Hope you are all doing well. The S&P 500 and the NASDAQ pushed their record levels higher for the fourth week out of the past five as those two indexes and the Dow on Friday closed more than 1% higher for the week. Since June 20, the S&P 500 has risen more than 7% while the NASDAQ has added almost 9%. Hulk Hogan passed away this week. In his honor I have broken down this week’s update using his three demandments, brother.
The Training
If you have been reading my weekly emails, then you have been trained to realize that when people are most afraid it’s usually the right time to buy not sell. Conversely, when people are the most complacent regarding investment risk it’s time to pocket gains and replenish safe money. The market gauge that tracks investors’ expectations of short-term U.S. stock volatility, the VIX fell 9% for the week. It’s now at its lowest level in five months.The VIX closed the week at 14.9, down from a recent high of 21.6 on June 17. A low VIX indicates that investors aren’t expecting much market volatility in the near future that usually coincides with less hedging (protecting against potential downside risk) which leave portfolios more vulnerable to sudden shifts. A low VIX might suggest tranquility but that is not the case. Unforeseen economic reports, political events, or geopolitical tensions can quickly disrupt the market’s calmness and cause a spike in volatility. I have been saying for a couple weeks now that we may get a pull back (a 5 to 10% move down) this summer and early fall. I think that could happen starting as early as this week. If the money that you have in the market is not money you are spending in the next 9 months, I don’t think you need to reposition. Longer term the strength of the corporate earnings and the recent progress on trade deals suggest we are likely to remain in a bull market. If I am right and we do get a short term pull back and you have been too conservative and missed out on some of the recent gains then that would be the time to redeploy money into the stock market.
The Prayers
Investors are praying for trade deals and a healthy reading on the economy. August 1 is the deadline set by the Trump administration before tariffs go back on. Investors worldwide are monitoring U.S. tariff negotiations. The administration announced progress toward deals with Japan, the Philippines and Indonesia. Negotiations have not been as fruitful with the European Union, India, and Canada. So I expect to see tariffs potentially go on the EU, Canada and other countries that have not made significant progress towards a deal. That being said we will know more in regards to the EU soon. European Commission President Ursula von der Leyen headed to Scotland as did President Trump and they will meet Sunday afternoon. The results of that meeting could move markets on Monday. We will also get the second quarter GDP number in the middle next week, which is how we measure the economy. If it is negative it will be a second consecutive negative quarter which would mean we are in a recession. That is not the expectation but regardless the number has the potential to be a catalyst for a market swing in either direction.
The Vitamins
Tech stocks have been the vitamins growing the stock market the past 20 months. So far it looks like that trend will continue with Alphabet posting great quarterly results this past week. The magnificent seven mega-cap tech stocks are again expected to generate a massive share of overall second-quarter earnings growth. In aggregate, the Magnificent 7 stocks were forecast to report average growth of 14.1%. Excluding those big tech firms, the S&P 500’s other 493 stocks were expected to post much slower growth of 3.4%.
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