July 5, 2023
Good morning,
Time is such an interesting dimension, a constant that constantly feels like anything but. For example, last week feels like last year, thinking about the markets this morning. I hope you had a nice break – it seems like I did.
One Wall Street adage you’ve often seen in these Morning Notes over the years – the market does what it needs to do to prove the majority wrong – certainly came true in the first half of this year. Coming into the year, sentiment was in the midst of its second-longest streak of extreme pessimism on record (Ned Davis Research Data) and Bloomberg’s survey of 25 Wall Street strategists showed a negative target for the first time since inception in 1999.
The naysayers spent the first five months of 2023 coming up with excuses. In January, they said the economy was about to fall into recession. In February, inflation was not going to decline fast enough. In March, the banking system was going to collapse. In April, the Fed was going to tighten too much. In May, the rally was too narrow. June felt a little capitulating. In spite of, or perhaps because of, the pessimism, the market staged one of its best first halves on record. The S&P 500 jumped 15.9%, the best since 2019, second-best this century, and 12th-best since 1926.
While it does not change the data, it is worth noting that three of the eleven sectors constituting the S&P 500, Technology, Communication Services and Consumer Discretionary, accounted for all of the S&P 500 gains so far this year.
The second half of the year is starting a little soft this morning. Futures are off half a percentage point (-0.5%) on much weaker manufacturing numbers in China, and to a lesser extent, in Europe. The minutes from the last Fed meeting are out this afternoon and will be scrutinized. This week does have a holiday feel to it, so fireworks likely ended last night.
As opposed to six months ago, sentiment is bullish, and markets reflect an 86% probability of a rate hike later this month. Signs of a recession, while not imminent, continue to grow. The likelihood of a first half redo for the markets in the second half seems low.
See you Friday.
Be well,
Mike