As we close out one of the strongest first quarters for the market in history, the country is experiencing a lot of extra hype regarding the total solar eclipse. Many people don’t realize that the sun and moon are at just the right sizes and distances to allow this to happen. The sun is about 400 times larger than the moon but, it just so happens to be about 400 times further away thus allowing for a total solar eclipse with the “Baily’s bead” aka “diamond ring” effect to happen. The odds of those proportions being that exact for any planet is pretty amazing, but our planet just so happens to have human eyes to witness it. Statistically, we shouldn’t even exist much less exist on a planet where we can witness a perfect solar eclipse and be intelligent enough to understand what we’re seeing. It’s never made much sense to me to fight or deny odds and probabilities, especially in extremes and that’s why I practice the faith that I practice. And it’s also why we manage money the way we do!​

 

So with that said, the odds and probabilities suggesting the market is going to go down at some point, are extreme. It’s statistically impossible for it not to and we are getting rather “overdue”. The market had a fantastic 2023 and has had a parabolic move to the upside from October 2023 to the present. As such, we’ve been doing a lot of trimming in

recent weeks, cutting back on the holdings that have had the highest gains and letting those profits add to cash. When a step back finally happens, we’ll be in a nice position to do some buying.​

 

Speaking of odds and probabilities, there have only been 11 times since 1950 where the S&P 500 started the year off with a 10% first quarter gain not counting this year. In every instance, the market suffered a pullback during the remainder of the year with the average being a decline of -11% and the most muted of those drawdowns being -4%. As I write this newsletter, the S&P has only had a 2% decline. The odds and probabilities are that we will see a bigger drawdown at some point this year and we’re ready for it.

​​

What then? Well, if history is a guide, the market is likely to end the year higher. In 10 out of 11 of these past instances, the market finished higher for the year despite the average decline of -11%. This is also a presidential circus year.... I mean election year. Historically, presidential election years tend to be a little sloppy from May to June and again right around the election itself but then have a tendency to finish the year very strong regardless of the winner.

​​

The economy has also continued to show strength and resiliency in the face of higher interest rates and soft patches in manufacturing and other areas. The labor market continues to be very strong while wage increases have tamed. Corporate earnings also appear to be improving which can help support the market going higher. There’s still work to be done on the corporate earnings front and this is an area we’ll continue to pay close attention to as markets ultimately revolve around earnings.

​

Our biggest concern for the remainder of 2024 continues to be inflation and the Fed’s reaction. The market seems to be absorbing the idea of fewer, if any, rate cuts by the Fed. Coming into 2024 the market was expecting 6 rate cuts beginning in March, which we did not find very probable. ​Now, with inflation staying rather sticky and commodity prices rising, Fed rate cuts look much less likely than the market was expecting.

This could put a bit of a cap on the upside potential of the market if corporate earnings don’t rise strong enough and fast enough to justify higher stock prices. Any hot inflation data will likely send the market into a bit of a short-lived panic.

​

​​Geopolitical concerns also continue to weigh with recent threats against Israel from Iran. Energy has been responding with oil prices rising which is also inflationary. We have been overweight energy in our traditional models along with extra exposure to gold and copper, all of which have been performing nicely in recent weeks as these issues have been escalating.​

 

All in all, we expect a pullback in the coming months but not a derailing of the market. On a technical basis, the market has accomplished things that have opened the door for a much higher level in the S&P 500. Based on the technicals alone, I believe it reasonable for the market to work its way up toward the 6,100 level from 5200 where it sits now. That would be an additional 17% gain from here. We don’t expect to see this level in 2024 but it’s quite possible to get there in 2025.​

 

Speaking of 2025 we would be remiss not to bring up recession odds. There’s a phenomenon that happens with interest rates when there’s disagreement between the bond market and the Federal Reserve interest rate policy. This phenomenon is called an “inverted yield curve”. A normal yield curve is one in which long term rates are higher than short term rates. You would expect to earn more interest on a 10 year bond for example than a 2 year bond. When the yield curve inverts, the opposite happens with short term rates paying higher levels of interest than long term rates. Every recession in the last 40 years was preceded by a yield curve inversion and only one inversion, in 1966, did not lead to a recession. The current yield curve inversion just became the longest in U.S. history. IN HISTORY. The second longest inversion in history was 1978 to 1980 and it ended badly with back to back recessions in 1980 and 1981. America has experienced a recession every 6 1⁄2 years on average since WWII and every 3 to 4 years if you count our entire history. Our last recession was the COVID recession in 2020. The clock is ticking and we feel it best to remain alert.

​​

We mentioned in our 2024 outlook that we did not expect recession until 2025 or 2026. Given all we just outlined, this still seems a more probable time period for a recession to unfold. What I’m finding very interesting is that the recession narrative has all but vanished from the discussions within our industry. Many market pontificators are suggesting that we’re going to have a “soft landing” for the economy. That might be true for another year or so but I think it’s extremely premature to completely discount the probabilities of a recession. We don’t want to be overly cautious and miss out on potential gains between now and its arrival but from this point forward, it’s important to maintain a measured approach. Recessions don’t come when everyone is well prepared and expecting them. They sneak up on the economy, usually when least expected. And although we’ve obtained a mathematical solution to predict future solar and lunar eclipses, no one has figured out the market. The stock market is far more akin to the unsolvable, “general three body problem” that’s been stumping mathematicians, scientists and super computers since Isaac Newton first drew attention to it in “Principia Mathematica” circa 1687. A book that I suggest you only try reading while wearing solar viewing glasses.... in a dimly lit room.