Bull Market Blues

“Well, first you got to want to get off, bad enough to want to get on in the first place
And you better trust in your lady luck, Pray to God that she don’t give up on you right now”
– lyrics, Johnny Cash “Bull Rider”


One of the more interesting phenomenon currently existent in the financial markets is the disconnect that exists between the reality of most investor’s current experience and how it is perceived by those receiving its benefits. The titles of some of the numerous commentaries on the stock market are revealing. “Boom to bust. More signs of a major market top.” “Impending final crisis 2.0?” “Morgan Stanley warns – Major stock market correction.” “The bull market: A bubble of epic proportions.” “ALERT: Analyst predicts 80% Market Crash This Year.” The readings of the CNN “Fear & Greed Index” are interesting as well. Currently at 24 on a scale of 0 to 100, it is at a level indicating extreme fear, and significantly below the levels of 41 one month ago, 62 one year ago, and as a contrarian indicator, is close to levels that historically have preceded significant market increases.

Possibly explaining at least some of the distance that exists between perception and reality is that the stock market is being fed by the liquidity being supplied to it by both the monetary (Federal Reserve) and fiscal (the administration and congress) authorities. In a “bad news is good news” feed back loop, what the markets most want to be served is the “not too hot and not too cold” bowl of Goldilocks’ porridge, with economic growth rates sufficiently robust to support higher levels of corporate earnings but with the economy sufficiently weak to justify the need for its continuing fiscal and monetary support. Wild cards in the deck investors have to play include a continuing pandemic that will possibly provide sufficient motivation for the administration to extend the various economic support measures currently in place past their September 30 termination dates and Congress’s passing a $1 trillion plus infrastructure spending bill.

Aficionados of the “not too hot” type of economic data certainly have been pleased with what they have been served this past month. Q2 GDP rose 6.5%, normally an extremely robust number, but materially below the estimate of 8.4%. The New York Fed is now forecasting a Q3 GDP growth rate of 4.1%, down from 5.3% six weeks ago. The supply disruptions afflicting the economy appear to be fading as businesses that plan to add to their current inventory levels are reaching four to five month lows. Further confirming the “not too hot” condition of the economy are claims for unemployment benefits that continue to hover near the 400,000 level, twice their pre pandemic level, and new home sales at 14 month lows.

Regardless of the state of investors’ attitudes toward stocks, the market in July continued its bullish ways with the S&P 500 registering a +2.4% return and with nine of its eleven sectors positive. Energy, which still holds the lead for the year at +30.3%, was a notable laggard in the latest month declining 7.2%. Positive returns outside of large cap US stocks though are becoming a bit more difficult to find. Small Cap stocks declined 2.5% for the month though, with a 20.5% return for the year, they continue to narrowly outperform the S&P 400’s +17%. Foreign Developed Markets at +.90% significantly outperformed Foreign Emerging Markets -9.8%, whose returns were impacted by China’s -13.1% fall. For 60/40 portfolio investors, the equity portion’s +.25%, with lower returns earned on fixed income and cash assets, created a 0.15% return for the month and +8.30% year to date.


Mark H. Tekamp July 31, 2021

Dousing Housing?

“There’s no place like home, there’s no place like home, there’s no place like home.” – Dorothy, The Wizard of Oz


“Manic Housing Market Needs a Calming Dose of Deregulation”. So headlined Bloomberg on June 1st. “An inflation storm is coming for the U.S. housing market.” Thus warned Marketwatch on June 26th. By now, most of us are aware that residential home prices are, and have been, heading higher, with the median sales price in May reaching $374,400 versus $317,100 a year earlier. Employing our recollection of Economics 101 many of us would assume rising prices are a result of higher demand. That would not be correct. Mortgage applications for new home purchases are at their lowest level since May 8th, 2020 and are down 20% from the end of last year. So, if rising demand does not explain rising prices, then it must be shrinking supply. Well, no. Supply is actually rising. The supply of existing homes for sale is at 5.1 months, a 50% increase since September of last year. Housing starts in May were 1, 572,000 versus an average rate of 1,200,000 in the three pre-pandemic years of 2017 to 2019.

Looking at median home prices on an inflation adjusted basis is perhaps the best way to understand just how extraordinary the rise in housing prices has been. At the start of 1960 it was $174,079, in 1980 $187,505 and 2000 $206,620. The low in the past ten years was February 2012’s $198,688. With the $374,400 figure for May home buyers are now paying 88% more than just over nine years previously. This may serve to explain the headline of a story posted by Reuters on June 23rd “U.S. new home sales tumble to one-year low as prices soar.” It may also explain the polar opposite perspectives of home builders and home buyers. A confidence index for homebuilders is at 81.0, down slightly from 90 in March but still at a thirty year high. Homebuyer’s though feel somewhat differently. At 74.0 it contrasts dramatically with the 108.0 in March of last year which had marked the prior thirty year low. So, to summarize, prices are at historical highs, demand is falling and supply is rising. Wondering which direction home prices may be heading?

Wishing to perpetuate our housing tale just a bit further, equity market investors may have felt they were holding a “full house”. The last five days of June saw consecutive rising prices. The month was the fifth in a row with higher prices and the 8.2% return for the S&P in Q2 was the fifth straight quarter with over 5% gains, the first time that has occurred since 1945! In the race towards new highs though, the market did exhibit signs of fatigue in June. Foreign developed markets were down 1%. Emerging markets were up 1%, small cap stocks +1/3% and mid cap stocks -1%. Five of the eleven S&P equity sectors were negative and Technology regained its leadership role rising 6.9%.

The leadership of the market had rotated last November favoring small cap stocks, value over growth and foreign performing in line with domestic. In March that leadership began to revert back to its prior sources and that is exhibited in the Q2 rates of return. The S&P returned 8.4% with mid cap +3.5% and small cap +4.3%. S&P value stocks are still outperforming growth stocks year to date 16.3% versus 14.3% but with growth’s +11.8% return for Q2 versus value’s +4.9% that gap has significantly narrowed. The year to date rise in interest rates was entirely contained in Q1 with AGG, a widely used index of returns on taxable investment grade bonds, +.83 for June, +1.77% for Q2 and -1.66% year to date. For 60/40 portfolios returns were 4% for the quarter and are now 8.6% year to date.


Mark H. Tekamp/July 6, 2021