Seasonal: Neutral. July is the #1 S&P 500 and NASDAQ month over the last 21 years, but July is also the first month of NASDAQ’s “Worst Months” and election year performance has been softer. Election-year Julys rank #6 for the DOW and S&P 500, #9 for NASDAQ, and #10 for Russell 2000.
Fundamental: Softening. The third estimate of Q1 GDP was revised higher to 1.4%, but the improvement came with a downward revision to consumer spending. Weekly initial and continuing jobless claims have been ticking higher along with the unemployment rate. This all suggests that the labor market is softening. Interest rates are still elevated due to persistent inflation that has thus far refused to return to around 2%. If the consumer continues to retreat, it will not be long before corporate earnings could take a hit.
Technical: Mixed. Fueled by AI enthusiasm, NASDAQ and S&P 500 closed at new all-time highs in June, while the DOW lagged. NASDAQ and S&P 500 remain well above their respective 50-day moving average, the DOW appears unable to break away from its 50-day moving average in either direction. Weekly market breadth and weekly New Highs/Lows data is currently signaling fading participation in the rally. Overlaid with seasonal factors that will turn more bearish in the second half of July, the market is susceptible to a mild single-digit retreat. Should that transpire, levels to watch are the DOW’s 200-day moving average around 37150, S&P 500 5250, and NASDAQ 16700.
Monetary: 5.25 – 5.50%. The best-educated guess I can offer is for perhaps one, maybe two small 0.25% rate reductions later this year by the Fed. This is based on current inflation metric trends and current economic data. The CME Group’s FedWatch Tool is slightly more optimistic with a 64.1% chance of a cut at the Fed’s September meeting. Some of the stellar year-to-date market gain is surely in anticipation of the Fed cutting rates. Eventually, something will give. Either inflation will retreat, and a soft landing will occur, or the economy has a hard landing, and the Fed is forced to cut rates.
Sentiment: Frothy. According to the Investor’s Intelligence Advisors Sentiment survey, Bullish advisors stand at 61.5%. Correction advisors are at 20.0% while Bearish advisors numbered 18.5% as of their June 26 release. Bullish sentiment has soared to just below its recent peak of 62.5% at the end of March just ahead of April’s decline. A cautious stance is warranted at this time as better opportunities will likely arrive later this year.
So far, bullish election-year forces have conspired with a generational technology macro trend from generative AI and all the related and ancillary industries to drive the market higher than anyone expected. In fact, I believe that this AI may very well be the “culturally enabling, paradigm-shifting technology” that fuels the next long-term bull market.
The midyear Russell Index and institutional fund portfolio rebalancing, along with Q2 earnings season and the start of the second half of the year, have made July the best month of the third quarter. I continue to expect the bull market to march ahead and achieve more new highs by yearend. But the outsized gains so far this year may have the market out a little too far over its skis at this point. The market has already reached and surpassed the 8-15% level of my 2024 Annual Forecast Base Case projection. While this brings my Best Case forecast of 15-25% gains for 2024 into play, the market looks like it’s due for some mean reversion. I would not be surprised if the market were to experience a mild 5%-8% pullback during Q3.
Unless something dramatic transpires over the next two weeks, look for the Midyear Rally to pull the market higher into mid-July. After that, the market will be susceptible to election campaigns and political missteps, Fed jawboning, economic data disappointments, and the Summer Market Volume Doldrums. As I have been saying for the last several months, I believe after we get through the historically weak third quarter, the market will rally to new highs by year end.
*Source: The Stock Trader’s Almanac*