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