The S&P 500 just hit a new record high, and this stock market rally has continued, despite the economy slowing down. The latest stock market news shows AI hype continues to be strong, pushing the Magnificent 7 stocks higher. But the 2024 economic outlook is indicating an economic slowdown in 2024. And hopes of the Federal Reserve cutting interest rates in March is starting to wane also. So why do stocks continue to rally in 2024? If you want to know why the market is rising, look no further than market psychology. Investors are greed, only looking at the good news, and ignoring the bad news. But as Warren Buffet famously said, “Be fearful when others are greedy.”
In a classic case of the rich get richer, while the poor get poorer, the stock market continues to rally, despite the economy slowing down. And while this might seem strange, it’s not entirely unprecedented. In 2006 and 2007, right before the great financial crisis, the stock market continued to rally. Even though there were signs that the economy was slowing down, investors tended to ignore those signs and just continue to buy stocks. When the recession in 2008 did happen, it took everybody by surprise. Alan Greenspan famously said after the great financial crisis that nobody saw it coming. And yet, some people did see it coming. In fact, there was an entire movie made about people who saw the great financial crisis coming and made a major profit off of it.
So why does the stock market continue to rise despite the overall economy slowing down? And is this the time to buy stocks and ride the wave upward, or are we near a top? Is this time to sell stocks and take profits and get out before a major crash? Well, the first thing to understand is that market participants are generally greedy. They’re generally going to be bullish, and believe stocks are going to continue to go up, and continue to go higher. After all, that’s why people invest. They put money into the stock market because they believe those stocks are going to go higher, and they believe they can sell those stocks at some point in the future for a profit.
But there’s a reason why Warren Buffett famously said, “Be fearful when others are greedy”. Because while stocks are at record highs, things are going to get harder from here. I’m Stock Curry. I’m a former Merrill Lynch and Morgan Stanley investment banker, and I’ve got over 25 years of trading experience. And over the past 25 years, I have seen many times where the stock market has rallied, despite the overall economic conditions getting worse. I saw this in the year 2000. I saw it in 2007, and now I’m seeing it again.
One of the reasons why stocks have continued to rally is a boost from AI hype. We’ve seen AI hype push a lot of the mega cap tech stocks, especially those dealing with chips, as well as AI technology, to incredible growth this year. We have seen a lot of stocks such as Nvidia, AMD, and others rise over a hundred percent over the past year, as investors buy these stocks expecting AI to change the world. Of course, this belief that AI is going to change the world is not completely unfounded, but the timing of it might be. Back in the year 2000, investors bought a lot of dot com stocks expecting the internet to change the world. But the rally in the dot com, believing that the internet was going to change the world, caused people to buy dot com stocks, causing a huge bubble in the dot com sector.
Eventually, however, that bubble popped and stocks fell significantly. After the dot com bubble popped, the Nasdaq lost nearly 80% and the S&P 500 lost 50%. And what’s shocking to a lot of investors this time around, is that it really is just those main AI stocks that have been rising. The rest of the stock market has missed out on the so called rally, and is actually trading fairly flat. You see there are eight stocks, or seven companies, that make up something known as the “Magnificent Seven”. Those include Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. And these seven stocks have rallied over 70% over the past year, while the remaining 493 stocks in the S&P 500 have continued to trade pretty much flat.
The problem with the Magnificent Seven is that these stocks are heavily weighted in the market. In fact, they make up 25% of the S&P 500 and 50% of the Nasdaq. Meaning that if those seven stocks were to rise 4% on any given day, while the remaining 493 stocks fell 1%, the overall S&P 500 index would actually be green. Despite the fact that 98% of the stocks in the market fell, the index would be green, if the Magnificent Seven were up a significant amount. And that’s exactly what we’ve seen throughout all of 2023 and now into 2024, is the Magnificent Seven rallying to insane highs on AI hype, causing the overall stock market to rally as well, even though the vast majority of stocks are not going up.
In fact, if we look at the Russell 2000 index, which is an index of 2,000 stocks, which does not include the Magnificent Seven, that has traded pretty much flat for the past two years. And despite this year’s rally in the S&P 500 and the Nasdaq, the Russell 2000 is actually down 4% year to date. In addition to the AI hype that has pushed the Magnificent Seven stocks higher, there is another reason why stocks have rallied over the past two months.
Last month, the Dow Jones hit a record high after the Fed signaled rate cuts in 2024. The idea behind the stock market rallying on hopes of Fed rate cuts, is that lower interest rates would cause higher profits for companies, which in turn would cause stock prices to go higher. The stock market has preempted this, expecting these rate cuts, and just going ahead and doing the rally ahead of time, before the rate cuts ever actually occurred. But how much company profits actually go up and how much of a long term rally we see is going to be far more dependent upon how fast the Fed cuts rates.
And while the Federal Reserve has only signaled three rate cuts in 2024, the market is expecting six rate cuts. So over the past two months, the stock market has been a bit delusional, rising on Fed hype, if you will, with the stock market pricing in six rate cuts, even though the Federal Reserve only said three. And while the stock market has been trying to fight the Fed on rate cuts, it’s starting to not work. The stock market originally rallied in hopes of a Fed rate cut in March, but now the March rate cut odds have plummeted, even as the Magnificent Seven have continued to surge. Recent better than expected economic data has caused the probability of a March short-term interest rate cut from the Federal Reserve to plunge to below 50% from over 90% in December.
Another thing that’s hurting chances for a Fed rate cut, especially six of them, is the fact that inflation is starting to go back up. December CPI prices rose 0.3%, pushing the annual inflation rate to 3.4%. So AI hype and Fed rate cut hype has continued to push the stock market higher, but whether that rise in the stock market is justified, or if it’s a bubble waiting to burst, really depends upon whether or not the economy is actually as strong as people think it is, or if in fact it is slowing down.
If we look at the leading economic indicators from The Conference Board, this shows that over the past year, the leading economic indicators have been negative, pointing to a slowdown in the economy. And every single time the leading economic indicators turn negative, it always ends up in a recession eventually. Other signs the economy is slowing down include an increase in the continued uninsured employment claims. These are not new unemployment claims. These are the continuing unemployment claims from people who have been out of work for a certain number of months, and have still not yet been able to find a job. Those numbers continue to rise. In addition, the total number of job openings is continuing to go down, and has been for over a year now. And to make matters worse, layoffs have continued to rise as well.
Now a lot of bulls will point to the fact that the official jobs numbers have been quite strong – the official unemployment rate remains at a near record low. And all of that is true. Except you have to understand the fact that the official jobs data is delayed. It’s lagged by at least three months. And when you look at the other jobs data, the jobs data I just showed you, as well as the leading economic indicators, it all points to the economy slowing down. Although, with the official jobs data remaining strong, there is no doubt that the economy remains strong, even if it is slowing down. And what that means is even though the economy is slowing down, and we will probably get a recession eventually, there are no good indications that a recession is going to come anytime soon. In fact, it might not even come this year. But the economy is slowing down, and we will get a recession eventually.
The question is, can the stock market continue to rally despite the economy slowing down, or is the stock market going to wake up to the fact that the economy is slowing down and start to sell off over fears of an upcoming recession? Now despite all of the stuff happening within the labor market, there are other signs that the economy is slowing down as well. The Q3 US GDP growth rate came in at 4.9%. And while that was a significant improvement over what we’ve seen over the past six quarters, it’s still is only about average for the overall US economy. But Q4 GDP growth estimates are expected to come in at only 2.4%, a significant decline from the 4.9% last quarter. And while forecasters were correct in their prediction that 2023 GDP would come in at around 2.4%, they are forecasting 2024 GDP to come in at a mere 1.7%. Again, showing the economy is expected to slow down considerably in 2024. And short term traders should also keep their eyes out for the official Q4 GDP numbers, which will be released on Thursday.
So we know the labor market is slowing down, even though it remains strong right now. And we know that the US GDP is also slowing down, even though it remains strong. But what about consumer spending? Consumer spending makes up 70% of the US economy. And over the past four months, consumer spending has remained strong, increasing every single month. But just like the official jobs numbers, these numbers don’t tell the full picture.
See, consumer spending would mean something if people were only spending the money that they had left over out of their paycheck every single two weeks. If people went and used their paycheck on their necessities, and then used their excess to buy goods and services that they wanted but didn’t necessarily need, consumer spending would be a pretty important number. But today, a lot of consumers use credit cards. And over the past few years, credit card debt has skyrocketed, hitting a record high. So if consumers are doing so well, then why is credit card debt reaching a record high? Well, the answer is consumers are not doing well, and that’s why they’re using credit cards.
And the fact that consumers are not doing well is showing up in the delinquency rate on those credit card loans, as the delinquency rate has continued to rise over the past two years. So what we’re seeing is consumers struggling to keep up with their bills. They’re continuing to spend, but they’re putting that money on credit cards, and they’re also starting to default on those credit cards. So consumers are definitely struggling. Anybody who’s been to the grocery store lately has seen the increase in prices. We all know it’s a struggle to continue to pay our bills when our wages simply are not keeping up. But there’s a new problem that’s hiding the actual problems behind consumer spending, and that is a brand new product called Buy Now, Pay Later.
Buy Now, Pay Later works kind of like a credit card, except for the payments are split out across four payments instead of a long term interest rate on a credit card. And buy now, pay later helped fuel record holiday spending online, surging 14% year-over-year. But now the buy now, pay later holiday debt hangover has arrived, and consumers are starting to wonder how they’re going to pay their bills. The reason buy now, pay later hides consumer spending and the reality of it, is because while buy now, pay later is positive, and that it does go into the consumer spending numbers, pushing those up, it does not go into the credit card numbers. Providers that offer buy now, pay later services don’t typically disclose how often those bills go unpaid, and the debts aren’t reported to credit bureaus.
So it’s clear that the economy is slowing down, even if the official data doesn’t necessarily show it. The official jobs numbers are a little bit skewed due to the fact that after somebody’s been unemployed for a certain amount of time, they drop off of the unemployment numbers. And the number of people who have been unemployed for a long number of months has continued to rise, and those people are starting to drop off, making the unemployment numbers look better than they actually are. On top of that, consumer spending appears to be great, but what’s hidden under the surface is that buy now, pay later is actually a major problem. It’s pushing consumer spending up, but also significantly increasing the amount of debt that people are in, even though it’s not reported, so we don’t actually know about it. And it makes things look a lot better than they are. But credit card delinquency rates don’t lie. And with those continuing to rise, it shows that people really are struggling, and eventually they’re going to be forced to slow down their spending because they’re simply going to run out of ways to buy and spend money.
Now all of that shows the economy is slowing down. But why does the stock market continue to rally, despite the economy slowing down? Well, the simple answer is, the stock market keeps scaling new highs because investors focus on the good, and ignore the bad, no matter how bad the bad parts might look sometimes. So while most stocks in the stock market are trading flat or even going down, the Magnificent Seven continue to rise, which in turn causes the S&P and the Nasdaq indexes to rise due to their weighting in those indexes. And stock market investors overall remain extremely greedy, completely looking at all of the good news, and completely ignoring all of the bad news. The only question now is, how long will that last?
In my free weekly newsletter that I send out every Sunday night, I go over all of the technicals, as well as the market psychology, and discuss when the market might actually start going down based upon the technicals and a decline in market psychology, as well as the economic data and earnings that are coming out that week. If you’d like to get my free weekly newsletter, which covers all of this in great detail, all you have to do is sign up at here.