Keep Calm and Carry On

“God is Great, Beer is Good, and People are Crazy.” Country music fans will surely recognize the lyrics from Billy Currington’s famous song. These words come to mind because the first half of this year was absolutely crazy and had us thinking about drinking on more than a few occasions.

The Magnificent Seven

No, we’re not talking about the old western movie, although we still love to watch Yul Brynner and Steve McQueen in that one. We’re talking about the Magnificent 7 stocks that have driven ‘the market’ higher this year. Although the S&P 500 is up some 17% this year, without those seven, it’s only up about 6%. If you didn’t own these seven (especially NVIDIA, up 200% YTD) it has simply been impossible to keep pace with the index and it has left many wondering if they have missed out on something special.

We understand, this looks like one of those ‘once-in-a-lifetime’ events, but it’s not. Perspective is everything. Below are the same seven stocks over the last 18 months.

Hmm, that looks a bit different… Yes, NVIDIA is still up handsomely, but everything else looks rather tame. In fact, three of the Magnificent 7 are down 17% or more! FOMO (Fear Of Missing Out) can play games with our psyches. Remember, we are not traders, we are long term investors. Short term returns mean very little.

A New Bull Market?

Here is another one you may have heard on the news. The S&P 500 is up more than 20% from its October low. That’s a new bull market! Well, during the great depression, as the stock market tanked 97% in the span of a few years, there were four different periods where the market rallied by 20% or more (and a fifth where it rallied 19%). In two of those four rallies, the gains were 47% and 35%, respectively! (Pardon the picture quality… we pulled it from the Bezinga web site).

It’s not unusual to feel like you ‘missed out’, but the reality is that most of the time, you missed nothing at all. Keep calm and carry on.

Rabbit Out of a Hat

As has been the case for the last several years, markets continue to hang on what the Fed will, or won’t, do. Another 25 basis point (o.25%) increase in two weeks appears baked in, but what happens over the rest of the year remains in doubt. At the moment, the stock market appears convinced that the July will mark the end of the rate hikes. Welcome to the soft landing (i.e., no recession).

That’s the conclusion if you examine the key economic data this week. CPI data, both headline and core, were lower than expected. The PPI (Producer Price Index, for intermediate goods) not only had the same trend, it was even better than CPI.

Garnering less attention, but possibly just as important, China reported declines in both imports and exports in June. If the Fed desires slower growth, there may be no better indicator for a slowing global economy than this.

Six months ago, the consensus opinion was that we were headed for a recession. That has now completely reversed. The consensus view is that the Fed has pulled a rabbit out of its hat and we are headed for a soft landing. We have even heard several financial personalities suggest that it is almost time for a victory lap at the Fed. It’s more than a little early for that, in our opinion.

What argues against that conclusion? Several things:

• Wage growth (measured by average hourly earnings) was up 0.36% in June, or over 4% annualized. If wages stay strong, it’s hard to see the Fed declaring victory. It implies that Fed may be more aggressive in raising rates, not less.
• After gradually coming down over the last several months, the average weekly hours worked ticked up in June, another sign of a strong labor market. (Typically, average weekly hours are a leading indicator of employment trends – hours change before workers are hired or fired.) One month does not a trend make, but the Fed would rather see that number declining.
• Employment gains, although lower than they were earlier in the year, remain stubbornly positive and continuing unemployment claims are declining. This makes the Fed’s job more difficult and the outcome less certain.

The Fed has made it very clear that, in their view, unemployment must rise in order to meet their 2% inflation target. So far, that is not happening. As usual, the situation is anything but clear. Like the weather, if you don’t like what you’re seeing, just wait a few minutes.

What We’re Reading

Billionaire investor Leon Cooperman sounds the alarm on NVIDIA stock

Xi Jinping Chokes Off Crucial Engine of China’s Economy

As Inflation Goes Down, Soft Landing Odds Improve

Harvard CAPS/Harris Poll (pdf)

Richard Bernstein: It’s Too Early to Price In Fed Cuts (3 min. video)

Sonders: Conditions for a Fed Rate Cut Don’t Exist (5 min. video)

Strategist David Roche says we’ll avoid a global recession

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By: thinkhouse