Market Commentary for the week of July 15, 2024

Is Up really...Down?

Consider why some sectors endure during tumultuous times and why others are catapulted here and there with the winds of emotion.  During the last six months the market has seemingly jumped off the page with feel good stories of “new highs”.  Ask yourself whether that wave has you feeling good about things...or nervous about the peril that might lie ahead?

The biggest threat to the market is actually a higher level of speculation brought about by the unburdening of threats, perceived or otherwise.  And yet, eroding profit margins and defensiveness on the part of budget offices (corporate and household) has behavior turning decidedly conservative.  Low interest rates cause aggressive behavior; higher rates cause attitudes to stiffen.

So, if you are unaware of or disinterested in the statistics the facts are that when the market has been making new highs only about a quarter of the elements of the S&P have been participating.  Many, if not most, of the sectors are in serious trouble when it comes to expanding their workforce (not) or planning for new initiatives and spending (also, not).  Employment and inflation are the twin gargoyles at the gate.

We get it…when the market is up everyone assumes good news.  They reason that following the herd is a good investment strategy.  They fear being late to the party, so they jump in with both feet.  But, of course, the inevitable ups and downs occur.  In fact, the data shows a serious trend developing downwards in sectors like retail, housing, consumer discretionary, and some industrials.  With many safe havens disappearing investors are torn between following the uptrend or seeking shelter while the getting is good.  And rightly so because the prospect of additional earnings surprises magnifies our attention to how slowly the global central banks appear to be acting to address monetary policy.  This is why we have been looking to put money into longer term demographics like Energy, Basic Materials, Financials, Utilities, and Technology. 

How elusive it is to try and follow the money supply and diminishing consumer expectations concurrently.

Down is really...Not Good!!

Last week’s market numbers puts into better focus the risks of speculating blindly into “story stocks” and ignoring the need for secular, generational planning.  Despite Wall Street’s protestations to the contrary, they want  you to take risks, buy their products, and try to capture the gold ring of “special opportunities”.  And yet, investing was once a noble art, combining analytics of economics with the social sciences and macro thinking.  More than ever it has become the art of seduction and sleight of hand designed to magnify the herd mentality.

Most businesses that rely upon consumer discretionary spending are showing a significant decline in year over year expenditures (2023-2024).  Spending figures for that period have declined by close to 5 percent even as the appetite for post-Covid activities has intensified.  This dichotomy between “real and perceived” is approaching a threshold that might spill over into hiring and inventory expansions.  For those of us who grapple with high inflation in household expenses (food, energy, housing, medical), any slowdown in spending could be big trouble for significant swaths of the economy.  As mentioned above, only a small percentage of companies are truly participating in the market’s growth and only a smaller percentage of wage earners can afford to keep spending manifestly.  It will be interesting to keep an eye on these data and how/if they might affect the US elections.

So, it’s an interesting dynamic at work right now: the data are mixed, investors don’t (yet) seem perturbed, and the markets are running.  The Fed is playing it close to the vest while inflation seems to be held at bay.  As alluded to in this week’s title, is “up” really up or is there something more diabolical to be read into this Summer melancholy?  Investors are taught not to fight the status quo and to “play the trends” but as we drift into election season you’ll start to hear more about “what’s wrong” with the economy from opponents who need to score knockout points.

We prefer to maintain a long-only bias that builds upon the multitude of efforts made in the post pandemic reality.  Markets always seem to have a positive bias in one way or another so our position is to use bold ideas and common sense as our roadmap against the noise.