“The difficulty lies, not in the new ideas, but in escaping from the old ones.”
John Maynard Keynes
Time is flying by so fast even the market monsters are out of breath, exhausted by the media’s incessant calls to take to the stage.
Reporting season will likely be their most challenging performance yet - trying to stir the audience up with bubbles, toils and troubles while this brand new economy, rapidly expanding earnings and margins, and young bull market are telling us a very different story.
In the news the song remains the same: If it’s good we’re not supposed to believe it; if it’s profitable then it soon won’t be; and if it’s going up in value it’s a bubble that’s about to pop. Enter Armageddon, stage left.
Summertime, And the Living is Easy…
Now that June is in the books – along with Q2 – we know these types of performances tend to lead to an encore. The two snapshots from Bespoke below will give you a sense of what history tells us about years when the market was steady in the first half. And when I say “steady” I mean when a market did not fall more than 5% from a previous high.
So, are the numbers growing larger by the year?
Yep. But keep in mind it was only last week that we finally broke above that trade range from March through nearly all of June. And don’t be shocked if the markets test that breakout range for support during a “summer swoon” in July.
Instead, if it happens, embrace it. It will be a good thing for long-term investors.
Remember, just when you think “the crowd” is too bullish, watch how they react (read: run) after a week or two of red ink.
Net-net, 2021 stands in a small group of those years where the S&P 500 never experienced anything more than a 5% pullback from a closing high in the first half of the year.
In fact, over the last 25 years the only other year that saw such steadiness in the first half of trading was 2017. And when you look through the S&P 500’s history, there have only been 14 other years where the largest pullback through June 30th was less than 5%.
Now have a look at what happened in all the other years like this (so far):
Of the 14 years shown, the S&P 500 tended to see positive returns in the second half with gains in 13 of them, and with a median gain of 10.2%.
The only down second half was in 1986 when the S&P 500 fell 3.5%.
Ah yes, you knew there was a “but” coming, right?
Don’t forget that July has some history of being “the summer swoon month.”
This merely hints that the market is acting in a very healthy manner and is about to be further shocked with an earnings season set to show the analysts are nowhere close to catching up yet.
So, if we rally a few percent up – and then fall 5-8% – ending back where we were in May, you can be completely assured that a) the crowd will be petrified again, and b) the financial media will unleash hell on your emotions.
Take the term “brutal” above as the joke it is meant to be.
While there were red months in the 1980s and prior to that after strong first halves, the most recent “red July” was 1998 (23 years ago) and it was down only 1.2%.
And The Fear Remains Embedded…
A year ago, the Fear Index stood at 47. This week (at the time of writing) it was 41.
Below is the chart showing what happened in between then and now.
So, here’s the logic: We are literally trading at all-time highs + or – 1% and yet we see the crowd is more fearful of the future than during last summer, when we were in the middle of a global pandemic shutdown the likes of which no one had ever experienced.
Like I said, pray for a summer swoon!