorable earnings.
The Fed Is Not Going to Break Up the Party
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Although the direction of the Fed’s benchmark rate shouldn’t be the only determinant of stocks’ performance, the central bank can derail the economy and stocks if it raises rates to ridiculously high levels.
But now the central bank is barely raising rates by 0.25 of a percentage point per meeting, and it’s widely expected to stop mountain climbing when its benchmark reaches around 5%. Furthermore, pressured by newly ascendant doves on the Fed, Chairman Jerome Powell finally admitted yesterday that inflation is easing.
Given all these points, the market realizes something I’ve been predicting for a very long time: the central bank is not going to trigger a recession and is not going to prevent stocks from rallying.
On the date of publication, Larry Ramer held long positions in TSLA and GE. The opinions expressed in this text are those of the author, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Amongst his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You possibly can reach him on Stocktwits at @larryramer.
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