Stocks were trading higher on Wednesday morning after November’s CPI inflation data was in line with estimates, cementing the case for an interest rate cut next week from the Fed.
The rebound comes on the heels of a rough start to the week, with many leading stocks staging negative reversals after surging in early December. The moves were not all that surprising, with some near-term volatility expected as institutions implement year-end tax harvesting strategies.
Still, this market continues to show signs of strong momentum as the Nasdaq hits a new all-time high this morning. While we saw renewed leadership in areas such as financials and industrials in the post-election period, the tech sector has come roaring back this month, which is a positive sign that points to the potential for more bullish outcomes moving forward.
Investors Cheer Lower Interest Rate Path
This morning’s release of the November CPI report showed headline inflation rose at an annual pace of 2.7% in November, a slight uptick from October’s 2.6% yearly gain in prices. On a “core” basis, which strips out volatile food and energy components, prices rose 3.3% over the last year.
Odds of a 25-basis point cut at the upcoming meeting jumped to more than 96%, all but assuring a new target range for the central bank’s policy rate. Fed Chair Powell is likely to remain cautious about upside risks to inflation in his post-meeting press conference next week.
The NFIB Small Business Optimism Index rose by 8 points last month, marking the largest monthly increase since 1980. The index is currently at its highest level since June 2021. Clearly, small business owners are excited about a second Trump presidency amid prospects of deregulation and lower taxes.
Year Two of Bull Market Aligns with History
Most investors were hesitant over the past year to accept the idea that we had entered a new bull market. But with stocks eclipsing their all-time highs in 2024, nearly everyone has now come around. We have entered the third year of a new bull market – that is an undeniable fact.
The S&P 500 has been in 10 bull markets (not including the current one) since 1950. New bull markets have lasted an average of 5.4 years from the prior bear market’s bottom:
Zacks Investment Research
Image Source: Zacks Investment Research
The longest bull spanned more than 12 years and ended with the dot-com bubble, while the shortest bull was the most recent one and lasted just 21 months (2020-2022).
What about new highs? Even after stocks have begun a new bull market, it takes some time for them to ultimately break their former highs from the prior bull market.
This time around, it took more than two years for the S&P 500 to break above the highs from January 2022. New highs should be viewed as a sign of strength; it means that stocks are ultimately surpassing levels that met former resistance, and a breakthrough of those levels normally ushers in additional buying pressure.
The S&P 500 hit a new high in January of this year. Dating back to the 1950s, once those former highs were put in the rearview mirror, bull markets have lasted an average of another 4.5 years. This overlooked fact suggests the potential for more gains ahead that could be substantial. Investors normally underestimate the length and magnitude of bull markets.
By contrast, we’ve seen 15 bear markets over the same time frame. We see bears occur roughly every 4-5 years and they tend to be short-lived, typically lasting about 11 months.
This is not to say that investing is easy; stocks always experience some form of volatility along the way. We saw above that in year 2 of new bull markets, the S&P 500 averages a nearly 10% decline. But we must embrace volatile periods as part of the process.
We can’t expect to achieve outsized gains without some bumps in the road. It’s important to not make any assumptions about what this third year may hold.
Tech Stocks Dominate Headlines
Tech giant Apple AAPL is breaking out to a new all-time high after reports suggested the iPhone maker is working with Broadcom to develop its first server chip designed for artificial intelligence processing. The AI theme has returned this month as companies spend billions of dollars in a race to introduce new technologies.
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Image Source: StockCharts
Apple stock, which is currently a Zacks Rank #3 (Hold), has advanced more than 30% year-to-date. The company is projected to grow its bottom line 10% in the current fiscal year on 5.6% higher revenues ($412.8 billion).
Meanwhile, Google-parent Alphabet GOOGL shares rose nearly 10% over the past two sessions after the company claimed a major breakthrough in quantum computing through the advent of its new Willow quantum chip. Alphabet CEO Sundar Pichai has stated that the new chip performed a benchmark computation in under five minutes, a feat that would take one of today’s quickest supercomputers 10 septillion years.
“We see Willow as an important step in our journey to build a useful quantum computer with practical applications in areas like drug discovery, fusion energy, battery design, and more,” Pichai said.
Alphabet shares have surged more than 38% in 2024 and are also breaking out to an all-time high. The stock is a Zacks Rank #3 (Hold), but that ranking may improve soon as the company experiences positive earnings estimate revisions.
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Image Source: StockCharts
Another stock in the AI space that is hitting new highs is EV-maker Tesla TSLA. The company sold 21,900 electric vehicles in China during the first week of December, which marked the highest weekly sales in the fourth quarter of this year. Tesla’s beloved Model Y has been the best-selling passenger EV in China over the past year with sales surpassing 550,000 units.
One of the biggest beneficiaries in terms of post-election performance, TSLA stock soared 66% thus far in 2024. Tesla remains a Zacks Rank #1 (Strong Buy).
StockCharts
Image Source: StockCharts
How to Approach This Rally
Many leading stocks were extended heading into this week. The first few days brought enhanced selling pressure, helping to alleviate some of the froth. An inflation report that mainly met expectations has helped to halt some of that selling activity, at least for the time being.
Overall, it’s not a time to be getting too aggressive. In terms of any new portfolio additions, target stocks that are not extended and are breaking out of proper bases.
But remember, this latest rally has now entered its third year. And while there will certainly be some volatility along the way, most investors tend to underestimate the length and magnitude of bull markets.
Make sure you’re taking advantage of all that Zacks has to offer as we head into the latter part of December.
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