Did you see that?!

The market continues to find ways to climb higher, with 31 all-time highs in the first half, the sixth-most since 1928. In the top ten years for most all-time highs in the first half, all but two (1983, 1987) enjoyed a positive second half of the year. With such remarkable concentration among the biggest names, though, a faltering megacap could materially undermine the S&P 500 as a whole. Still, the equal-weighted S&P 500 is holding up and could break out of the range it’s been in for the past four months. More than two-thirds of S&P 500 stocks are trading above their 200-day moving average. Can that continue? Maybe: the relative strength index (RSI) has has a reading greater than 60% about two-thirds of this time so far this year. The RSI moved over 70 recently and stayed there for seven straight days, the longest such stretch since December 2023. Short term, overbought RSI can be a sign of consolidation, but long term it’s bullish. Since 1990, average 12-month performance for the S&P 500 after the RSI reaches 70 is more than 12% with positive results 88% of the time (pretty good odds). Still, the narrow leadership and the continued yield curve inversion make you wonder if a correction, if not a bear, might yet be out there. Jeffries notes that the S&P 500 has had a somewhat higher proportion of up days (56%) this year than usual since 1928 (52%). They think that this high “win” rate and a subdued VIX are indications of uneasiness – and that this could be a sign that there’s more to the rally ahead. 

This weekend marks the midway point of 2024. Once the Fourth of July cookouts have faded into memory, the second half bull is looking for broadening. A catchup theme could be in order if inflation eases and rates come down. That would tend to favor value and small caps, both of which would benefit from rate cuts and steady economic growth. The still-strong labor market constitutes a support for the economy as a whole. That’s been softening, but for now it appears the economy can hold out a little longer at high rates. The first half of the year is in the top 20 since 1950. That’s frequently a harbinger of good things the rest of the year, though seasonality often hurts returns in August and September. UBS notes that the cap-weighted S&P 500 is expected to outperform the equal-weighted S&P by 3.3% this year. Still, relative earnings expectations are improving for the broader market. Thus, megacap tech soared 68.2% in Q4 last year vs. -0.2% for non-tech. By contrast, expectations for Q4 this year are for megacap tech to rise 20.8% versus 10.8% for non-tech. The market has already priced in two Fed cuts this year and several more for next year; with cuts already underway elsewhere, this may help the dollar stay strong, potentially favoring U.S. equities. 

After a nice first half, there are plenty of worries on my mind. High rates, for instance, with fed funds well above nominal GDP growth – something that’s been associated with trouble before. Geopolitics, with, in Jeffries’ view, the specter of Ukraine trying to broaden the conflict in advance of the U.S. election in hope of triggering NATO involvement as an insurance policy against a Trump win. Ocean spot rates, which have jumped 89% in the past two months and 233% y/y thanks to increased demand and the Red Sea disruption. A normalization of job openings with an end to the excess openings seen in recent years, which means that a sudden decrease in openings would drive the unemployment rate higher. The effects of Fed policy, which fall hardest on the less affluent and on small business – i.e., on the most cyclically sensitive consumers and firms. The participation in the rally, which has been exceedingly narrow. Growing energy inventories, which suggest that Chinese demand is softening. The growing risk of higher tariffs and a trade war. All that said, what could go right? Here’s a big one. Looked at in the context of the last several years, the recent runup in stocks is not such a stretch. All 2023 did was offset the losses of 2022. So, the past six months is really the only period of gains in the past 30 months. Furthermore, this has been a time of heavy inflation -– meaning that in real terms, all the gains since January 2022 are close to zero, with the S&P 500 only breaking even in real terms this past month! If disinflation continues, consumers and investors may find they’ve been too dour. Now, we’ve got to address the elephant in the room with the Democrats, en masse, agreeing that the debate was an unmitigated disaster for Biden, yet as we write the S&P has rallied to a brand-new record high. This week, the critical jobs, inflation, and inflation expectation readings were unabashedly good news! In the words of Renaissance Macro, “a bearish narrative based off of a U.S. political candidate is a bad bet fueled more by ideological hysteria and less on sober analysis, historical facts or belief in the ingenuity of the human spirit.” Let’s keep our eye on the ball. 

Positives

The Fed’s favorite barometer Core PCE rose 2.6% y/y and 0.1% m/m (good news!), matching expectations, down from last month’s reading of 2.8% y/y and 0.2% m/m. The string of painful inflation readings from the winter has come to an end and the new trend appears to be downward again. 

Inflation fears abate Year-ahead inflation expectations as measured by the University of Michigan Consumer Sentiment index fell to 3% from 3.3% last month (good news!). Long-run inflation expectations remained at 3%. The survey’s consumer sentiment reading dipped just slightly on the month. 

Not playing hard to get The Conference Board’s Consumer Confidence Index fell slightly in June. However, the survey found a relatively high 38.1% of respondents said jobs were “plentiful” while a very low 14.1% said jobs were “hard to get” (good news!), both readings an improvement from the month before. 

Negatives

What 7% mortgages bring Pending home sales fell to their lowest-ever level in May, in a series that goes back to 2001. Single-family home sales fell in May by 79K to 619K, versus consensus of 633K. The Mortgage Bankers Association said mortgage applications are well below pre-Covid levels. The FHFA House Price Index and the S&P CoreLogic CS 20-City Index both rose m/m in April, but the annual rate declined slightly.  The Architecture Billings Index fell for the 16th straight month in May, marking the lowest level since August 2020.

Regional Fed roundup The Richmond Fed’s manufacturing index fell to -10 from flat in May. The Dallas Fed’s manufacturing index remained negative but improved somewhat, from -19.4 in May to -15.1 in June. The regional Fed manufacturing surveys have mainly hovered in negative territory in June. The Philadelphia Fed’s non-manufacturing index, however, rebounded to 2.9 in June from -0.6 in May. 

No infrastructure package this year Core capital goods fell 0.6% in May versus a 0.3% increase in April. The third estimate of Q1 real GDP was revised 0.1% higher to a still-weak 1.4%. Consumer spending was also revised sharply lower to 1.5% from 2%. The Atlanta Fed’s GDPNow measure currently estimates Q2 growth at 2.2%, down from 2.7%.

What Else

Time’s a-wasting By August 7, names need to be filed for the Ohio presidential ballot, a date which precedes the Democratic convention by nearly two weeks. The party has said it plans to hold a “virtual nomination” before August 7 so as to comply with Ohio’s timeline. Owing to the modern pledged delegate system, the decision of whether to stay in the race is Biden’s to make. 

Cold comfort The first debate is usually bad for the incumbents. Presidential elections have major down ballot implications, but still in this historically polarized country it’s not quite clear that a sweep would have the same power as in the past. 

A housing glut? Construction of new homes has been in recovery, with new multi-family supply at a record and new single-family homes at levels not seen outside of recessions. Also, rents are coming down as vacancy rates have recovered. In Piper Sandler’s view, the demographics of the U.S. imply that even high levels of immigration will keep household formation too low to absorb the current rate of construction.