“TOO HOT” OR “TOO COLD” DATA CAN STILL UNDERMINE OR END THIS RALLY

By John Lau

July 31, 2023 – The stock market rallied to new 2023 highs last week on strong earnings and a largely as expected Fed decision before hot economic data saw volatility pick up into the weekend.

Unlike the January-through-May advance in the S&P 500, the rally since June hasn’t been driven primarily by too-bearish sentiment or the impact of just seven stocks on the S&P 500 (while the other 493 did nothing). Instead, the rally since June has been quite logical: Solid growth, falling inflation, and a looming end to Fed rate hikes. I call them the “Three Pillars” of the rally: Soft/No Landing, Disinflation, and Fed Done (or Almost Done) with Rate Hikes, and as long as these pillars stay in place and are confirmed by the economic data, the outlook for stocks may continue to be positive near-term.

As I have said in the past, 2023’s market is all about data; since the end of May, data has been “Goldilocks”, which has powered the S&P 500 to current levels, and I think it is going to take more Goldilocks economic data to sustain this rally and possibly prime for an extension of it in the coming weeks and months. This week will be important because we get three important monthly economic reports: Jobs Report, Institute of Supply Management (ISM) Manufacturing Purchasing Manager Index (PMI), and ISM Services PMI. The S&P 500 needs Goldilocks economic data to hold current levels, because markets are not at all pricing in a chance for a hard landing, nor are they pricing in another rate hike. Data that makes either of those more likely will be negative, given current valuations.

Our focus from a risk management standpoint is to continue to monitor the pertinent data, and to identify, as early as possible, any events that could damage the three pillars identified above. And, just like economic data has driven this rally since June, data that’s “Too Hot or Too Cold” can also undermine or end this rally. 

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