The Federal Reserve (FED) met today, and although a rate cut was not expected, perhaps a softer tone was. Chairman Jerome Powell said a March rate cut is unlikely, and the stock market sold off. I’m assuming investors expected a dovish FED, like in December. However, Powell sounded hawkish.

After the dovish rhetoric of the FED in December, the stock market got priced to perfection, assuming low or decelerating inflation, six interest rate cuts of 0.25% each during 2024, good earnings reports, a strong economy heading into a soft landing as the worst-case scenario, low unemployment and low volatility. The December FED’s dovish comments helped the Standard & Poor’s 500 (SPX) and the Nasdaq 100 (NDX) indexes break out of the previous peak in December 2021.

What do we have right now in terms of stock market direction? An SPX that was overbought at the beginning of today’s session which needs to consolidate, and nervous investors who are becoming hesitant before any signs of FED officials appearing doubtful about lowering interest rates.

The SPX and NDX reached its peak in December 2021. 2022 brought a bear market in stocks and bonds due to interest rate hikes that extended through 2023. Stocks recovered in 2023 due to a small group of out-performing companies, but bonds did not. This made the recovery of many portfolios very difficult and slow, regardless of a stellar stock market performance in 2023.

The stock market’s best six months are November through April, and February is the weakest link. Therefore, we expect a pullback during February, and stock market weakness may extend to the second quarter. The third and fourth quarters of 2024 may bring decelerating inflation and accelerating GDP growth, which creates the perfect environment for stocks.

From a fundamental perspective, the 2023 4th quarter Gross Domestic Product (GDP) was reported at 3.3%, showing healthy consumer spending. Inflation at the consumer level (CPI) was slightly higher than expected at 3.4%, and at the producer level (PPI) slightly better than expected. The final result is that inflation is still running higher than the FED’s 2% target while corporate earnings are cooling down.

Our forecast for the year remains positive for the stock market as long as the FED is done raising rates, the U.S. Dollar (USD) weakens, and yields move lower; however, we expect volatility to increase during the first quarter of the year, which may extend into the second quarter. Headwinds may also come from geopolitical tensions (currently, there are two wars).

Consider not being fully invested, taking on smaller position sizes, and holding a higher cash allocation.

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Check the Main Trend of stock indices, volatility, yield, currencies, and much more here.

Consider not being fully invested, taking on smaller position sizes, and holding a higher allocation of cash.

(*) The Greenwich Creek Capital “Index Trend Table” is not meant to be used in isolation, it is part of a more complex set of variables and it is not designed to provide trade entry and exit points.

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Saul A. Padilla, RIA

Saul A. Padilla, RIA

Registered Investment Adviser and founder of Greenwich Creek Capital Management LLC, bringing over 37 years of experience in managing discretionary and non-discretionary investment portfolios for wealthy families and institutions. His main focus is to protect invested capital by re-balancing the allocation of cash, equities, fixed income and commodities, while closely monitoring macro-economic indicators and market trends to determine the transition phase between the completion of a Bull Market and the beginning of a Bear Market. He started his career in early 1987 mainly managing family financial investments.