Stocks Are up 30% in the Last Five Months – Should Investors Pull Back?

March 30, 2024

By Robert Wiedemer

The market is up a lot and Bull Bear clients have benefited mightily as we’ve called this rally since the beginning of last year.  But has it run out of steam? 

Well, going forward there’s little doubt that the market won’t be able to maintain the almost 1% a week gains it had in January and February.   That’s just too fast a pace for any market.

But will it continue to go up?  To answer that question, let’s first look at why it went up. 

There Are Very Good Reasons the Stock Market Has Rebounded So Much:  Interest Rates Have Stopped Rising and the US Treasury Has Become a Solid Friend of the Stock Market

It’s important to recognize that the market’s big move up wasn’t just a random move of the market.  It coincided perfectly with the end of higher interest rates. 

The rate on the 10-year bond rose very rapidly in October from 4% to 5%.  That was incredibly scary, and the market took a 10% dive.  On top of that, it was not absolutely clear that the Fed had lost all interest in raising rates, which had pummeled markets in 2022.  And, even if it had lost all interest in raising rates, why were rates going up so sharply in October?  Was the Fed going to intervene to bring down those rates?  Scary times for good reason.    

Also, there was a newcomer to the interest rate setting world.  It wasn’t just the Fed setting rates anymore, the US Treasury was becoming much more important.  In the past the Treasury Department didn’t have much effect on interest rates because it usually sold long term bonds. 

However, more recently it has been using short term treasury bills much more heavily to fund our massively growing debt.  Borrowing short term from money markets has much less negative impact on the 10-year interest rate than borrowing 10-year bonds.   

At the end of October there was a big question about the Treasury intentions:  How much of the government’s 4th quarter borrowing would it fund by selling long term bonds?  The more bonds it sold; the higher interest rates would go.  That just added even more anxiety to the market. 

Fortunately, the Treasury announced it would fund almost 75% of the debt it issued in the 4th quarter with money markets.  That was a huge relief to the market, and it portends a big and positive change for the stock market.  If the Treasury was willing to fund our massive deficits with money markets instead of long-term bonds, that would greatly reduce pressure on interest rates for long term bonds.

After the October 29th announcement by the Treasury, the market rallied and never looked back. 

The stock market’s biggest threat – higher internet rates – had been destroyed by both the Fed and now, a new friend, the US Treasury.  The Fed and the Treasury were clearly on the side of keeping rates from rising further.

Keep in mind that rising interest rates have been the only real threat to the market since the Financial Crisis of 2008.  In fact, the market has had only two significant down years since 2008 and both of those were caused by rising interest rates.

Those Very Good Reasons Are Likely to Continue

So, this rebound is due to very good reasons that are likely to continue:  1) A Fed that no longer wants to raise rates and has lower inflation to back it up and 2) a Treasury that is much more sensitive to putting upward pressure on interest rates by being willing to fund our massive deficits with money markets instead of long-term bonds.

Finally, since the beginning of 2022, the market is only up 11%.  That’s not a big increase over a 27-month period. So, much of the gain we are seeing is just a rebound from a big downturn. 

Since the Financial Crisis, the market has shown that whatever price it was earlier was a fair price and it always rebounds back to that price.  That may not fit normal valuation models, but it’s reality.

We’re Not Pulling Back from Stocks and Those Who Talk About It Are Just Trying to Look Smart, Not Manage Smart

So, we’re not pulling back from the market.  But, again, as I said at the beginning of this article, I don’t think the market is going to go up as fast as it did in January and February.  And we are guaranteed to have a pullback at some point, maybe in April, but, if not, then very likely by this summer. 

However, a short-term pullback is not a reason to pull out of the market.  Pulling out of the market for a short-term pullback is just a way to lose money without protecting you from any real long-term risks. 

All the money managers who talk about pulling out of the market or reducing their stock position because of a likely pullback coming are just going to hurt their clients’ returns without giving them any increase in long-term safety.  Just maybe a little less volatility short term. Maybe.

What all the talk about reducing market exposure gives them is a great stock picking/stock timing talking point -- another way to try to look smart in their portfolio management, without actually being smart in their portfolio management either short term or long term.