Hello all – we hope you had a nice July. Hard to believe we are already into August.
Stocks continued their march higher. For the month, the Dow was up 1.3%, the S&P 500 rose 2.3%, and the Nasdaq, which has a higher concentration of tech companies, gained 1.2%.
Stocks continued their march higher. For the month, the Dow was up 1.3%, the S&P 500 rose 2.3%, and the Nasdaq, which has a higher concentration of tech companies, gained 1.2%.
Our newsletter last month discussed a few red flags we were seeing. Several indicators we followed were moving lower. Also, the overall market was rising but fewer and fewer stocks were participating in the rise. This often occurs before a fall in the market.
These concerns were justified as the markets did fall sharply, as you can see in the chart below. The indexes had their biggest one-day drop since last October.
These concerns were justified as the markets did fall sharply, as you can see in the chart below. The indexes had their biggest one-day drop since last October.
However, the fall was short-lived. Investors quickly bought the dip and markets rebounded strongly to close the month with decent gains.
Right now we aren’t seeing the red flags we saw before. The economy seems to be in decent shape and corporate earnings have done well. There are new concerns with the Coronavirus and the Fed may be a step closer to pulling back on its stimulus and that could send stocks lower. We’ll talk about these more later.
Right now we aren’t seeing the red flags we saw before. The economy seems to be in decent shape and corporate earnings have done well. There are new concerns with the Coronavirus and the Fed may be a step closer to pulling back on its stimulus and that could send stocks lower. We’ll talk about these more later.
_____
We’ll start with corporate earnings. Results for the second quarter began coming in this month and about half the companies in the S&P have reported so far.
Companies have done much better than expected, although accurate predictions have been tough to make coming out of the pandemic. While earnings are good now, there’s a concern that earnings may have reached their peak. Many companies are warning of high inflation and that they see sales slowing in the future. This is something to keep an eye on.
Companies have done much better than expected, although accurate predictions have been tough to make coming out of the pandemic. While earnings are good now, there’s a concern that earnings may have reached their peak. Many companies are warning of high inflation and that they see sales slowing in the future. This is something to keep an eye on.
_____
The Fed was also in the news this month as they held one of their policy meetings. No change in their stimulus policy was announced - as expected - but they seemed closer to pulling back on the stimulus.
Investors have been watching the Fed closely for clues as to when they’ll reduce stimulus since many of the targets the Fed has set have already been reached or surpassed. Inflation is running at levels we haven’t seen in over a decade and economic growth is strong.
During the Fed meeting, many reporters asked for specifics on their policies but the Fed never gives a straightforward answer. Is the sky blue? It might be today, but it might not be tomorrow.
They acknowledged the progress in the economy, but noted that it wasn’t enough. Inflation is high now, but they expect it to recede in the future (they never define when that is). Also, they expressed concerns about high unemployment, but we believe that’s not a sign of weakness in the economy and is due more to attractive unemployment benefits from the government.
Our take is that while inflation is high, it will never be a concern to the Fed since they will always believe inflation will be lower in the future. We think their focus is on employment. Solid employment reports will force the Fed to pull back on stimulus, but even then it might be by a tiny amount. The Fed has recently introduced minority unemployment as another metric they follow and it’s always higher than the average, so they can continue to cite that as a concern.
Frankly, we think the Fed is looking for any excuse to not pull back on stimulus. They are trapped - they know the stock market will fall if they do and higher borrowing costs on the enormous amount of debt in our system will slow the economy. We think all this money printing will eventually cause significant problems, but its anyone’s guess as to when that will be.
During the Fed meeting, many reporters asked for specifics on their policies but the Fed never gives a straightforward answer. Is the sky blue? It might be today, but it might not be tomorrow.
They acknowledged the progress in the economy, but noted that it wasn’t enough. Inflation is high now, but they expect it to recede in the future (they never define when that is). Also, they expressed concerns about high unemployment, but we believe that’s not a sign of weakness in the economy and is due more to attractive unemployment benefits from the government.
Our take is that while inflation is high, it will never be a concern to the Fed since they will always believe inflation will be lower in the future. We think their focus is on employment. Solid employment reports will force the Fed to pull back on stimulus, but even then it might be by a tiny amount. The Fed has recently introduced minority unemployment as another metric they follow and it’s always higher than the average, so they can continue to cite that as a concern.
Frankly, we think the Fed is looking for any excuse to not pull back on stimulus. They are trapped - they know the stock market will fall if they do and higher borrowing costs on the enormous amount of debt in our system will slow the economy. We think all this money printing will eventually cause significant problems, but its anyone’s guess as to when that will be.
_____
Switching gears to economic data released this month, we’ll start with inflation. Last month’s report saw a 5% annual increase in inflation, the highest in 13 years. This month’s report was even higher at 5.4%. Remember, the Fed wants 2% inflation (which we believe is a bad policy and the target should be 0% - or even negative).
The GDP report measures the strength of the economy and it came in at a solid 6.5% for the second quarter. Economists are warning that this could be the peak in GDP, though.
With all the concern over high unemployment, there sure are a lot of job openings out there. More than 9 million, in fact, and we have about 8 million unemployed.
The manufacturing and service sectors are both growing, though at a slower pace than recent months.
People are still out shopping as sales are rising.
Despite higher prices from inflation and new Covid headlines, optimism is surprisingly strong.
_____
Where does the market go from here?
We continue to think the markets will have a tougher time going forward. The threat of a pullback in stimulus hangs over the market and every economic report will be scrutinized for how it will influence the Fed. Bad economic data - especially employment figures - will be good for the market. We aren’t too enthusiastic on the market at this time.
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 continue to think the markets will have a tougher time going forward. The threat of a pullback in stimulus hangs over the market and every economic report will be scrutinized for how it will influence the Fed. Bad economic data - especially employment figures - will be good for the market. We aren’t too enthusiastic on the market at this time.
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.
