The stock market's latest joyride to the upside appears to have hit a snag. Well, for now at least, anyway. Up until last week, the bulls were large and in charge based on the idea that (a) the economy and in turn, earnings, were doing just fine, thank you and (b) the Fed was about to cut rates. What more can a bull ask for, right?

In short, everybody on the planet knows that it doesn't pay to "fight the Fed" and that stocks tend to enjoy above average gains once the U.S. central bank cuts rates the first time. In fact, the computers at Ned Davis Research Group tell us that since 1921, the Dow Jones Industrial Average has produced a median gain of +15.2% in the 12 months following the first rate cut.

Therefore, investors of all shapes and sizes can't be blamed for jumping on the bull bandwagon after Jay Powell signaled that a "pivot" in monetary policy was forthcoming. And because of this, I've been surmising for some time now that the stock market has been in the process of "pulling forward" some of the gains that tend to occur after an easing cycle begins.

But then, almost right on cue, with the market having become overbought and perhaps even a little over exuberant, a couple things happened to pour some cold water on the bull case. First, Jay Powell stepped to microphone and started poo-pooing the idea of a March rate cut. And then a few days later, a hotter-than expected CPI print snuffed out the last of the hopes for a near-term rate cut.

We've Seen This Movie Before

Just like that, the markets adjusted. Again. You see, this wasn't the first time that traders had gotten ahead of themselves in terms of Fed expectations. Nope, we've definitely seen this movie before. And while the hero doesn't die in the end, there are usually some casualties when the shootout at the OK Corral begins. In this case, we're talking about lower stock prices and higher interest rates.

The bears are quick to opine that the Fed's pushback and the recent strong data means "higher for longer" is back in play. As such, some of those stock market gains based on expectations of rate cuts need to be given back. Then with inflation looking a little sticky lately, some of our furry friends have gone so far as to suggest that the Fed may even have to raise rates again before they start going the other way.

So, it isn't surprising to see traders hit pause on the recent run for the roses and take time to rethink their game plan a bit.

However, a question worth asking is, why haven't stocks fallen farther? After all, the market has gone into a pretty decent funk each time a rethink has been required over the past year or so. And so far, at least, the S&P 500 is only a couple days from an all-time high. So what gives?

The Key Is...

My take on the current situation is it's not a question of "if" but rather "when" Jay Powell's merry band of central bankers starts to cut rates. Therefore, longer-term investors are likely thinking that, according to history, above-average gains are likely to show up over the next year. And while the timing of the first rate cut may be a little tricky, most analysts agree that the first cut will happen in the coming months. So, instead of trying to get too cute with the timing, some investors may want to get on board now - comfortable in the knowledge that stocks are likely to be higher a year from now.

Sure, the current sloppy period could get even sloppier - or perhaps even a little scary if a certain AI Chipmaker's earnings don't meet the stratospheric expectations this afternoon. As we've discussed, stocks are overbought, and conditions suggest a pullback wouldn't be surprising.

But from my seat, the idea that stocks tend to advance at a pace that is almost twice the norm after the Fed starts cutting rates is reason to stay seated on the bull train. At least for now, anyway.

Thought for the Day:

Seek first to understand, and then to be understood. -Anonymous

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES