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Stocks are off to one of their in history.
But I get the impression many of you are perplexed as to why stocks are rallying.
Don’t worry, you’re not alone; the market’s default state is confusion.
That makes predicting what’s going to happen to the market in the future that much more difficult…
For instance, going into 2023 everybody and their mother expected a recession to hit in 2023 causing stocks to head lower.
I know this argument well because I was making it at the time. But earlier this year, a chain of events caused me to shift my view.
And if you haven’t already, you should shift yours too.
This Rally Has Legs
Back in March, Silicon Valley Bank suddenly collapsed.
It sent a chill down the spine of many investors as it was the second largest bank failure in US history:
Linear thinking would dictate that banks failing = bad for the stock market.
But my video from March 13th titled “why banks failing could be good for stocks” shows I didn’t see it that way:
At the time, the biggest risk for stocks was further interest rate hikes from the Federal Reserve.
But as a student of financial history, I knew that the Fed typically hiked interest rates until something “breaks.” In 2001 it was the Dot-Com Bubble bursting. In 2008, it was the collapse of the subprime mortgage market…
And during this hiking cycle, I reasoned that rapid regional bank failures - all of which stemmed directly from Fed rate hikes - were likely enough for the Fed to back off.
And that brings us to reason #1 why I believe stocks will keep rallying.
Reason #1: The Fed is (Mostly) Done Hiking
The Fed was aggressively hiking interest rates to help subdue inflation.
But with the latest CPI report showing a 12th straight monthly decline in inflation…
…it looks like the inflation story is officially dead.
Whether it was the rate hikes or the normalization of the global supply chain…
…inflation is on the run. That means the next move for the Fed is likely a pause after many one-or-two more 25 basis point interest rate hikes.
This liklhood went up even more this week after the Fed’s most “hawkish” member abruptly announced his departure from the central bank:
And while the Fed keeps saying they intend to keep interest rates “higher for longer,” history shows that is rarely the case:
Since the market is forward looking, investors are now pricing in interest rate cuts early next year. That will be a tailwind for stocks, as lower interest rates make it cheaper to borrow and invest.
But it’s not the only catalyst for higher stock prices…
Reason #2: The Weakening US Dollar
While it may seem counterintuitive, a falling US dollar can actually be good for stocks.
When the US dollar weakens, it means that it loses value compared to other currencies like the euro or the yen. This can have a positive impact on stocks for a couple of reasons.
First, a weaker dollar makes US exports more competitive. That’s because foreign buyers find it more affordable to purchase goods and services from American companies. This increased demand for exports can boost the revenues and earnings of US companies, which in turn can drive up stock prices.
Second, a weaker dollar can attract more foreign investment into US stocks. When foreign investors see that the dollar is losing value, they may view US stocks as a more attractive investment opportunity. This influx of foreign capital can provide additional buying pressure for stocks, pushing their prices higher.
Lastly, a falling dollar can benefit multinational corporations like Apple (AAPL, Microsoft (MSFT), and Alphabet (GOOGL) that generate a significant portion of their revenues from overseas markets.
When these companies convert their foreign earnings back into US dollars, they receive more dollars for each unit of foreign currency. This currency translation effect can boost their reported earnings, which tends to have a positive impact on their stock prices.
But there’s a third reason stocks could keep chugging along.
Reason #3: Recession? What Recession?
98% of US CEOs expected a recession in 2023…
…but a recession has not materialized for a few reasons. First is the collapse in energy prices after the Ukraine War shock in early 2022 took pressure off US consumers:
But the second is what I’m calling the “Boomer Spending Boom.”
The Baby Boomers – or the generation born between 1946 and 1964 – are currently 59-77 years old.
This demographic cohort had a net worth of $73.1 trillion at the end of last year. That accounted for over half of all net worth in the US:
And as more of the Boomer generation retire, the more they are spending on travel (including airfare, accommodations, and cruises), eating out, and health care.
Considering consumer spending accounts for 68% of US GDP…
…it’s a key reason economic growth will keep chugging along for the foreseeable future.
Keep Your Eye on the Prize
As I said at the outset, the market is designed to confuse you.
But this is it’s nature; the market mechanism is discounting what will happen 6-9 months from now.
Does that mean the market is always right? Far from it. But it usually is, and is one reason staying pessimistic about the outlook for US stocks is a losing bet.
Because the market is telling us things are getting better.
And you’d be a fool to ignore this message.
Stay safe out there,
Robert
So helpful!