The summer months are often characterized by sleepy low volume trading, but the experience in 2017 makes that statement even more pronounced than normal. It is no secret that in recent months, observed volatility is extraordinarily low, but Friday marked the 12th consecutive trading session wherein the S&P500 moved less than 0.3% throughout the day; the longest such boring (not that boring is bad) streak on record. For investors who remain long the market, this calm is attractive as the level of volatility tends to be negatively correlated with the direction of markets (low volatility tends to accompany rising markets, while spiking volatility tends to push values lower). In support of that correlation, the Dow managed to set a fresh all-time closing high crossing the level of 22,000 for the first time this past Wednesday while the broader S&P remains within 1% of its record high set a week back or so. Still, while it is neat to see the market moving higher and seemingly unfazed by ongoing noise from political dysfunction, it has been more than 270 days since the US stock market experienced a pullback of 5% or more; this is not the longest such streak without a pause, but it sits among the longer stretches. That fact alone is probably why the number of media outlets and respected investors calling for a top or sharp pullback in the near term seem to be getting louder and more attention.
On the economic front, the Goldilocks (not-too-hot, nor not-too-cold) economic camp continues to see their base case validated by the incoming data. Most notable and watched last week was the employment report for the now complete month of July; the report showed another round of better than expected job creation and a falling unemployment rate. Company surveys also continue to reflect a stable corporate outlook and upbeat sentiment for business both here domestically and abroad. At the same time, a declining US dollar looks to be helping domestic export activity and sharply rising commodity prices like that of Iron Ore and the stabilization to improvement of oil prices suggest economic activity is healthy and perhaps accelerating (even though acceleration has been elusive throughout much of the economic recovery). And in the US, the number of cities that are experiencing robust economic conditions seems to be broad and expanding. Perhaps the most stubbornly curious data point continues to be on the front of low observed inflation; at this stage of the cycle and with unemployment so low, one would typically expect to see wages growing at a faster clip than they are and resulting in more normal inflation. But low inflation should be enough to help central bankers avoid the temptation to get too aggressive in their pursuit of normalizing monetary policy which could ultimately short-circuit what is now one of the longest economic cycles in US history.
In the coming day, we look to distribute our August commentary to clients (also made available on our website). In that note, we will survey what we believe is the front-and-center topic on investor minds: how much longer than the current market advance continue? In many respects, it is hard to argue with the growing chorus that a notable pullback should be coming amid financial markets that feel to be a bit departed from economic and corporate fundamentals. On the other side of the coin however, valuations while elevated slightly above historical average are getting some help from corporate earnings which grew double-digits again in the 2Q over the same period last year. And, as long as wage growth fails to accelerate meaningfully or provoke higher inflation, it is equally challenging to say that the economy (and financial markets as a derivative) will suddenly impair the current trend beyond a short-term bump or two. We encourage you to check back for our monthly commentary titled Dancing on the Ceiling in the coming days.