Weekly Update August 22: A Rather Bullish Development

Investors cheered as the The S&P 500 was up >12.5% the past month.  Previous big months have usually lead to better than average returns. Yes, during the tech bubble burst this didn’t work, but most other times the past 60 years have been rather bullish. The market has become more comfortable with the inflation picture—seeing prices come down—and the likely path of the Fed. In addition, earnings have been quite a bit better than many had feared.

After this rebound, the key question investors are asking is whether this is a bear market rally that will soon fizzle or the start of a new bull market. As of Friday, August 14th, over 90% of S&P 500 stocks were above their 50-day moving average. Breadth thrusts, like these, are a sign of broadening participation and momentum. They often occur in the early innings of a new cyclical advance. It’s even more constructive that we’ve gotten several different thrusts in recent weeks. There’s too much uncertainty to have a high conviction view right now, but the fact that we’ve seen a handful of these signals occur within a few weeks of each other increases the likelihood that a new bull market is being born.

Following the latest rally, the risk-reward for stocks has become more balanced.

Still, with increasing odds that the June lows hold and our view that a soft landing may be as likely as recession, we remain slightly comfortable, although viligant.

At the same time, the lack of capitulation, still-high risk of a Fed policy mistake, and tinder box of geopolitical tensions suggest perhaps this rally may be due for a pause or even a bit of a retreat. But that doesn’t change our belief that stocks have more room to run through year end and into 2023.

Please reach out with any questions.

Debbie