Things are going very much according to plan for investors as November has been a terrific month for stocks. This is quickly making the earlier correction fade in the rear view mirror.

What is driving stocks higher?

Is there anything to worry about going forward?

How high could we go?

All that and more will be the focus of today’s Reitmeister Total Return commentary.

Market Commentary

Let’s tackle those topics noted above in the intro:

What is Driving Stocks Higher?

First remember that a surge in bond rates up to 5% for the 10 year Treasury was the main factor behind the previous correction. It is that advance stopping in its tracks and reverting that was the catalyst for stocks to rebound.

The retreat in the 10 year Treasury to 4.3% is a big part of the equation. Gladly around the globe we saw other key bond rates in Europe and Japan pull back from recent spikes.

The main reason for this is that the battle over high inflation seems to have been won without Central Banks creating a recession. Now investors are looking ahead to 2024 when the Fed, and their international counterparts, start lowering rates. This should spark more economic growth and with that higher equity prices.

Is There Anything to Worry About Going Forward?

Yes.

It is always risky to assume that the Fed can be this aggressive with their rate hike regime without sparking a recession. That’s because 12 of the last 15 rate hiking periods did end in a recession. Gladly the odds of a soft landing for the economy looks like the best bet.

Unfortunately, there are 6-12 months of lagged effects on Fed policies that could still jump up and bite the economy in 2024 even as they start ponder lowering rates. Thus, we all need to stand watch that no recession is in the offing. That would obviously lead to stock downside (and perhaps return of a bear market).

I see the odds on this as being fairly low. Like only 15-20%. Yet given that I do have an economics background I have to admit it’s a soft science and recessions have a way of coming out of nowhere surprising economists and investors alike.

Currently I would not worry about a recession. I would just keep close watch on the economic indicators to make sure there is not one forming.

Our best friend for that is the GDPNow model from the Atlanta Fed that has done a great job estimating the quarterly readings for GDP. Right now, the model says +2.1% for Q4. That is a steady as you go pace that is also mild enough to keep tamping down the flames of high inflation.

How High Could Stocks Go?

Right now, the S&P 500 (SPY) is flirting with the new post bear market highs above 4,600 as we did back in late July.

Certainly I would expect a retest of that break above 4,600 with the help of the bullish bias of the holiday season. However, I wouldn’t expect to go that much higher before the year is out.

Why?

Because the earnings growth outlook is still pretty tame including a -3% drop in earnings expected for Q4. That improves only slightly to flat earnings growth in Q1 of 2024. Then finally in Q2 earnings are expected to accelerate to +6% growth (solid, but not a very impressive pace).

That is where it stands right now. The sooner we get to rate cuts in 2024...the sooner analysts will likely increase their earnings outlooks creating a nice catalyst for stock prices.

Back to the question...how high could stocks go?

I think end of the year upside is likely 4,650...maybe 4,700 at most for the S&P 500. Modest gains from where we stand now...but an impressive +21% gain on the year.

Then again, this is a warped view of what happened for most investors in 2023 as we know most of those gains only accrued to the usual mega cap tech stocks that dominate the S&P 500 index.

As we look at broader readings of the market we find that right now the Equal Weighted version of the S&P 500 (RSP) is currently up only +5.1%. Even more lackluster is the +1.5% gain for the small caps in the Russell 2000 index.

The healthiest thing that could happen is that this rally broadens out to the rest of the market. Especially small caps as it is hard to be truly bullish without more speculative, growth oriented small caps leading the way.

The point being is that I don’t think there is tremendous upside in the S&P 500 in the year ahead. Perhaps topping out around 5,000. However, we could easily see 2-3X gains in the beleaguered small caps that would make up for some of their underperformance the past few years.

Long story short, if you believe in the bull market...then time to focus more on smaller stocks as the winners of 2023 are pretty well tapped out. Goldman Sachs also talked about focusing on “quality stocks” in their most recent research note. Here is the key excerpt:

“Our analysts think there may be investment opportunities beneath the surface. "Quality" stocks — with higher profitability, stronger balance sheets, and stable sales and earnings growth — could outperform in an environment of persistent investor concern about an impending recession. Growth stocks, which have a higher expected growth rate than the rest of the market, may be attractive given stable economic growth and interest rates. Lagging cyclical stocks that are sensitive to a downturn may rally, given our economists' prediction that recession risk is lower than feared.”

I very much like the sound of above as quality stocks is the bread and butter of our POWR Ratings model that scans 118 factors of a stock’s attractiveness. Nearly half of those factors revolve around growth and the quality of operations.

Of course, we would all love a rip-roaring bull market where most everything moves higher. Yet with expectations for earnings growth between modest and negligible in 2024, then it’s a situation for the cream to rise to the top.

And yes, I very much like our odds to capture more of those creamy stocks with the POWR Ratings model that will then show up in the Reitmeister Total Return portfolio. More on that below...

What To Do Next?

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Plus I have added 4 ETFs that are all in sectors well positioned to outpace the market in the weeks and months ahead.

This is all based on my 43 years of investing experience seeing bull markets...bear markets...and everything between.

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Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares rose $0.08 (+0.02%) in after-hours trading Tuesday. Year-to-date, SPY has gained 20.28%, versus a % rise in the benchmark S&P 500 index during the same period.

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

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