@theMarket: Financial Markets Could See July Fireworks

The good news is that early in this coming month we should see new highs in the stock market. The bad news is that we could also see some downside as well.

 

The equity markets' grind higher throughout June has been achieved by fewer and fewer stocks. Most of the gains have been concentrated in ten stocks or less. There have been a few days where the other 490 stocks of the S&P 500 index managed to mark up some gains, but if you weren't in AI or Fang stocks, you underperformed by a mile.

 

I have mentioned this before in several of my past columns. As we push higher, a feeling of caution seeps into my bones. On the surface, there is nothing that I can put my finger on, and yet my Spidey sense tells me to tread lightly. However, the macroeconomic data does not justify my worries.

 

Inflation, while sticky in some areas, continues to come down. The Personal Consumption Expenditure Price (PCE) for May was unchanged, as expected, while the core index which excludes food and energy, rose 0.1 percent compared to 0.3 percent in April.

 

I recognize that the official inflation data (CPI, PPI, PCE) is not the inflation that normal people are feeling. Grocery prices may be coming down but are still 200 percent higher than they were.  Prices at the pump are still high as is the cost of eating out. Most restaurant prices are so high that one could feed a family for several days on a single tab for two. Rents, insurance, and a bunch of other items are still in the stratosphere.

 

This has led to a slight decline in the rate of consumer spending, especially among lower-income consumers. However, the consumer spending averages have been held up by overspending by those in the upper income brackets. Fortunately, the continued health in the jobs market allows many to still make ends meet (for now).

 

Given the above scenario, the fact that the Fed is still waiting for more definitive data to cut interest rates should not impact the direction of the markets. Many argue that the Fed does not need to cut at all this year given the strength of the economy. They have a point.

 

The deficit is climbing exponentially and interest payments on our debt now equal what we spend on defense. And yet, billions of dollars of monthly Treasury auctions that make up the government's quarterly refunding needs have hardly moved the needle on the benchmark, U.S. ten-year Treasury bond. The U.S. dollar also remains well-bid.

 

What's not to like given the above scenario? The bull case I have laid out should give me comfort that new highs in the market are justified. And maybe they are, but why isn't the market broadening out? Why are investors flocking to only the best, cash-rich, mega companies in the world if everything is so good?

 

Maybe I am looking in the wrong place for clues to the future. I have just finished several columns on populism and its future impact on the country and the economy. From all the responses I received, I have identified one clear message--people are scared. They are afraid of the coming elections, worried about our climbing debt burden, of geo-political tensions, and much more.

 

We are entering the season where election politics begin to matter to the stock market. It may be that political uncertainty may begin to trump economics.  Last night’s disappointing debate performance by President Biden, for example, has many calling for him to bow out. In any case, I suspect that for market participants July will be less about dull markets and long vacations, and more about who said what and when.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.