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We’re back! Just a reminder, folks — this is a special preview of our new exclusive market research service, We Study Markets Pro, that delivers institutional-grade investment research directly to your inbox.

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Let’s dive into this edition of WSM Pro 👇🏻

The We Study Markets team

Post Bear Market New All-Time High Supports 12% Upside Over The Next 10 Months

The S&P 500 briefly hit a new all-time high on Friday before pulling back into the close.

This new all-time high can be puzzling to many.

Consider that:

  • At the start of the year, Wall Street Strategists forecasted, on average, a 2% rise in stocks over the course of 2024

  • Year-to-date, the S&P 500 has rallied +7.4%

  • That’s 24.4% annualized: 12x higher than Wall Street had anticipated

  • Conclusion: markets rarely make sense and often perform contrary to what consensus expects

That is why the We Study Markets Pro Team uses historical data to create forward-looking probability-based assumptions about the future.

“History does not repeat itself, but it often rhymes,” according to Mark Twain. We subscribe to this philosophy, which tends to yield strong results even though it goes against conventional wisdom.

Using history as our framework, we looked back (since 1950) at all of the times the S&P 500 made a new all-time high coming out of a bear market. (This happened on Jan. 22, 2024.)

  • In the previous 10 instances, the S&P 500, on average, rallies +13% over the next 12 months

  • As shown in the chart below, we are on an even stronger trajectory, surging +6% since the new all-time high made on Jan 22.

  • Using the average price path in previous instances, it implies an additional +12% over the next 10 months (S&P 500 5,738)

  • Yes, this is out of consensus, but it is what history suggests.

Economic Data Last Week Was a “Best Case Scenario” for the Outlook on the Economy and Fed Cuts

There’s an adage on Wall Street: “Don’t fight the Fed.”

The good news: Economic data this week confirms, in our view, that investors will no longer be fighting the Fed by mid-year as the outlook for rate cuts improved this week.

Below is a summary of the economic data released this week and their important market implications.

JOLTS (Job Openings)

  • Job openings fell in January to 8,863K (from 8,889K in December)

  • Fewer job openings mean labor market conditions are easing

  • This means the Fed can “take its foot off the gas” on raising rates

  • Additionally, our proprietary JOLTS leading Indicator (made by scraping real-time job posting data from company websites) shows JOLTS should continue to decelerate in February

  • Even more reason for the Fed to cut rates —> this is positive for stocks, and it means investors are no longer “fighting the Fed”

Nonfarm Payrolls & Average Hourly Earnings

The jobs report yesterday confirmed two things:

  1. The economy remains strong

  2. Inflationary pressures are easing

These are the highlights you need to know:

  • Nonfarm payrolls were strong as the economy added +275K jobs in Feb

  • Wage pressures eased as Average Hourly Earnings slowed from 0.52% month-over-month in Jan to 0.14% month-over-month in Feb

  • These two data points confirm we have a strong economy with easing inflationary pressures, a welcome sign for both the Fed and investors

(Note: This Wednesday, we will cover what a Fed cut could mean for investors, including the best sectors to invest in historically after Fed cuts. That report will be exclusive to We Study Markets Pro Clients).

It All Comes Down to Inflation

For now, the path of markets largely depends on the trajectory of inflation.

To measure the significance of inflation on the stock market, we went back to 1960 to find how the S&P 500 performed during periods of rising core inflation and falling core inflation.

  • The blue shade is the S&P 500 in periods when Core inflation is falling

  • The red shade is the S&P 500 in periods when Core inflation is rising

We summarized these stats in a table for you below:

  • Annualized S&P 500 returns are 10.59% on average when core inflation is falling

  • And only 4.95% when core inflation is rising

  • So, generally, falling core inflation is good for stocks

So, where does inflation go from here?

To assess the outlook on inflation, we overlaid M2 Money Supply YoY (advanced forward by 13 months) and Core CPI YoY since 1987.

Take a look below:

  • Core CPI YoY tends to follow M2 money supply YoY

  • and M2 Money supply growth is now negative

  • indicating continued slowing in core inflation through mid-2025.

However, many remain unconvinced with this comparison, citing that shelter inflation (which makes up 45% of core CPI) will remain sticky and keep core inflation elevated.

The data suggests differently:

  • We overlaid the NAHB Housing Index (Advanced 17 months) vs Shelter CPI YoY

  • the NAHB indicator suggests Shelter CPI YoY is set to tank

  • This is disinflationary

And even the Fed itself expects core inflation to slow.

Per Cleveland Fed:

  • Feb 2024 Core CPI YoY Estimate: 3.70% YoY (slowing)

  • Mar 2024 Core CPI YoY Estimate: 3.68% YoY (slowing)

So, taking the data in its totality, inflation is set to continue easing.

As discussed, that is bullish for stocks.

Earnings Growth Expected to Accelerate in 2024

Analyst earnings forecasts seem to be catching up with the rise in stock prices.

Take a look at consensus expectations for S&P 500 earnings growth over the coming quarters.

  • Earnings growth is set to inflect higher in 2024

  • Up to +17% YoY in Q4-2024

  • That is serious growth

  • And keeps us constructive on the fundamental outlook for stocks

The Bottom Line

Certain investors may be skeptical that stocks can continue to rally.

And while it’s possible that the market may take a breather in the near term, the incoming data still points to higher stock prices over the next 6-12 months.

  • Inflationary pressures continue to ease

  • The economy remains strong

  • Earnings growth is inflecting higher

  • And stocks continue to reach new all-time highs

  • This is all sending positive signals

We will continue to monitor the incoming data and keep our We Study Markets Pro clients updated.

Look Ahead

Our next We Study Markets Pro edition, exclusive to clients, is on Wednesday, March 13th, and will come out every Wednesday after that.

Cool perks: We’re offering 1-on-1 consultations with everyone who signs up for We Study Markets Pro, plus quarterly market outlook webinars, networking opportunities, and so much more.

Go Pro by signing up for your free trial (cancel anytime).

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