Will Stocks Ever Go Down Again? – Week Ended 7/21/17

Will stocks ever go down again? This seemingly absurd question is actually the result of Google search auto-complete feature if one starts typing the phrase: will stocks ever While we obviously do not root for the market to do so, the answer to this funny question is YES as the strong rally that has gone virtually uninterrupted for the better part of 12 months will assuredly end at some point. Rainy days are part of investing and should be expected (history reveals they do not occur as often as sunny ones, which makes it a rewarding endeavor). But in a period where the market is regularly setting new all-time highs and price volatility hovering near all-time lows in spite of less than encouraging news flow (political failures and dysfunction in particular), perhaps it should not be surprising to observe that this question is being asked of Google often enough to auto-complete. In support of those favorable trends, it is worth highlighting that the S&P500 added another +0.5% last week; the Nasdaq snapped its streak of 10 consecutive positive days on Friday, but still concluded the week up +1.2% adding to the gains by both for July and YTD. Interestingly, momentum factors, those least predicated on economic fundamentals continue to do the best and lead the overall market charge higher while valuation continues to be a factor that is not rewarded by the market at present.

On the economic front where recent weekly data has been somewhat muted and fallen short of the narrative looking for economic improvement, the data last week was more positive. Soft data from corporate surveys continues to produce encouraging readings. Hard data confirmed with bank lending reaccelerating and unemployment claims declining. 2Q corporate earnings are also improving over year-ago levels roughly as expected (and beating corporate guidance by healthy margins). Housing data was also in focus last week amid a number of fresh points was strong with new starts up +8.3% in June over the month prior which had disappointed. This better housing data fits with a logical theme of pent-up demand following the housing crisis 8 years ago and the long shadows it cast until just a couple years ago. At the same time, inflation data remains benign. Abroad, animal spirits (business and consumer sentiment) in Europe continue to look up despite the ongoing uncertainty related to Brexit while China posted very positive data favoring the upside. This is all occurring at the same time central banks continue to discuss shrinking their balance sheets (a form of monetary tightening) and additional rate hikes.

In closing, its been over 270 days since the US equity market experienced a pullback of -5% or more from a recent high. This is not unprecedented, but is well longer than typical. We are keenly aware that markets will not always move unilaterally higher. With that said and despite recent strength, it is hard to characterize investors as euphoric when data reveals that investors continue to pull money out of equities and funnel the proceeds toward bonds. Low volatility suggests that while investors may be complacent (can also be dangerous), but are not euphoric (herding behavior). With so many people continuing to believe we are overdue for a big correction, that may well remain an elusive development. With all that said, the seasonally weakest months are now upon us, and it seems reasonable to suspect some unforeseen negative surprise might have the ability to reawaken fear in the short-run. But returning our focus to the fundamentals, the themes of sound economic attributes suggest the longer-running bull trend can endure a bit longer. Business cycles do not end with profits up and wages up together, and the not-too-hot but not-too-cold Goldilocks theme continues to appear in-tact.

Posted in Blog Post.