The market is near all-time highs. That doesn't mean it can't go much higher

Published Wed, Mar 27 20246:00 AM EDT

Looking at the recent performance of the market and several stocks in our portfolio, one thing is clear: This is a market that wants to go higher. It's incredible to see how stocks are reacting to even the slightest hint of positive news. Even a simple lack of bad news seems like enough to propel many stocks to the upside. Consider what played out last week after the Federal Reserve released its latest economic projections and Chair Jerome Powell held his customary post-meeting news conference. The ground-breaking revelation that caused the S & P 500 to add 1.6% between 2:00 p.m. ET Wednesday and Thursday afternoon, before trending slightly lower into the weekend, was … nothing. There was no headline-level change to the Fed's interest rate outlook. We came into the year with the Fed's policymaking arm projecting three rate cuts this year, and all we got last week was a reaffirmation of that view. But in a market where hotter-than-expected inflationary readings had investors on edge that the Fed was going to get more hawkish, simply maintaining posture was enough for the relief rally that held into the weekend. The market came into the year pricing in closer to six cuts, but the fact we've rallied as those expectations diminished — and the market fell more in line with the Fed's stance — adds credence to our view that this is a market that is still rising. And why shouldn't it? Fewer rate cuts are the result of more economic strength than many were likely expecting to see at this point in the year, considering how swiftly the Fed raised rates to try to slow the economy. A strong economy is a good sign for corporate profits, which is the best driver of stock performance. We would much rather see stocks up on strong earnings instead of rising on lower rates that are only lower because the operating environment is deteriorating. To be sure, many risks to the market need to be acknowledged and appreciated. We're also in the midst of three straight down days for the S & P 500. But it's important to understand, at a high level, what kind of market we are still in — a bull market seeking new heights. We are fielding a lot of questions about how one should approach a market near all-time highs. And we understand why: It's human nature to be cautious against that setup. After all, nobody wants to be the person who buys the top tick only to see the market correct. However, as we always say — and will keep saying it because it may be the single most important, yet continually overlooked aspect of long-term investing — price is what you pay, value is what you get. Despite staying mindful of the risks to the market, such as a significant slowdown to the U.S. economy, we see several major reasons to support the view that there is indeed value to be found in this market. For starters, rising interest rates result in lower present values for stocks . The Fed is indicating that, as of now, its next move is to cut. That is why, as we look to the future, there should be support for multiples on the horizon rather than headwinds. By contrast, there were indeed headwinds to multiples in late 2021, when it became clear the Fed was embarking on a tightening cycle that ultimately pushed interest rates to their highest levels in two decades. Second, consider why folks had become fearful the Fed would get more hawkish: the U.S. economy is strong. Yes, it's cooling off from the peak of Covid-era growth, but it's still chugging along better than any other major economy in the world. Even though some recent inflationary readings came in hotter than expected, the current trend on the Fed's preferred measure of inflation — known as the core personal consumption expenditures price index — is lower. We'll get another update on Friday, but even if that's hotter than expected, one month does not make a trend. Additionally, even a hotter-than-expected core PCE number will still likely be below 3%, which should be enough for the Fed to continue its slow and steady approach to inflation data. Of course, it's not just about the core PCE price index. Prices matter little if people aren't working. But they are working. We'll get another update on that next week, but as of February, unemployment was still below 4% and, equally important, average hourly earnings were up 4.3% year over year. In other words, incomes are finally rising faster than inflation, so consumers — depending of course on their purchase needs — are getting some buying power back. Remember, while the current focus is on inflation, the Fed has a dual mandate of price stability and low unemployment. Ensuring unemployment remains low is a good reason to stay patient even if inflation runs a bit above target for a while. Lastly, February housing starts and building permit data came in better than expected, carrying a host of positive implications. First, you don't start new home construction if you're predicting a recession in the near term. So, the home builders are not too down on the economy. Second, shelter costs are a major source of upward pressure on inflation readings, so any increased supply that could help to reduce the rate of shelter cost inflation is a major positive from the Fed's perspective. Finally, as we've said before, the housing market punches above its weight in terms of economic impact because new home formation means increased demand for everything from furniture to utilities to services like the internet and so on. The Fed is signaling that rates should be coming down before year-end, and as the saying goes, don't fight the Fed. And the trend on inflation, which supports the Fed eventually lowering rates, is downward sloping. The trend is your friend here. Could we sit here and instead focus on all the bad things going on in the world? Sure. Russia is still at war with Ukraine, the Middle East is obviously in a volatile state, China is ramping up its efforts to combat U.S. semiconductor dominance (with an eye on Taiwan no doubt), and we're heading toward what could be a divisive presidential election this year. And, of course, the current monetary policy is specifically designed to slow economic activity, which always has the risk of going too far and pushing the economy into a recession. After all, sometimes the difference between medicine and poison comes down to the dose. We're not dismissing any of these situations and risks. However, it's fair to say the market is focused elsewhere at the moment, and investors would do well to acknowledge that. Don't dismiss it. Don't disregard it. Do hedge accordingly, as we're doing with our nicely sized cash position, but don't get so caught up with it that you fail to account for the positives. The key is to avoid an outsized focus on the bad driving your entire approach to this market. Instead, listen to what the price action is saying. Be on the lookout for stocks amid a catch-up trade after the strong start to the year that mega-cap tech companies have seen, in line with the idea of a broadening rally, as discussed earlier this month . The common denominator in many cases was that the companies catching a bid were those closely linked to economic activity, such as materials stocks like Club holding Linde , which is up 4.2% this month compared with a roughly 2.1% gain in the S & P 500. Industrials like DuPont – which is up 9.2% in March – also fall in this camp. So do financials such as Morgan Stanley and energy companies like Coterra Energy . Morgan Stanley and Coterra are up 6.1% and 6.5% month to date, respectively. The sectors these stocks belong to require economic strength to drive their sales and earnings. That's in contrast to the more secular trends that were driving the action to start the year, like generative artificial intelligence and stocks exposed to that buzzy technology. Zooming out, the top-performing sector so far in March is, indeed, energy followed by communication services. Club holding Alphabet , which benefits from ad revenues that are linked to economic activity, is certainly helping the second-place sector. The next up in the performance rankings are materials, financials, utilities, and industrials. Meanwhile, even with the continued focus on AI, information technology is seventh out of 11 S & P 500 sectors. Bottom line The macroeconomic data and signals from the Fed are supportive of equity valuations in the future. Interest rates appear to have peaked and should trend lower over time. At the same time, the price action we are seeing at the micro level, with the action broadening out to more economically sensitive corners of the market, reflects a market that wants to go higher. Now, that doesn't mean stocks are on a one-way march higher and a pullback is impossible. Acknowledge the risks, but don't let them drive your entire approach to the market. The price action says we are in a bull market, and act accordingly. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Wall Street Bull statue in New York's Financial District.

Erik McGregor | LightRocket | Getty Images

Looking at the recent performance of the market and several stocks in our portfolio, one thing is clear: This is a market that wants to go higher.