This week’s commentary is an easy one. The U.S. stock market is bumping right up against all-time highs due to the simple fact that the predominate market fear has been the “fear of losing”, which has been evident in weak investor sentiment and underweight stock positioning among many professional fund managers.
As fickleness is a well-documented condition that afflicts individual investors, short-term traders, and professional managers whose livelihoods hinge on short-term performance, when you catch the masses huddled on one side of the fear boat it’ll be merely a matter of time before they grow impatient and rush to other side.
Of late that would be moving from the fear-of-losing to the fear-of-losing-out, as I described in this video…
That said, of course there’s a whole chorus of “experts” — who’ve been singing a bearish tune — who tell us not to believe this rally, not for a minute!
Friday’s jobs number was huge. But if, for example, you listened that morning to one of the world’s most respected bond fund managers it was nothing to write home about — in that average hourly earnings increased by merely .1% and the workweek remained unchanged at 34.4 hours. Plus, the second quarter average was just 147,000 per month versus 196,000 for Q1. All of what the gent said was true, and eh hem, he is a bond fund manager (bonds do better when the economy doesn’t, hmm…).
In Thursday’s video I mentioned weekly unemployment claims and recent Institute for Supply Management Survey results that pointed to a high probability that June’s number would exceed analysts’ estimates. 287,000 was more than I would’ve guessed, but the beat should not have been a big surprise to anyone. In my view it, save for Mr. Bond Fund’s points, was an impressive report on a number of fronts. Per Bloomberg:
June’s strength is led by a 38,000 gain for professional & business services, a closely watched area that is especially sensitive to changes in labor demand. Telecommunications, which fell 32,000 in May during the Verizon strike, rose 28,000 in a positive reversal for June. Manufacturing shows a rare gain and a sizable one at 14,000. Other industries posting gains include retail, government and also finance.
The unemployment rate rose 2 tenths to 4.9 percent but reflects strength, not weakness, in the labor market as discouraged workers, who stopped looking for work in May, re-entered the labor force in June.
The fact that the stock market surged on the news (Dow closed 250 points higher, SP 500 up 1.5%) — on very strong breadth (498 of the SP 500 [505 actually] rose on the day) — tells us that, as I suggested in Thursday’s video, good economic news, at least on Friday, is good news for the stock market. The irony is that the scare that was/is Brexit, in my view, had a lot to do with Friday’s rally — in that it obliterated the chances of a Fed rate hike any time soon and, thus, allows traders to feel comfortable with such a robust jobs number. Although the odds of a hike reflected in fed funds futures trading on Friday did jump from 11% to 20% (still very low) for December.
So then, are we there yet? Are we at last going to move above the May 2015 all-time high, establish support and work our way to levels that’ll catch our portfolios up after what have essentially been two nauseating years of flatness? Well, no, we’re not there yet: The S&P 500 closed Friday at 2,129.90, the all-time record close is 2,130.82. At one point Friday it did get to 2,131.71, but, alas, it just couldn’t hold it. So, we need a close 0.92 points higher than Friday’s to get there. “There”, that is, in terms of a new all-time high. Sustainability, on the other hand, is a whole other can of worms that I’ll be dissecting for you in commentaries to come.
All this, and the video below, speaks to the prospects for U.S. stocks. You’ll be receiving a video soon where I’ll touch on some of the reasons why I believe that thinking globally will be essential to our investment success going forward.
Have a great weekend!
P.s. Here’s Jim Paulsen making the case for the second half of the year. This should sound familiar to regular readers: