A key tenet of Cabot’s investing philosophy is to remain optimistic over the long term.
After all, given the historical returns of equity markets, maintaining a rosy outlook is well warranted.
That said, it’s also worth gaming out alternative scenarios when considering the future, even if just for the purposes of contingency planning.
So, with that in mind, let’s (temporarily) put on our bearish hats and consider what barriers to the bull market could arise in the second half of the year.
For starters, the massive broad market rally that began in April was heavily predicated on the temporary suspension of the White House’s tariffs. Specifically, the U.S. announced it would suspend its reciprocal tariffs imposed on April 2 for 90 days (although it will retain a 10% tariff during the period of the pause).
While news of the tariff pause was enough to send stocks flying, with the S&P 500 Index rallying 20% from its (closing) April low, there are still rumblings below the surface that suggest there could be more trouble ahead for the market.
Notably, even following seemingly positive negotiations with China, imports from the country remain subject to 55% tariffs. An improvement over the 100%+ tariffs initially proposed, no doubt, but still well beyond the levels that most market participants were anticipating to begin the year.
While this news didn’t immediately roil the equity market, it did seem to contribute to a slowdown of the rally’s velocity.
What’s more, ongoing discussions with the European Union (EU) have been described as “tense,” with the U.S. pushing for tariff reductions while threatening additional duties if concessions aren’t made, including threats of 50% tariffs made by President Trump via social media. The EU is also reportedly preparing $108 billion in retaliatory tariffs if talks fail.
In view of these developments, both China and the EU remain potential obstacles for the broad market’s continued recovery. So, investors will obviously need to closely monitor this developing situation.
Also a concern is the interest rate outlook, with medium-to-longer-dated U.S. Treasury yields an increasing worry. For instance, the CBOE Treasury Yield Index (TNX) remains elevated near 4.5%, not far from its 4.8% peak it hit in January—a level that served as a catalyst for the major broad market decline earlier this year. A continuation of the rising bond yield trend would likely be a major concern for the bullish case.
On the equity front, the number of NYSE-listed stocks making new 52-week lows has risen of late.
Specifically, between June 13 and June 16, markets registered a three-day string of new lows above the 40-per-day mark, which historically serves as the dividing line between a healthy and unhealthy market backdrop.
If this negative development persists in the coming days, we could be in for another broad selling wave.
And while the decline in energy prices in recent months has been a plus for consumers, the recent spike in oil prices due to conflict in the Middle East could upset the already tenuous consumer sentiment backdrop even further while putting upward pressure on inflation. That, in turn, would potentially be a negative for stocks.
Of course, these are only conjectural scenarios which may not all come to fruition (and to be fair, some of them likely won’t). But keeping them in mind as possible outcomes can help us remain grounded if the recovery rally continues, while keeping us from becoming too complacent and overcommitted to equities should things suddenly go south.
