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April 2024

Dear Clients and Friends,

Has there ever been a stock market more obsessed with the Federal Reserve and interest rates? No, at least according to CNBC market pundit Jim Cramer. Investors are salivating in anticipation of multiple interest rate cuts this year. Ironically, a declining interest rate environment often means a weakening economy, which is obviously not good for stocks. Since 1955 the Fed has substantially cut rates (cumulative cuts of 1% or more) 17 times. Twelve of those were in reaction to downturns or economic crises. If the Fed cuts well before a recession, they are more likely to stave off a downturn. If a recession has already laid its foundation, rate cuts would only be catching up to an already-weak economy, which will likely have seen stocks already falling.

For now, the US economy continues to be remarkably resilient, leading US stocks to rally significantly since October of last year. A very strong first quarter of 2024 might suggest that investors have gotten over the tips of their skis a bit. Valuations are stretched. Not extremely so, but stocks are not cheap as shown by the price-earnings ratios below taken from the Wall Street Journal.

Behind the jump in price-earnings ratios are: 1) strong corporate earnings, especially among the largest companies in the market indexes (the so-called Magnificent 7) whose stock prices have been pushed even higher by AI-mania, 2) the very heavy weighting of those seven stocks in the indexes (a staggering 29% of the stock market’s value), and 3) investor belief that multiple interest rate cuts are coming this year. Lower interest rates usually equal higher price-earnings ratios.

The strength of company profits has been undeniable. The key issue is always “how long can it last?” We know the Fed wants to get to 2% inflation (from 3.5% currently), which likely means a slowing down of the economy, hence slower growing corporate profits. What is interesting is that Wall Street analysts are already anticipating this slowdown and cutting their estimates for quarterly earnings at a fairly rapid clip, at least for the other 493 companies in the S&P500 index. If companies can continue to beat Wall St estimates, even in the face of slowing earnings growth that could maintain share values.

In the following chart, you can see that analysts are still raising estimates for Magnificent 7 stocks (Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia, Tesla) while lowering expectations for earnings for the rest of the S&P500.

We must keep in mind that corporate profits are not a leading indicator. And there remain some indicators that highlight possible trouble ahead. In the past, we noted companies having to refinance a wave of debt, especially in the commercial property space, at much higher interest rates. This impacts smaller companies much more than larger ones.

We also see consumer credit starting to strain in the face of higher interest rates with the exhaustion of pandemic-era stimulus and excess savings. The next chart shows the recent increase in consumer loan and consumer credit card delinquencies. While the overall delinquency rate merely returns to historical averages, the trajectory is concerning. A continued rise could slow down one of the primary drivers of recent economic growth – surprisingly robust consumer spending.

A slowing economy and stubborn interest rates will inevitably lead to stocks trading closer to their average historical valuations. For the S&P500 that’s a price-to-earnings ratio of about 16-18. From our first table on page one, you can see that the S&P500 PE was 18 a year ago. To get back to that average, with earnings at current levels, implies a decline in the S&P500 from around 5200 now to 4500, undoing almost all of the market’s rally from October. That would be a significant drop and would require the earnings growth of the Mag 7 to substantially under-perform expectations. Is it likely? Probably not.

However, stocks are due to take a breather from their most recent rapid advancement and some retrenchment should probably be expected. Already, over the past six weeks, we have seen markets become choppy and range-bound, a good digestion of the rally. It would not be surprising to see stocks drop back somewhat here as stubborn inflation keeps interest rates steady and investors continue pushing out their expectations for rate cuts. Indeed, in election years such as this one, stocks often slump in the middle of the year before regaining their strength as the election uncertainty passes.

Here is a chart of election-year market movements for almost the past 100 years:

To future profits,

Don Lansing
Chief Investment Officer.

Garrett Beauvais
Portfolio Manager

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About MarketTrend Advisors

MarketTrend Advisors is an investment advisory firm that specializes in the trend-following strategies outlined in this report. We offer a variety of strategies that can be used to build portfolios to meet almost any investment objective. We divide our strategies into two main groups: "Long" strategies and "Trend" strategies. The Trend strategies follow the trend up or down. The "Long" strategies are typical investment portfolios that usually remain fully invested, potentially raising cash or moving to income-focused investments when the market is weak. We have a variety of "Long" strategies depending on how aggressive or conservative you want to be. These strategies will make their money when the market is moving higher. The "Trend" strategies will provide protection in a down market and add to gains in an up-trending market. By combining the Long and Trend strategies you get all the components needed to build a successful long-term portfolio:
  1. A portfolio invested in the best performing indexes, ETFs, or stocks
  2. Substantial exposure to global growth through international holdings
  3. Protection for your overall portfolio from down-trending markets When the market is going up, you benefit as aggressively as you wish.
When the market is going down, your assets are protected, or even profiting. Over time, you will see returns that exceed the market if only by AVOIDING market corrections and bear markets. By using one of our more aggressive long strategies in an uptrend, you will see even better performance.

  1. MarketTrend Advisors, Ltd. is an independent registered in the States of California, Florida, New York and Texas.
  2. Other Securities Industry Affiliations or Activities. MarketTrend Advisors, is not registered as a broker or dealer, nor do we have any partners or employees who are affiliated with any broker or dealer. See Form ADV, Part II for official declarations.
  3. MTA portfolio strategies assume risk and no assurance is made that investors will avoid losses. No representation is made that clients will or are likely to achieve profits or incur losses comparable to those shown. Performance results are shown for illustration and discussion purposes only. The performance information has not been audited. However, the information presented is believed to be accurate and fairly presented. All performance figures in this presentation are net of management fees and commissions. Management fees are charged to actual client accounts on a monthly basis. Accounts include both taxable and non-taxable IRA accounts.
  4. Regarding the MTA Blend strategy: This strategy was migrated into the MTA Wealth Builder strategy and closed in December 2008.
  5. Regarding actual performance: Actual performance for all strategies includes all commissions as well as management fees (fees range from 1% to 2%). Actual performance statistics are based on the inception date of each strategy through the end of the last business day of the most recent month listed in the monthly performance section of this report. Starting with Q4, 2006, returns include only assets of Fidelity clients who were fully invested in their respective strategies. Returns before Q4, 2006 include all Fidelity client assets regardless of investment status. Results do not include the assets of clients at other brokerage firms.
  6. Regarding future performance: Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.
  7. S&P 500 refers to the Standard & Poor's 500 Large-Cap Corporations Index. The index is designed to measure performance of the broad based US market and consists of 500 American companies. This index is used for comparative purposes only. (Data is taken from Yahoo! Finance.)
  8. MarketTrend Advisors is not liable for the usefulness, timeliness, accuracy, or suitability of any information contained in its web site or of any of its services. The user understands that the information given can and will fail to predict the direction and magnitude of market price movements and the user can lose money when using this information.
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