Ever get stuck in an elevator in a skyscraper? It happened to me near the 40th floor, back when I worked in Manhattan in the 1980s. It was nerve-wracking. For those 20 minutes in limbo before the elevator started working again, I kept imagining a sudden plunge to a horrible death.

There’s an old Wall Street adage: The market takes the stairs up and the elevator down. That’s just a colorful way of saying that the market tends to drop faster than it rises.

We’ve witnessed a powerful rally so far this year, so I consider it healthy that the main equity indices have modestly pulled back so far in August. A sentiment predicated on prudence, rather than the fear of missing out (FOMC), is preferable.

Investors are pocketing some profits, especially among red-hot tech stocks, and reassessing how the second half of 2023 is likely to play out. It’s safer to take the stairs.

The biggest retreat has been among technology stocks, as the mega-cap leaders catch their breath. The segments of the market that have been in the vanguard of the bull run are down the most, which shouldn’t be a surprise.

The next meeting of the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) will be held September 19-20, during which time the central bank could either pause its tightening or dole out another 0.25% rate hike. Either way, the Fed is nearing the end of its rate-boosting campaign.

The fundamentals (e.g., economic growth, the jobs market, inflation, and corporate earnings) remain generally favorable. Until we get a clearer picture of the Federal Reserve’s intentions next month, stocks will give us a bumpy ride, as they did last week (see chart).

Yields are likely to continue to edge higher until a couple months previous to any pause in the boosting of rates, which could occur soon.

On Monday, the main U.S. stock market indices starting the new week on a positive note and closed mostly higher, as follows:

• DJIA: +0.07%
• S&P 500: +0.58%
• NASDAQ: +1.05%
• Russell 2000: -0.24%

I don’t foresee a full-fledged correction (a decline of 10% or more) this year, but we’re heading into the autumn months, which tend to be volatile.

FOMC and AI…

The market rally in its early phase stages was fueled by FOMC regarding artificial intelligence (AI), led by enthusiasm for the Big Tech stocks that are household names. Those names also led losses last week.

However, the rally has broadened with cyclical sectors and small-cap stocks seizing leadership. It’s a good sign that the Dow Jones Industrial Average has shaken off its slumber and come to life. The Dow’s components are particularly sensitive to economic conditions. It’s also heartening that commodity prices, notably bellwethers such as crude oil and copper, have been rebounding.

Copper is a widely used commodity so sensitive to economic ups and downs, it’s viewed as a leading indicator. Because copper is a time-proven predictor of macroeconomic trends, the metal is said to have a PhD in Economics.

Hence the metal’s nickname “Dr. Copper.” And the doctor’s economic prognosis is positive, with prices for the red metal on the upswing since May.

The pace of inflation’s decline has moderated somewhat, but that’s to be expected too. Investors yearning for unalloyed good news on inflation are unrealistic; these data points ebb and flow, especially in the context of geopolitical strife and resource scarcity. The overriding point is this: inflation is heading in the right direction.

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Barring any nasty surprises on inflation, the Fed is on course to hold the fed funds rate at the current 5.25% – 5.5% for a prolonged period. Of course, as Fed Chair Jerome Powell has said himself, the door is open for additional rate boosts, but odds are increasing that the Fed will pause, and then cut sometime in early 2024.

The bookmakers on Wall Street are betting that we’ll see the first rate cut in March 2024, but as I’ve often warned you, long-term predictions of that sort are foolhardy.

Fed officials are in uncharted territory that offers no clear precedent. Inflation is dropping but the unemployment rate (thus far) hasn’t increased. The textbooks tell us that this dynamic shouldn’t happen. Theories abound as to why we’re witnessing this anomaly.

Some analysts speculate that companies are hoarding workers and therefore keeping unemployment low, due to the unpleasant memories of trying to find suitable workers during the pandemic. Others point to unusual supply chain problems, now on the mend, that were caused by the Russia-Ukraine war and COVID. (If you’re looking for a single person who’s most to blame for global inflation, wag your finger at Russian President Vladimir Putin.)

The more conventional explanation is that interest rate increases exert a lagging effect and unemployment is likely to eventually spike higher.

Regardless, the U.S. economy has been surpassing expectations. Lost amid the preoccupation over inflation has been an astounding fact: the Fed currently forecasts third-quarter gross domestic product (GDP) growth of 4.1%. I’m willing to bet that statistic surprises you. So much for a recession, which many analysts had until recently forecast as inevitable.

Rather than presage a correction, the rally’s recent pullback probably represents a reset for the next leg higher. Another pillar supporting my view is the anticipated recovery of corporate earnings growth. The consensus expects earnings to bounce back into the black in Q3 and Q4.

From a technical standpoint, the S&P 500 still hovers above its 50- and 200-day moving averages, and as long as that remains the case, the bullish argument holds sway.

Expand your exposure to stocks (e.g., cyclical plays) that tend to outperform during economic expansion, but take it one deliberative step at a time.

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Robert Rapier is chief investment strategist of our premium advisory, Utility Forecaster. He’s the “income guru” on the Investing Daily team, and no one understands income investing better than Robert.

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John Persinos is the editorial director of Investing Daily.

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