Is Time Our Friend?

The market continued its upward momentum last week with the S&P 500 advancing slightly, up 0.61%, the Dow Jones Industrial average gained 2.11%, but the Nasdaq cooled down 0.40%. The market leader was the FTSE 100 up 3.08%, but the broad foreign markets MCSI-EAFE were a bit schizophrenic, losing 0.25%.

The White House gave themselves a glowing report on the economy, touting the success of Bidenomics for lower inflation and low unemployment, which left many analysts and observers scratching their heads wondering “what world the President is living in?” Steve Forbes, in a recent interview, remarked as much after the President spoke to union supporters in Philadelphia Thursday. Forbes basically agreed with my supposition that the headwinds to this economy are very real to the average American and deeply felt in their wallets. As Forbes said more eloquently than I, reminding all of us that the drop in inflation rate only indicates a slowing of the RATE of Inflation, meaning prices are still high and have not retreated, along will anemic real wage growth. The unemployment number does not include the labor participation rate which has not come close to the pre-pandemic levels.

Where do we go from here? We still believe the Fed will raise rates this week, as generally expected. The market has been “melting up,” meaning an almost euphoric buying of risker assets, pointing to a pullback, which we have been waiting for, and explaining why we have been hesitant to add new money the past few months. The result: we look a bit foolish with our caution as the Dow Jones just notched its 10th consecutive win, the longest since August 7, 2017. The Nasdaq finally seems to take a breath and the rotation to more value is playing out. Are there bearish short signals? Absolutely not. So, the pull back may be in the 3-5% range but the bulls still own the day.

For us, the good news is we have benefited from our foreign stock exposure and still are hedged against the stubborn inflation that still exists, and we believe, will continue to persist. Why the caution? What is bugging me more than anything is the market ignoring the US leading economic indicators, which continued to fall in June, for the 15^th month in a row and we still have not, according to the majority of economists we follow, had our recession. (The last time this occurred was in 2007-2008 when the US economy fell into the “Great Recession.”) However, they still believe recession is in the offing as June’s data suggests decreasing economic activity in the months ahead.

We will continue to look to moving into intermediate term bonds and lock in some nice yields. However, the “Sage of the bond managers,” Bill Gross (who ran PIMCO’s bond portfolios) does not see the historic bull market in bonds but does concede the environment has improved.

One more point on the economy, and why most economists are sticking to their guns on a coming recession, is because the Federal Reserve has sharply increased borrowing costs to slow the economy and quash inflation.  So far, they are not convinced they have succeeded.

A final point on the market: a few weeks ago I commented that the traditional summer malaise of the market has been changed and July “the traditional dog days of summer” has reversed, and recent history been one of the better months for stocks. It looks like 2023 will verify that belief as history seems to be repeating itself. Could that be the reason for the euphoria?