Don’t Sell Everything | Seeking Alpha

The S&P 500/SPX (SP500) and other significant stock market averages have been in a downturn since the SPX hit a blowoff top in late July. However, I began warning of an upcoming correction in June when the SPX went parabolic, registering an RSI well above the crucial 70 level. I warned that the top-weighted tech stocks in the S&P 500 had appreciated too much and too quickly, putting up a median (from the bottom) return of 130%.

Then, in late July, just days before the blowoff top came, I discussed that the pullback would continue and could cause the S&P 500 to decline by 10%. We’ve been in a rolling correction for approximately two months, and my pullback bottom/buy-in target remains at 4,150 in the SPX (roughly 10% correction mark). I noticed that some market participants were panicking, and there was a strong sense of fear in the air.

However, the technical conditions are oversold, and the fundamental backdrop should improve as we advance. The market is a forward-looking mechanism, and we witnessed the bear market end last year. Therefore, the current negative sentiment will likely change to a more positive tone. Instead of panicking and selling everything, we should consider adding to our favorite stocks soon.

The Time To “Sell Everything” Has Passed

The time to sell everything was around the peak of the last bull market in late 2021. Valuations had gone wild, and high-flying growth stocks went vertical. Of course, we witnessed an epic drop where the stocks of many high-quality companies declined by 50-75%. We’re not likely to see Tesla (TSLA) back at $100, Meta Platforms (META) below $90, or Nvidia (NVDA) at $105. That ship has sailed, and we had many excellent buying opportunities last year around the bear market lows and going into 2023.

More recently, we had an opportunity to sell some things, as it became evident the correction was near. However, why would you want to sell everything when the correction could end in the coming weeks? Despite a challenging macroeconomic landscape, the market is forward-looking, and high-quality stocks should move higher as economic growth improves next year.

The Benchmark – Not Going to 7%

Recently, JPMorgan’s (JPM) banking chief, Jamie Dimon, said that the world might not be ready for the Fed funds rate to go to 7%. Mr. Dimon has often been outspoken, claiming Bitcoin is worthless at times. Therefore, I’m unsure how to interpret Jamie Dimon’s comment about the Fed funds rate (possibly) going to 7%. Nonetheless, one thing seems clear: Mr. Dimon likes to make a splash with his quotes, but regarding the Fed’s benchmark going to 7%, the market does not agree.

First, the Fed Funds rate is at 5.25-5.5% now. Why would the Fed need to hike the benchmark by another 150-175 Bps? Inflation has moderated considerably and should continue declining in future months. CPI inflation has dropped from a high of around 9% to just 3% in recent months. PCE inflation also recently fell to just 3%. While we’ve seen a minor resurgence in inflation, and despite core PCE still being around 4%, high-interest rates and a cooling economic atmosphere should help bring inflation down to the Fed’s 2% target range.

The forecast is for a 3.9% core PCE reading this Friday, and if we get a 3.9% or lower reading, the market should react favorably. Also, the 30-year fixed mortgage average is around 7.2% now, its highest level since 2000. We’ve also seen the most significant spike in mortgage rates in about 40-50 years, and this dynamic should cool the economic atmosphere, bringing inflation down.

30-Year Fixed Mortgage Average

We see a similar but more extreme dynamic with rates on credit card plans. Commercial bank interest rates on credit card plans have skyrocketed to a staggering 21%, much higher than anything we’ve seen in recent years and decades.

Commercial Bank Interest Rate on Credit Card Plans

We see a similar dynamic with auto loan rates. Auto loan rates have nearly doubled since the lows in 2021 and 2022.

Interest on 60-month New Car Loans

We see interest rates spiking all around us. Therefore, if you were going to buy something (make a big purchase), you may want to hold off. Consumers are acknowledging the abnormally high-interest rate environment, which should enable Inflation to cool.

10-Year Treasury

Aside from a brief blip in 2006/2007, the 10-year Treasury is at its highest level in over 20 years. Due to the Fed’s tightening monetary policy, rates all around us are spiking to their highest levels in decades. This dynamic is required to bring down inflation. The current interest rate environment is cooling most segments of the economy and should continue correcting inflation without further rate hikes.

However, if the Fed wants to avoid a soft landing, trigger a recession, and crash the U.S. and possibly the global economy, it can continue raising the benchmark to 7%. Nonetheless, I fail to see why the Fed would take such a destructive path, considering it could lead to deflation, high unemployment, and destabilize the economy.

Rate Probabilities – 7% What?

There is no indication of a 6-7% benchmark. Looking out into mid-2024, there is a higher probability that the benchmark rate will be lower than it is now. Also, there is a minimal probability (less than 50%) that there will be another 25 Bps increase, never mind 150-175 Bps, as Jamie Dimon suggests. Additionally, if we look at non-government-backed, independently compiled inflation numbers, inflation is lower than expected.

USA Truflation – 2.6%

We all know the government’s way of doing things could be more efficient and updated. It’s the same thing with inflation. The government’s top two inflation gauges, the CPI and the PCE, may need to be more accurate and as reliable as we’d like. Moreover, the Fed’s preferred gauge, the core PCE, may also need to be updated and more reliable. Truflation takes gauging inflation to a new level. Also, Truflation does not play down inflation. It presents it in a more effective, up-to-date manner.

We see inflation peaking at 9.7%, around the bear market lows of last year. Then, inflation dropped to 2.08% in July this year, exceptionally close to the Fed’s 2% target rate. Truflation could measure inflation more efficiently than the government’s outdated methods. Thus, government figures could catch up to Truflation’s inflation readings as we advance. This dynamic suggests that the actual inflation rate may be lower than perceived, and the Fed may not need to introduce additional rate increases. Also, this dynamic supports the benchmark probabilities illustrated in the CME Group’s FedWatch Tool.

Abundant Fear Mongering

– We May Be Close to a Bottom

One thing I’ve learned in my 20-plus years of investing is when the bears are out in force. The bottom is likely near. It’s also like when no one wants to be bearish, and everyone is only focusing on the “positives,” a top in the market may be near. Someone famous once said that you should be fearful when others are greedy and be greedy when others around you are fearful.

Aside from the 7% Jamie Dimon speech, another JPMorgan banker (Kolanovic) says the current rate environment “rhymes with 2008.” This sounds scary, right? Yes, that’s what I mean. Kolanovic says, “Don’t expect AI to come to the rescue either.” Kolanovic has been bearish (underweight) in the market throughout 2023, missing out on significant gains in the first half of the year.

Nonetheless, we should listen to him. I think Kolanovic and JPMorgan’s” global strategy team have minimal credibility. Instead, this dynamic may represent a solid counter indicator suggesting that the year-end rally could soon begin.

As far as AI is concerned, we are still in the very early innings of a long ball game, and high-quality AI stocks have substantial upside ahead. If comparing to the ’90s internet boom, it’s not 1999 or 1997, but likely the 92-94 time frame, suggesting multiple years of significant upside for the highest-quality names.

My Top Five AI Stocks for The Next Ten Years

1. Palantir (PLTR)
2. Nvidia (NVDA)
3. Tesla (TSLA)
4. Meta Platforms (META)
5. AMD (AMD)

Enough About The Negatives

– Let’s consider some positive factors instead

Earnings season is approaching – Earnings season should be a constructive catalyst for stocks, as we should see many companies report better-than-expected sales and EPS. Moreover, many high-quality companies should become even cheaper than expected as EPS projections may get revised higher.

Around the top of an interest rate cycle – Despite Jamie Dimon’s comments, we could be around the top of the interest rate cycle, implying the Fed may stop raising rates and move to a more accessible monetary stance in early 2024, a bullish dynamic for stocks and other risk assets.

The government shutdown will get resolved – I’ve seen many of these “shutdowns.” The impact on the general economy has always been minimal, and this time is no different. Instead, stocks should get a positive boost when the nonsense in Washington gets resolved.

Many stocks are cheap – The current S&P 500 P/E ratio is around 20, and the forward P/E ratio is below 20, suggesting that many stocks are relatively inexpensive.

Inflation continues to moderate. It doesn’t matter which gauge we use. Inflation has declined sharply over the last year and is close to the Fed’s 2% target range (by some measures). Therefore, we may see fewer rate increases, and a more accessible monetary regime could soon begin.

The AI revolution is still in its infancy – The AI revolution is just starting, and we should see significant economic activity in this sphere. Many companies, sectors, and industries should prosper, increasing general economic activity due to advancements in the AI sphere. This dynamic should reflect positively on the overall stock market, enabling the Nasdaq and the S&P 500 to move up to new ATHs in the coming years.

Keep your eyes on the prize – Investing is a marathon, not a sprint. While continued volatility in the near term is plausible, long-term investors always win. This phenomenon is especially true when investing in the highest quality stocks in the most promising industries, likeliest to succeed. Therefore, despite the turbulence and the uncertainty, I’m keeping my S&P 500 price target in the 4,800-5,000 range.