The stock market just doesn’t want to go down right now, but no one should let their fear of missing out on gains override their risk management.
Nothing looks like it can stop the market. The
Nasdaq Composite
is on pace to close at a new all-time high, up 1.6% for the week, while the
S&P 500
is on pace to close the week up 0.8%, which would also be a record. The benchmark index has now risen for two consecutive weeks.
We know what investors are thinking. The gains can keep coming, driven by an economy that is neither too hot nor too cold. The personal consumption expenditures price index rose 2.4% year over year in January, in line with estimates, and durable-goods orders came in lower than expected. The economy is growing, but only moderately, and the Federal Reserve can keep thinking about when it can start cutting interest rates. The federal-funds futures market is indicating that the Fed’s most likely course of action this year will be to cut rates three times.
This dynamic is why nobody wants to miss out on the rally—and why they think it can keep going. A recent survey from Investors Intelligence shows the number of bulls outnumbered their bearish counterparts by the widest margin since late 2021. This level of bullishness is nearly as good as it gets, and suggests that parts of the market “look a little euphoric,” says Julia Hermann, global market strategist at New York Life Investments.
Two risks loom large, though. Despite the fact that the Fed has been reluctant to cut interest rates, the Bloomberg U.S. Financial Conditions Index, which tracks how easy or difficult it is to borrow money, is near its easiest level since late 2021. Conditions haven’t been looser than now in at least the past seven years, according to Evercore ISI strategist Julian Emanuel. That means they’re likely to tighten from here, and when financial conditions tighten, the S&P 500 usually drops.
The other, more proximate risk, is what’s happening to
Apple.
Despite the stock market’s gains this year, Apple has dropped 7.5% and now trades below $180, a level that had been important support for the stock. With iPhone sales growth almost nonexistent in the fourth quarter, the stock could head even lower. If it breaks below $170, the stock could drop even more—and drag the S&P 500 down with it, ending the “fear of missing out” once and for all, Emanuel says.
That’s not the kind of market worth chasing. Rather than being afraid of missing out, investors should fear the very real possibility of a decline.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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