By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Can Anything Stop This Train?

Stocks’ torrid run higher in 2024 has continued at such a blistering pace it makes one wonder whether stocks are still capable of falling in value.

Of course, such complacency is in and of itself somewhat of a warning sign, and this complacency is corroborated by the volatility index reaching its lowest level since July this past week.

So are investors throwing caution to the wind and ignoring the potential risks still inherent in this market?

At 22 times next year’s earnings forecast for the S&P 500, it’s hard to argue that stocks are cheap at these levels.  In addition, earnings estimates for the next few quarters have actually been falling over the past few months.

Market momentum is a powerful force, and there are no hard and fast rules that dictate what the markets can and can’t do.  Enjoy the ride, but be sure to stick to a well-thought-out asset allocation discipline – if this move higher has your equity allocation at levels that significantly exceed your target weighting, a rebalancing of your portfolio may be in order.

Featured Insight: Mind the Flows

Speaking of market momentum, it’s difficult to stress just how much passive investment flows have come to dominate the equity market.

What are passive flows, you ask?  Well, over the past 20 or more years, investors have increasingly come to use passive indexes like the S&P 500 in their portfolios as opposed to actively managed mutual funds or individual stocks.

Given the strong performance of the S&P 500 over basically every other asset class during the past 15 years, this strategy has made a lot of sense.  

As long as investors keep pouring cash into the market, or, in other words, as long as America remains fully employed, this process is essentially self-perpetuating.

However, a deterioration in the employment picture could change that dynamic.

Looking Ahead: Will Inflation Readings Spoil the Party?

We’ve been experiencing disinflation for roughly the past 18 months, which means the rate of inflation is falling, in other words, prices are rising, just at a slower pace than before.

It is now fairly commonly accepted on Wall Street that inflation is yesterday’s problem.  Hence, the Fed has been able to start lowering interest rates, and that is expected to continue in 2025.

But what if inflation remains stickier than people think it will?  We’ll get some data on that next week with the monthly consumer price index reading, or CPI, as well as the producer price index, or PPI.

If those numbers surprise to the upside, it could throw a wrench in the market’s expectations for further rate cuts, and that could throw a wrench in the market rally – let’s hope it doesn’t, but when no one is expecting a negative surprise, that’s when the market becomes more vulnerable to getting one.