Amid widespread pessimism and weak economic data, and to the surprise of many hedge fund managers holding trillions in cash, the market has gained ground since October. The S&P is up 8% year-to-date and 16% since last October’s low, that despite the daily onslaught of negatives here and abroad. Imagine where stocks would be if some of the troubling negatives become a little less so. We may soon know. 

Because this year’s rally is almost exclusively in technology stocks investor sentiment remains negative. In a recent survey, money managers were asked to name one asset class or security that would do best through year-end. More than 35% said the two-year Treasury note, which yields 4.01%. Nothing better than that for the next nine months? That’s setting the bar low.  

Such pessimism bodes well for stock prices. The S&P’s future value will depend on earnings in 2024 and beyond, the outlook for which is a moving target dependent on the economy, which in turn depends in part on future interest rates and inflation. About inflation …

The year-over-year inflation rate is 5%. Any way you look at it inflation is far too high. Groceries and services are leading the way and now with energy prices rising there will be more upward pressure on inflation. Energy costs are in everything.  Inflation undermines asset values and living standards. No one wins.  

My advice to all Fed governors and Jerome Powell is to get out of the forecasting business. They are terrible at it and have been for decades. The latest: In his Q&A session Powell said the Fed sees GDP growth this year of 0.4%. First quarter GDP is expected to grow 2-3% so if the Fed’s is right there will be negative growth for the remainder of this year. He also said the Fed won’t cut rates this year. Oh? But they would if growth is so slow.  

The S&P 500 is trading at 17.9 times its expected earnings over the next 12 months, down from 21.6 times earnings at the start of 2022. That’s near its 10-year average of 17.3. The reasons why stocks might fall (banking system, inflation, likely recession, falling profit margins, etc.) are well known and already priced in. The reason why stocks could rise is that few expect that. Investors are flocking to the money markets instead. That money will be the fuel for the next big stock rally.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.