Daily State Of The Markets: As Good As It Gets?

David Moenning profile picture
David Moenning


  • Earnings are strong.
  • The initial read for Q2 GDP will likekly have a 4-handle.
  • And yet stocks are going sideways.
  • What gives?

After a sloppy June, stock market investors appear to be enjoying the month of July. So far at least, the S&P 500 sports a gain of 3.75% for the month and is inching closer to that all-time high set back on January 26. And yet, many of my indicators aren't exactly in their happy places right now and analysts continue to toss around a laundry list of issues to fret about.

You know the drill. There is the trade war ("Tariffs are the greatest!"). Geopolitics (can you say, Iran?). Inflation. Rates (and, in turn, the yield curve). The Fed. Europe. The mid-terms. Housing (yes, really). Valuations. And of course, the economy.

On the latter subject, the bulls are quick to point out that this Friday's guesstimate on the country's economic growth rate (aka the Q2 GDP Report) should be strong - with lots of folks looking for headline GDP to have a 4-handle on it. Playing the extrapolation game, our heroes in horns contend that a strong economy will produce strong earnings going forward. What's not to like, right?

But, here's the rub - the "going forward" part. As we all know, the stock market is effectively a discounting mechanism for future expectations. As such, I can argue that the current growth in the economy was "baked in" to stock prices late last year.

So, the question is this. If we look six to nine months down the road, what is the stock market currently pricing in? And given that prices have been going nowhere fast for six months now (give or take a day), the immediate answer might be, not much.

How can this be, you ask? It's simple really. While there are no signs that a bear market or a recession is waiting in the wings, there is a fairly big batch of evidence suggesting that the trend of growth is slowing.

Tim Hayes, Chief Global Investment Strategist at Ned Davis Research Group (a firm that I know, trust, and have worked with since 1994), made this point to a couple of knucklehead interviewers on CNBC's European Squawk Box a couple weeks back. Tim's point was the rate of growth was slowing and that stocks were picking up on this. The facts were lost on these two nitwits, but for anyone with an open mind, Tim offered up some interesting data to ponder.

Mr. Hayes suggests that there is continuing evidence of what he calls a "reflation retreat" - especially on a global basis - that could (key word) increase the risk of bear market. Hayes opines that bearish signs include a decline in inflation expectations, the recent strength in defensive sectors, the weakness in cyclicals and Financials, the downtrend in commodities, what he calls a "risk off" condition in currencies, rising credit spreads, and, of course, a flattening yield curve. For a guy that, in my opinion, is usually pretty level-headed and upbeat, this is eye-opening a list.

In essence, Hayes is saying that since the secular bull market began on March 9, 2009, there have been two intervening cyclical bear encounters. As in the declines seen in 2011 and 2015-16. I like to call these brief negative cycles "mini bears" while others have dubbed them "teddy bears." But in any event, Tim says that the odds appear to be rising that another cyclical, mini, or teddy bear may be in our future.

Couple Tim's list of worries with the distinct lack of "oomph" within the current uptrend, high valuation metrics, narrowing leadership, what looks to be a protracted trade tiff, and the state of my favorite market models, and well, one can't be blamed for feeling that Friday's GDP and the current earnings parade may both wind up in the as good as it gets category.

Call me a "Negative Nancy" if you must. Tell me to step away from the keyboard and go work on my short game if you'd prefer. After all, my bullish buddies tell me that the market indices are "just fine, thank you."

But there is one very important lesson I learned a long time ago about the stock market game that just might apply here: Investors should strive to be the most fearful at tops and the most optimistic at bottoms. Hmmm... and what does the most recent sentiment data suggest?

Yes, it can be hard (VERY hard) to be skeptical when stocks are at or near new highs. No, I'm not calling a top. And no, I don't expect a bear (of any kind) to commence tomorrow. What I AM trying to do is point out that all is not right with the indicator world right now - especially if one moves away from price trend indicators. I'm trying to say that risk is elevated. And until/unless the bulls can show me some real (and sustained) "oomph" to act as an "all clear" signal, I'm going to remain skeptical/modestly cautious for a while.

Publishing Note: My next report will be published Monday morning (my chipping/putting definitely needs some work!).

Thought For The Day:

Wise men talk because they have something to say; fools, because they have to say something. - Plato

This article was written by

David Moenning profile picture
David Moenning is founder and Chief Investment Officer at Heritage Capital Research, a Registered Investment Advisor. Heritage is an independent, privately owned, investment management firm located in the Denver area. Mr. Moenning has more than 33 years of portfolio management experience and focuses on a risk-managed approach to capital markets via modernized portfolio development and dynamic adaptation to ever-changing macro environments. Most recently Chief Investment Officer for a $1.3 billion RIA firm.
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