Happy Saturday!
You may have seen that this was a pretty good week for the stock market. The S&P 500 was up by a little over 3.25% for the week. I thought this would be a great time to review some important concepts that have been playing out.
Expectations versus Reality
This concept typically drives overall movement of the stock market. If expectations are high and the economic reality isn’t as good, stocks will likely fall. If expectations are low and the economic reality is better, stocks will likely rise.
So, things don’t have to be good or bad for the stock market to go up or down. Just less bad (stocks up) or less good (stocks down).
We saw this on Wednesday, as it pertains to inflation and interest rates. On Wednesday, the headline Consumer Price Index (CPI – standard inflation measure) came in at 8.5% year-over-year in July. The consensus expectation was 8.7%.
The Fed already indicated at their last meeting that they may not have to be as aggressive with interest rate hikes (which are viewed as a threat to the stock market). And slower inflation bolsters that case. So the stock market responded very favorably to the “less bad” news on inflation.
“Buy the Dip” Sentiment
One of the trademarks of a bull market is “buy the dip” sentiment. When the market corrects from an up trend (goes down), the dip is bought and the stock market moves on to new highs. Conversely, “sell the rally” sentiment is a trademark of a bear market. When the market bounces back from a down trend (goes up), the rally is sold and the stock market moves on to new lows.
We saw some major “buy the dip” sentiment this week. Monday and Tuesday saw the stock market decline by almost 2%. This dip was bought, as the market then went up by over 2% on Wednesday. And those gains were extended to nearly 4% by the end of the week.
If this sentiment persists, it would be a very good sign.
Small Cap Leadership
Historically, when we are coming out of a recession and entering into a new bull market, small cap stocks tend to lead the way. And we’ve seen this recently. Here is a 1-month comparison between small cap stocks and large cap stocks:
Russell 2000 (most prominent small cap index): +16.69%
S&P 500 (most prominent large cap index): +12.08%
Going Forward
Everything I’m seeing looks and smells like the early stages of a new bull market. There are still a lot of fears being talked about. But then, there were lots of fears being talked about in March of 2009 and March of 2020, when the last two bull markets began. But if reality continues to come in “less bad” than those fears, we should be ok.
Of course, I could be wrong. And that’s why I always stick to my long-term strategy, which can be found here.
With that, I’ll click send and wish you a great rest of the weekend! As always, send me feedback if you love or hate this newsletter.
**stock market return numbers are estimates, and the data is pulled from Yahoo Finance