Yesterday, after a meeting of the Federal Open Market Committee, Federal Reserve Chairman Jerome Powell signaled the Fed was considering a pivot on interest rate strategy and would possibly begin lowering interest rates soon. There has been speculation for weeks about these cuts, as the economic reports have shown inflation is cooling off. This speculation has turned into a “melt up” in stock prices, resulting in an all time high for the Dow Jones Industrial Average. While I am happy for all of us who own dividend paying stocks, why am I also nervous and concerned?
This has been an unusual year for the financial markets. For nearly nine months, seven stocks in the S&P 500 skyrocketed in price while the other 493 barely moved at all, with many going down in price. That is not a healthy market, it is a market that is chasing hot stocks. These 7 stocks (Apple, Alphabet (Google), Microsoft, Amazon, Tesla, Meta (Facebook), and Nvidia) are up, on average, over 101% this year. However, these same companies were down in price an average of -48% in 2022. As you can see there is a ton of volatility, as investors either love or hate these stocks.
As we hit new highs, here are some of my concerns:
- Stocks now trade at 22 times projected earnings, whereas 17 times earnings is the average.
- Reports show at least 7 interest rate cuts are now priced in for 2024 and if they do not happen we could see a nasty correction.
- These top 7 companies now make up nearly 30% of the S&P 500 Index, so their price movements have a huge influence in the daily values of the index.
- Unemployment is still low and wage inflation still exists, so the inflation story may not be over.
On the bright side, the labor market is cooling and is slowly returning to normal and the same can be said for housing. The unemployment rate is still very low and consumers are in relatively good shape. The recent drop in gas prices works like a tax cut, so consumers have more money in their pocket to spend on Christmas.
In my experience, a “melt up” in stock prices is often met with disappointment as the expectations are unrealistic. This recent rally feels the same, but we will enjoy it while it lasts. Our strategy remains the same: buy stocks of America’s top companies that pay dividends consistently and add bonds for additional interest income. This strategy tends to be less volatile and more consistent in the long term.
As always, thank you very much for your continued business and friendship. If you have a friend or family member who is unsure, feel free to send them this report or have them call me. And during this Christmas season, drop by our new digs…we will treat you to a tour and a cold Cheerwine!
