First-quarter gains were led by technology

The NASDAQ 100 index jumped more than 20% from its December 2022 lows. The textbook definition indicates that when a market does that, it officially leaves a bear market and enters the bull market territory.

A handful of stocks can be credited with not only pushing the tech sector higher but also dragging the rest of the market up with it. I’m sure you can guess the names—Meta, Apple, Netflix, Google, and Microsoft—they all did yeoman’s work in the first quarter.

In my opinion, the motivation for crowding into these stocks can be explained with a single word—fear. Fear of financial contagion. Fear of a gathering recession. Fear of a Fed that may have overstayed its role as an inflation fighter. All these companies represent a place to hide out. They have little debt, strong cash flows, and solid business models.

Fear is also the reason investors have flocked to gold and precious metal miners. Throughout history, whenever there has been a question of financial stability in the banking system, gold seems to shine. The fact that the government and the private sector have rushed to assure all of us that the system is stable, and a few bank failures are nothing to get upset about was commendable and expected. But has it assuaged the market’s worries that we have yet to see another foot to fall in this sector? No, depositors are still moving money out of smaller banks into larger banks and into U.S. Treasury bills, money market funds, and out of checking and saving accounts.

On the positive side, the recent banking crisis has forced the Fed to pump money into the credit markets. That has caused the equity markets to rise as the liquidity in the financial system increased. The flow of billions of dollars from the central bank into the banking sector has effectively put the Fed’s quantitative tightening program on hold for now.

In addition, many investors are convinced that the regime of interest rate hikes is over. They point to the impact the Fed’s rapid rate rise over the last year has had on the banking system. Further hikes could translate into even more bank failures, which is something the Fed will need to avoid. As such, the next move by the Fed will be to cut interest rates and do so before the end of the year.

I am still thinking we have room to run here on the S&P 500 Index. In the next few weeks, my upside target of 4,370 could be achieved but it won’t be a smooth ride. Near-term resistance on the benchmark index is right here, around 4,100. Investors for behavioral reasons are attracted to or repelled by round numbers. The 200-day moving average (DMA) has held like a champ throughout this period, which is an encouraging sign.

All the averages, however, are fairly stretched, so a stalling out and a bit of selling should be expected in the near term. One area that has shown exceptional strength is the precious metals area, especially gold, and silver. Aggressive investors in the short-term might want to dabble in these commodities if there is a pullback in price next week.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  None of his commentary is or should be considered investment advice.  Email him at bill@schmicksretiredinvestor.com.