The stock market started the first week of the year down, with the decline in the S&P 500 being driven by a big drop in shares of Apple, because that stock makes up a large part of that index. The same is true for the Nasdaq, of course. The headlines in the financial media focused on changes in perceptions on how quickly and how much the Federal Reserve will lower interest rates this year and Friday’s employment data, linking every tidbit of news with the short-term gyrations in the market.
In reality, this news didn’t have much to do with what the stock market did last week and is a bunch of noise.
You see, before last week, many people were predicting that the Federal Reserve would lower interest rates in March and by the end of the week the Fed funds future market priced in a 65% chance of a cut, reducing the odds. That supposedly created a lot of angst among traders and investors, but those same Fed fund futures are pricing in a 92.3% chance of one by the May meeting.
What difference does it make if the Federal Reserve lowers rates in March or May?
I would say to you none when inflation is still above 3% and interest rates shouldn’t even be reduced anyway without the CPI inflation rate close to 2% or economic data that says that the economy is in a recession.
Interest rates ARE NOT HIGH!
Go look at the average interest rate in the past 100 years and they are just around the average.
Lowering rates until inflation goes away is reckless and for Federal Reserve officials to suggest doing so means moving away from their mandate of sound money and turning themselves into political tools – trying to make stock market investors happy ahead of the November elections.
Either way, the Federal Reserve has ended its righteous campaign to fight inflation, by raising interest rates, for a new round of easy money policies, which will come with the cost of an even bigger wave of inflation down the road.
So, why did the stock market fall last week?
The reason is simple.
The market went up so fast in November and December that it became overbought and some people decided to take profits once the calendar flipped to January.
In, fact the market got so overbought, coming into this new year, that the RSI, a technical analysis indicator that measures overbought and oversold conditions for a market, came into this year over 80 – it’s highest reading in almost six years.
Just because the stock market is overbought, though, doesn’t mean it is going to crash or go into a new bear market right now.
Most of the time overbought conditions are worked off by sideways action and that is most likely what is really happening in the markets now – the market was poised to go sideways no matter what here and that’s why I say last week’s news was just noise.
You can see the RSI indicator on the above chart.
You can also see the stochastics indicator, which is another popular technical indicator, which gives oversold and overbought readings.
It signals overbought when both stochastics are over 80 and oversold when they are under 20.
They are on the path to both going below 80 in another week.
As, I wrote in my financial markets forecast for 2024, last weekend – this is simply year two of a short-term cyclical bull market for the US stock market. However, as this is a new year, and a more mature cyclical bull market, with the Federal Reserve no longer raising interest rates, leadership is shifting into sectors beyond big cap tech stocks this year.
Stocks that pay stable dividends are likely to outperform most of the big cap tech stocks in 2024.
Two that I own are D and PDM.
D is a utility stock paying a 5.44% dividend. I actually bought it in November near its lows when it was paying a dividend well over 6%.
The stock currently has support at $46 and closed on Friday above its 200-day moving average.
Everything looks good to me with this stock.
Utility companies have stable earnings and people buy them for their yields.
That makes them attractive when interest rates go down, but at the same time the utility stock sector tends to poorly when interest rates rise, which is exactly what it did last year until November.
The same is the case with the REIT stocks and a REIT I own is PDM.
PDM is paying a dividend over 7%.
It had a rally that stalled out around $7.50 back in July and the same price area became resistance in December.
So, it appears to be consolidating this month, like much of the stock market, below its December price resistance high point.
I’m looking to see if it will breakout through resistance before this month is over.
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-Mike
