The S&P 500/SPX and other major stock market indexes have experienced a downturn since late July. As an experienced investor, I anticipated this correction back in June, noting the overvaluation of top-weighted tech stocks and the rapid pace of their appreciation. While some may panic and consider selling everything, let’s explore why it may not be the best course of action.
Don’t Miss Out on Opportunities
Selling everything may have been advisable during the peak of the previous bull market in late 2021 when valuations were excessive. However, we have already had significant buying opportunities during the bear market lows last year. Selling now, when the correction could be nearing its end, would mean potentially missing out on future gains as economic growth improves next year.
The Interest Rate Picture
JPMorgan’s Jamie Dimon recently mentioned the possibility of the Fed funds rate going as high as 7%. However, there are several factors that suggest this scenario is unlikely. Inflation has moderated significantly, with both CPI and PCE inflation dropping to levels that should help bring it within the Fed’s target range. Considering these factors, the market does not support the idea of a 7% benchmark rate.
Furthermore, a rise to such high rates could have detrimental effects on the economy, potentially leading to deflation and high unemployment. Current interest rate trends indicate a cooling effect on different sectors, aligning with the goal of curbing inflation without causing significant economic instability.
A Cooling Effect on Different Sectors
Various interest rates provide evidence of a cooling economic atmosphere. Rates on the 30-year fixed mortgage average have reached their highest level since 2000, and rates on credit card plans and auto loans have also seen significant spikes. These developments indicate that the high-interest rate environment is likely to enable inflation to cool in the coming months.
The Fed’s Benchmark Probabilities
Looking at the probabilities compiled by the CME Group’s FedWatch Tool, there is little indication of a benchmark rate as high as 7%. In fact, the tool suggests a higher likelihood of lower rates compared to the current levels. Non-government-backed, independently compiled inflation data also suggests inflation rates may be lower than expected, supporting the view that additional rate hikes may not be necessary.
Abundant Fear Mongering or a Bottom Near?
When fear and negative sentiment dominate the market, it can be an indication that a bottom is near. Statements from JPMorgan insiders may sound alarming, but they do not necessarily reflect the overall market sentiment. In fact, past experiences have shown that such statements can be counter-indicators, suggesting that a year-end rally may be on the horizon.
As for artificial intelligence (AI) stocks, we are in the early stages of their potential. Drawing a parallel to the ’90s internet boom, we are likely in the early ’90s, meaning there are still multiple years of substantial upside potential for high-quality AI names.
Positive Factors to Consider
While it’s essential to acknowledge the negatives, let’s not overlook the positive factors:
- Earnings season: Better-than-expected earnings reports can serve as a catalyst for higher stock prices.
- Interest rate cycle: We might be close to the top of the interest rate cycle, suggesting a more accommodative monetary stance in the near future.
- Government shutdown: These events historically have had minimal impact on the economy, and once resolved, can boost investor sentiment.
- Attractive valuations: The current P/E ratio suggests that many stocks are relatively inexpensive.
- Continued moderation of inflation: Inflation rates have declined over the past year, and there may be fewer rate increases as a result.
- The AI revolution: The growth potential of the AI sector is still in its early stages, with significant economic activity expected in this sphere.
Keep Your Focus on the Long Term
Investing is a marathon, not a sprint. Although volatility may persist in the near term, long-term investors tend to benefit. Investing in high-quality stocks in promising industries has traditionally yielded positive results. Despite the current turbulence and uncertainty, it is wise to maintain a long-term perspective. Therefore, I maintain my S&P 500 price target in the range of 4,800-5,000.