I know many investors are feeling anxious about the recent market volatility and the hawkish tone of the Federal Reserve.
But I’m here to tell you that there is no need to panic.
In fact, I believe we are on the verge of a major bull market that will reward those who stay invested and diversified.
Let me explain why I’m so optimistic about the future of stocks.
Even though the stock market is shaky due to a hawkish Fed, we’re still gearing up for a tremendous bull market run… and I’ll explain why.
Stocks challenged and bounced off crucial technical levels last week.
And we believe that was the start of a significant short-term rally in stocks in March and April.
Furthermore, we see this recovery as an indication that the rally from the October 2022 lows is, in fact, the commencement of a new bull market.
This bull thesis has three components: fundamentals, technicals, and positioning.
Before we dive into the details, let’s review the big picture.
Some people are worried about rising inflation, higher interest rates, a slowing economy, and the 10-year Treasury yield hitting 4%.
But these trends are actually improving. Inflation is coming down, even if it’s not smooth sailing.
Supply and demand have normalized after the pandemic shock. Consumers are still spending but not splurging.
The Fed is raising rates but not rushing. We expect inflation to keep falling until 2024 and ’25. The Fed is the main uncertainty in this scenario.
But it knows that inflation is easing and will likely adjust its rate hikes accordingly. The job market is also holding up well and doesn’t signal a crash. So we are confident that the Fed can pull off a soft landing.
Sure, the gap between what stocks earn and what bonds pay – known as the equity risk premium (ERP) – is at a record low.
But given how strong earnings have been lately, today’s ERP is normal by historical standards.
And we think stocks are fairly priced. The numbers show that stocks have room to grow over the next nine months based on earnings and valuations.
Let me explain the technicals:
Last week, stocks stayed above the 200-day moving average.
They kept the momentum from the rally in October 2022. They also rebounded from the resistance line that capped the stock market’s gains throughout the 2022 bear market.
When stocks turn resistance into support, it means they are changing direction for good.
And they have just done that with a resistance level that lasted for a year, which is very positive.
The market always went up when stocks were in a bear market and then broke above and stayed above the 200-day moving average for more than 20 to 30 days. That’s exactly what we have now.
And don’t forget the Triple Barrel buy signal from January, which combined the Breakaway Momentum, Whaley Breadth Thrust, and Triple 70 Breadth Thrust signals.
All three are very rare and very bullish, and they all showed up on the same day for the first time ever.
Finally, let’s look at the positioning:
From a positioning perspective, the stock market has gone back to its October levels. That’s when the 10-year yield hit 4%, the futures market started betting on rate cuts, and inflation expectations were soaring.
And this makes us hopeful because expectations are at levels that leave a lot of room for dovish surprises. There’s a good chance that the data we get in March and April will beat our forecasts.
Since these outlooks have turned to maximum pessimism while stocks are still well above their October lows, we think this is just another sign that we’ve started a new bull market.
So there you have it.
The fundamentals, technicals, and positioning all point to a bullish outlook for stocks in the coming months.
I’m not saying it will be a smooth ride, but there will be bumps and dips along the way.
But I’m confident that if you stick with your strategy and diversify your portfolio, you will be rewarded in the long run.
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