Hello all – we hope your June was a nice one.
It was another decent month for the markets, with the S&P and Nasdaq reaching record highs and the Dow near its high. The Dow had a slight decline of 0.3%, the S&P 500 gained 2.3%, and the Nasdaq was up 5.2%.
The end of June was also the end of the 2nd quarter. It was a good quarter for the markets, with the Dow climbing 4.6% in the three months, the S&P gained 8.6%, and the Nasdaq returned a solid 11.2%.
It was another decent month for the markets, with the S&P and Nasdaq reaching record highs and the Dow near its high. The Dow had a slight decline of 0.3%, the S&P 500 gained 2.3%, and the Nasdaq was up 5.2%.
The end of June was also the end of the 2nd quarter. It was a good quarter for the markets, with the Dow climbing 4.6% in the three months, the S&P gained 8.6%, and the Nasdaq returned a solid 11.2%.
Interestingly enough, the S&P 500 index is following its historical average almost perfectly this year.
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The record highs in the indexes are a bit misleading in how stocks are really performing. Fewer and fewer stocks are rising and the records are coming from a rise in just a handful of stocks. 70% of stocks are below the index, which means only 30% of stocks are above the index. In fact, there were days this month where the market would be higher, but all of the individual stocks we owned were lower (those are the days you question your own existence).
This is a big red flag for the markets. You want to see more stocks rising when the index is rising. It’s like building a house on a weak foundation - eventually it will collapse.
The chart below shows the Advance-Decline line (the red line), which tracks all the stocks moving higher versus the ones going lower (it’s commonly referred to as “breadth”). When we compare it to the S&P 500 (the black line), we can see how they tend to move together. When the Advance-Decline line (A-D line) moves lower, it usually signals the broader markets will fall, too.
This is a big red flag for the markets. You want to see more stocks rising when the index is rising. It’s like building a house on a weak foundation - eventually it will collapse.
The chart below shows the Advance-Decline line (the red line), which tracks all the stocks moving higher versus the ones going lower (it’s commonly referred to as “breadth”). When we compare it to the S&P 500 (the black line), we can see how they tend to move together. When the Advance-Decline line (A-D line) moves lower, it usually signals the broader markets will fall, too.
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We’ve seen a big divergence lately, which is a bad sign for the market.
Before you think it’s all bad news out there, high-yield bonds (the riskiest bonds) are also a good indicator for the broader market and they’ve been pretty solid.
So while it’s not all bad news, the handful of red flags are enough to make us a little cautious.
Despite the red flags - we think the fate of the market lies with the Fed and their policies, which we’ll discuss shortly.
Despite the red flags - we think the fate of the market lies with the Fed and their policies, which we’ll discuss shortly.
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First, we need to talk about inflation, which was the big story this month. The CPI inflation report released this month showed inflation rising 5% over the past year, the highest in 13 years.
Inflation is one of the main metrics the Fed looks at to determine their stimulus policy, so a high level of inflation would lead them to pull back their stimulus. This is important because the stimulus has been responsible for much of the rise in the market.
The Fed held a policy meeting this money and they did indicate that they would be pulling back on their stimulus by raising interest rates - by the end of 2023. 2023 sounds like a long way off - and it is - but it’s a sign that the party WILL be coming to an end at some point. That’s enough to worry the markets.
The Fed held a policy meeting this money and they did indicate that they would be pulling back on their stimulus by raising interest rates - by the end of 2023. 2023 sounds like a long way off - and it is - but it’s a sign that the party WILL be coming to an end at some point. That’s enough to worry the markets.
We’ve often seen the Fed make a statement that rattles the market and realize the reaction isn’t what they intended. In those cases, Fed members would make TV appearances to soothe investors. That didn’t happen this time. In fact, most of the Fed speakers that appeared on TV indicated that inflation was a concern and they’d like to pull back on the stimulus even faster.
Their take was completely rational. Inflation is high and there is no need for these crisis-level stimulus measures. A reduction in stimulus would be good for the health of the economy, but a stock market addicted to stimulus will not fare well as stimulus is removed.
Their take was completely rational. Inflation is high and there is no need for these crisis-level stimulus measures. A reduction in stimulus would be good for the health of the economy, but a stock market addicted to stimulus will not fare well as stimulus is removed.
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That brings us to the economy. In light of the Fed’s new stance, bad economic data will likely see the market rise since it would make the Fed less likely to pull back on stimulus.
Employment will be an important metric to watch. The Fed cites high unemployment as a concern, and while hiring has improved somewhat, it is still sluggish. We can argue about the cause of high unemployment, but there is a record amount of job openings in this country. We believe that hiring will pick up when unemployment benefits wear off.
Here’s a look at many other economic indicators, with most showing an improvement.
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Where does the market go from here?
We think the markets will have a tougher time going forward from here. In the short term, market internals like breadth are flashing red. Plus we have a Fed that seems likely to pull back on stimulus. There aren’t a lot of positive catalysts out there now. Poor economic reports or explicit comments from Fed disavowing a pullback in stimulus will likely put some wind back in the sails of the market.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
We think the markets will have a tougher time going forward from here. In the short term, market internals like breadth are flashing red. Plus we have a Fed that seems likely to pull back on stimulus. There aren’t a lot of positive catalysts out there now. Poor economic reports or explicit comments from Fed disavowing a pullback in stimulus will likely put some wind back in the sails of the market.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
