In our May commentary we mentioned the old saying “Sell in May and Go Away!” The adage points to what can sometimes be mediocre market performance in the summer months. Well, we hope you didn’t actually do that because the S&P has climbed another 10% since then! July logged another strong month that now makes 5 straight months of positive returns. What’s promising about this is that, on average, the S&P 500 has returned another 11.8% the following 12 months after a 5-month run of consecutive positive returns.
Virtually every metric we follow for the markets is positive right now. (The key word there is “markets” as economic indicators are reading very differently; more on that below). While the market performance has been dominated by tech, it has begun to finally broaden out. Whenever you have such a narrowly focused market, one of two things happens: either the markets broaden to pick up other areas left behind or what’s been driving the markets stall and fall back. As of right now, we’re seeing it broaden out. Just over 2 months ago the S&P Equal-Weight Index was still in negative territory while the standard S&P 500 was up double-digits. At the end of July, the Equal-Weight is now up over +9% YTD. That’s a good sign that, at least for now, the party is spreading out beyond just big-tech.
Nonetheless, though, we must acknowledge what Goldman Sachs noted last week: The Magnificent 7 has made up 12% of the entire 19% gain in the S&P 500 so far this year. The NASDAQ 100 had its best performance through July on record. If you’re a value investor or focus on dividend stocks you may be feeling left out…and for good reason:
The average stock that pays more than a 1% dividend yield is only up 2.1% this year.
All this to say that I do expect the market to take a pause and likely give some back as it’s feeling a bit long in the tooth. Trying to make short-term predictions is useless, but we also realize the markets rarely move in a straight line. With August and September tending to be mediocre months, a 5-10% correction would not surprise me and feels justified at this point.
Switching gears to the economy, where’s the recession everyone’s been promised? That’s a good question and has a lot of smart people scratching their head. The Fed has been rapidly hiking rates to tame a decades-high spike in inflation post-Covid. The yield curve continues to be massively inverted. Every single economic leading indicator is red and pointing to recession. Virtually every economist has been predicting recession for months, yet it’s still not here. The Fed paused hiking rates in June but raised another 0.25% point in July and yet the markets yawned.
Can Powel & Company actually pull off the Goldilocks scenario with the so-called soft landing? We’ll know the same time you do but I’ll say this for now: Inflation is now 3% and falling faster than it went up, unemployment is at 50-year lows, and 2nd qtr GDP just came in at +2.4%. If recession is coming, it’s not here right now.
Maybe this economy is more resilient than they gave it credit for? Maybe the American consumer and corporate balance sheets are stronger than they thought? (I actually think the answer to both of those questions is an absolute Yes.) But while the indicators are generally pretty accurate in predicting a recession, they are really lousy on predicting the timing of the recession. It’s certainly plausible the goal posts have just been pushed back to 2024.
As a serious long-term investor does any of that really change what we should be doing though? Not really. Recession or not, we always want to own great companies. Recession or not, and this year is yet another example of this, we know we can’t time this. Buy low, sell high, be patient, and ignore the noise. Smart, long-term investors have been very successful with this strategy for generations.
Here’s your Useless Fact of the Month:
If an asteroid is heading for Earth and you’re concerned about saving humanity what would you do? Well, if you’re the Oreo company, you build an asteroid-proof doomsday vault to shelter your Oreo recipe and stockpile of cookies for anyone lucky enough to survive. True story: NASA tweeted that they’d been tracking the VP1 asteroid and it had exactly 0.41% chance of colliding with earth. Oreo saw this tweet and in 2020 decided to build a vault in Svalbard, Norway to protect their most valuable asset. For any of you that fancy yourself an explorer, the coordinates are: 78° 08' 58.1" N, 16° 01' 59.7" E. Send pics!