Stocks climbed last week, with the S&P 500 and Dow Jones Industrial Average hitting record closing highs. But as Larry David might say: curb your enthusiasm.

Stay invested in stocks but stay cautious. Despite rising last week, markets in 2024 so far can best be described as muted and choppy. Worsening geopolitical conflict has reignited inflation fears, pushing the benchmark 10-year U.S. Treasury yield (TNX) past 4.0%.

That said, the more cautious stance of investors is to be expected, after a powerful rally over the last two months of 2023 whereby the S&P 500 jumped over 15%.

If you’ve lived through a lot of rallies, as I have, you learn that a period of consolidation is to be expected. After a big surge, modest pullbacks are actually healthy. Fear of Missing Out (FOMO) rallies often come to tears.

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On the macro level, despite growing anxiety, the bullish narrative remains intact, albeit with caveats. Inflation will continue to fall (perhaps with occasional but temporary hiccups higher); the Federal Reserve will cut interest rates (the major uncertainty is the timing of those cuts); and the economy will continue to expand (but with the lagging and deleterious effects of previous rate hikes starting to bite).

Hence, although I’m bullish for the stock market’s prospects in 2024, I also expect continued volatility, as the Fed possibly balks at early rate cuts and international strife keeps investors on edge.

The major U.S. stock market averages finished in the green during the holiday-shortened week, but a warning sign is the TNX’s move past 4.1%. The following chart tells the story:

The Israel-Hamas and Russia-Ukraine wars, compounded by terrorism on the Red Sea, remain wild cards. Events in Gaza are especially unstable, as regional players get drawn into the conflict.

However, this volatility also is a chance for you to diversify into quality stocks in the sectors that were beaten down in 2023.

Stock market leadership has gotten broader and I expect that trend to continue, as evidenced by the New York Stock Exchange Advance/Decline line (NYAD), which has risen well above its 50- and 200-day moving averages (see chart).

The NYAD shows how many stocks are advancing versus declining in any given period on the New York Stock Exchange. A rising NYAD is bullish, because it denotes more stocks are advancing than declining.

It’s also noteworthy, though, that stress is building beneath the surface. The CBOE Volatility Index (VIX), aka “fear index,” has bounced higher and currently hovers above its 50-day moving average.

Sector rotation appears to be at work. Segments of the market that had struggled in 2023, e.g. health care, utilities and real estate investment trusts (REITs), are coming back to life.

Utilities, in particular, are setting the table for a prosperous year, following a dismal 2023. Falling interest rates and economic growth benefit this “essential services” sector. The shrewd move would be to increase your exposure to these dividend-paying stalwarts, the best of which can offer both growth and income. REITs also are poised for a comeback, as borrowing costs decline.

The main U.S. stock market indices on Monday proved that the rally is staying alive, by closing higher as follows:

• DJIA: +0.36%
• S&P 500: +0.22%
• NASDAQ: +0.32%
• Russell 2000: +2.01%

The Dow closed above 38,000 for the first time. The S&P 500 also hit a new all-time high. However, gains will get harder from here, as expectations for early interest rate cuts start to fade.

The week ahead…

Keep an eye on the following U.S.-based economic reports, scheduled for release in the coming days:

Leading economic indicators (Monday); S&P flash U.S. services and manufacturing PMIs (Wednesday); Q4 gross domestic product (preliminary), initial jobless claims, durable goods orders, new home sales (Thursday); personal income, personal spending, personal consumption expenditures index (PCE), and pending home sales (Friday).

We face a busy week of market-moving economic data, with the PCE report (for the month of December 2023) as the most significant. Corporate earnings will continue to pour in as well.

For Q4 2023, with 10% of S&P 500 companies reporting actual results, 62% of S&P 500 companies have reported a positive earnings surprise and 62% have reported a positive revenue surprise (as of January 19, according to data from FactSet).

The blended year-over-year earnings decline for the S&P 500 is -1.7%, but if history is any guide, the final number will exceed those conservative expectations.

A choppy start to 2024 may seem disconcerting, but it also paves the way for opportunities in later months. Now’s the time to rotate into the laggards of the previous year that have started to show leadership in the new year. The rally probably will get subdued, but to quote Larry: it’s still pretty, pretty, pretty good.

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John Persinos is the editorial director of Investing Daily.

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