Total Eclipse of Fears

by Mark Oelschlager of Oelschlager Investments, 4/4/24

In 1983 Bonnie Tyler's "Total Eclipse of the Heart" rocked the FM airwaves, reaching number 1 on the Billboard chart. My father, who couldn't get enough of the tune and played it over and over in the car, called it "Turn Around, Bright Eyes." Forty-one years later we will have a total solar eclipse, with Akron lying in the path of totality. April 8 has been eagerly anticipated, with schools in the area closing for the big day. The Cleveland baseball team even moved back the start of their home opener to avoid any conflict. The 72-year-old Tyler, believe it or not, is releasing a new album in April, though it is her classic track that should get plenty of play around those few minutes of darkness this month.

Every now and then we got a minor pullback in stocks in the first quarter, but prices kept shining, with the major indexes reaching all-time highs. The climb in the quarter was notable for its smoothness, as any drawdowns were quickly reversed. In mid-February, the S&P 500 had risen in 14 of the last 15 weeks, a streak not seen since 1972. Gains continue to be driven in large part by the mega-cap tech companies, and the concentrated weighting of the index’s top constituents remains at an extremely high level, which, depending on your perspective, is reflective either of excessiveness that will eventually correct or the natural outcome of capitalism in a highly scalable, digital world.

Excitement about Artificial Intelligence is providing a boost, as markets price in a massive new spending cycle in technology. It is somewhat reminiscent of the late 1990s and the enthusiasm over the Internet. As it was then, it is difficult to project business growth several years out for the companies riding the wave, but that doesn’t stop the market from attempting to do so. Valuations of those exposed to the new technology haven’t become as unhinged as they did back then, but they do appear to be stretched.

The relentless rise in stocks has surprised many, and looking at it after the fact, it’s perhaps even more surprising. While the US has so far avoided recession in the aftermath of the Fed’s aggressive interest rate hikes, which is certainly positive, one would have thought the persistence of inflation, and the greater than expected rise in the Fed Funds rate, would have provided rougher seas for stocks. While inflation showed progress (declined) in 2023, it did not reach the Fed’s 2% goal and in fact has reaccelerated in recent months. Despite all this, the Fed has continued to guide the markets to expect three interest rate cuts in 2024. This is perplexing; in dismissing the uptick in inflation, it’s almost as if the Fed is attempting to will it back to its downward trend.

The Fed’s talk of lowering rates has been like catnip for the stock market and has surely contributed to the massive gains since October. Speculating about people’s motives we think is generally wise to avoid, and we are the last ones to engage in conspiracy theories, but one has to wonder how much political pressure Chairman Powell and the Fed are feeling to keep the good times rolling in an election year. They may be concluding that 3%-4% inflation with a healthy stock market and economy and happy legislators isn’t so bad compared to 2% inflation, lower stock prices, a slowing economy, and angry legislators. It isn’t a stretch to conclude the Fed thinks about these things, as they have waded into more areas in the last couple decades than they had before. It is our opinion that the Fed should focus on price stability (equivalent to a sound currency), as this is the bedrock of any economy. But the temptations to lose that focus are many.