Search

A week ago, the main issue with the market seemed to be earnings and if the reports would save or doom the rally. But we have since been completely blindsided by fears of recession.


While earnings have so far not been impressive, the main event has suddenly become recession. Last week, the most recent jobs report was far worse than expected. There were numbers within that report that have reliably portended every recession since the 1970s. As a result, the stock market plunged, and interest rates crashed. The benchmark 10-year Treasury rate moved below 4% and Wall Street has assigned a 95% chance of the Fed cutting the Fed Funds rate by 50 basis points in September.

The market continues to hover near the all-time high. The S&P 500 finished the first half of the year up 14.5%. That’s a not-too-shabby 29% annual pace.

As I mentioned earlier, I believe it is unlikely that the S&P will finish the year up 29%. That means market returns must at least flatten out somewhat going forward. It’s also true that the technology rally has petered out in the last few weeks.

This market rally keeps forging on no matter what. Technology cooled off but, no problem, other sectors are picking up the slack.

Interest rates have likely peaked. The chances of a Fed rate cut before the end of the year have increased. And the economy is still solid. Sectors rotate, headlines come and go, but as long as the main ingredients of future lower rates and a still-decent economy prevail, the market should be good.

That wasn’t a good start to September. The holiday-shortened week was the worst week for the market in two years as recession fears reemerged. Here are the results from last week.

It’s another big Fed week in a market that has rallied for more than four months.

The S&P 500 is up 7.28% in the first two and a half months of this year and has rallied over 25% since the low of late October. Stocks have been thriving amid the likely peak in interest rates, expected Fed rate cuts this year, a still-strong economy, and the artificial intelligence (AI) catalyst in the technology sector.

The market looks great. The quarter ended last week with the S&P posting the strongest first-quarter start in five years. All three major market indexes have now risen for five straight months.

The Fed said it still intends to cut the Fed Funds rate three times this year at the March meeting. Meanwhile, inflation remains subdued, and the economy is surprisingly strong. Manufacturing data was much better than expected and the Fed raised its GDP forecast for 2024 from 1.4% to 2.4%.

The good times keep rolling. The S&P 500 continues to make new highs and closed last week up 7.7% YTD. Nine of the 11 S&P sectors are well into positive territory for the year so far.

As usual, the index is being led higher by technology, which is by far the largest sector. Technology stocks are up over 12% YTD. While no other stock sectors are up as much as the overall market, most of them are delivering very respectable returns for the year so far. The only down sectors are Real Estate and Utilities. But even these beleaguered sectors are only down 1.4% and 3.25% respectively YTD.

It’s a new high! April was down. May was up. And June has been an up month so far. Hopefully, June will follow through and be another good month, but I’m still expecting a flatter market for a while.

The market goes back and forth with the interest rate narrative. But I don’t expect a resolution on that issue any time soon, or at least for the rest of the summer. Either the economy has to slow, or the Fed is going to at least leave rates where they are. But investors still insist on expecting rate cuts before the end of the year even though the economy looks strong.

Just when it looked like the rally was petering out, the market is having a great June so far. The S&P is up about 5% in June after making four consecutive record closes last week. The index is now up 14% so far this year, and it’s not even half over.

The market has regained its footing. After a 5% pullback in the earlier part of April, the S&P 500 has since regained nearly all that was lost, and the index is within bad breath distance of the high.

Earnings have been good. With 92% of S&P 500 companies having reported, earnings increased an average of 5.4% over last year’s quarter. But it’s better than that. If you take out the report of Bristol-Myers Squibb (BMY), average earnings growth would be 8.3% for all the other stocks on the index. That’s a healthy gain.

The market has leveled off since the middle of May. I expect more of the same going forward.

The S&P 500 pulled back in early April after a five-month rally as sticky inflation soured the interest rate narrative. The index then recovered to new highs in the middle of May on an improved interest rate outlook. But stocks have since leveled off as the interest rate outlook got stuck in the mud.

The market is in a tug-o-war between the bummer that rates are likely to stay higher for longer and excitement about the earnings season and artificial intelligence.

The launch of this earnings season has so far saved the market from a selloff that began at the beginning of April when the interest rate prognosis soured. Sticky inflation and a Fed that appeared to lose its resolve to cut rates this year spoiled a five-month rally. But earnings are reviving the market.

The market has shown some renewed strength over the past several days, particularly among interest rate-sensitive stocks. The Fed met last week, and the market dug this month’s vague insinuations.

The rally sputtered in April after sticky inflation soured the falling interest rate narrative. But last week the Fed Chairman indicated that the next Fed Funds rate move would most likely be a cut and not a raise. Although a hike wasn’t expected, investors like hearing the Fed say it. The statement also combines with recent news of weaker economic growth and a slowing job market.

This has been a relatively quiet week for us in terms of quarterly reports as Repligen (RGEN), which reported this morning (details to follow), was the only portfolio company on the schedule.

This is an incredible market that just keeps creeping higher. The promise of a booming recovery with trillions in stimulus ahead continues to pull stocks to new all-time highs.

The market continues to forge nowhere. The S&P 500 is still below the May 7th high, but it’s only less than 1% below the high. It stopped going up. But it isn’t going down.

It’s earnings season. So far, it has mainly been just the big banks that have reported. And the results have been largely positive.

So much for the technology selloff. The sector dipped its toe into correction territory and has roared back with a vengeance.

The market is still in an uptrend and not far from the highs. But things are changing.

Enjoy the current strength but be aware of the environment we’re in, and why. Accept that we could see a significant retreat in the prices of many of our stocks in the near term, but that the fundamental reasons behind their current strength should persist despite a retreat, and drive them higher over the coming years.