“The difficulty lies, not in the new ideas, but in escaping from the old ones.”

– John Maynard Keynes

 

Good Morning,

Well, there you go – the fastest 6 months I can recall in my entire life.  Good Lord time is flying.  Heck, the monsters are even out of breath and seemingly, in recent weeks anyway, cannot keep up with the media calling them on stage for the latest scare.  Shortly, it should be a fun reporting season watching them try to explain away this brand new economy, rapidly expanding earnings and margins – and very young bull market.

Just recall, the new themes are pretty simple:  if it is good, we are not supposed to believe it.  If it is profitable, then you just don’t understand how bad it is yet.  If it goes up in value more than a smidge – it is a bubble and is set to crash down on you – soon.

And – if it keeps going up, well, Armageddon will come knocking.

Take Summer for What it is….

Home of the potholes in the road, the resting points along the way, the base camps in the climb up the mountain…or the media’s preferred tag lines:  i.e., Summer Swoon, Market Crash, Correction or Plunge references will do.  Now that June is in the books – along with Q2 – expect the reference volumes to pick-up as more head to the beach, relax and turn a blind eye to all that terrifies and stresses.

The good news is this – markets like we have witnessed in the first half of 2021, tend to end on a very positive note in the second half as well.  Likely something to do with momentum of the giant aircraft carrier called our $23 Trillion economy.   It’s tough to hurt it for long – as the last 50 years will show.  The two Bespoke snapshots below will give you a sense of history tells us about years when the market was steady in the first half.

In this case, “steady”, is defined as a market that did not fall more than 5% from a previous high.  Thank God above that everyone is still afraid at a moment’s notice.

…read ’em and reap:

Yes, I know that with the numbers becoming larger by the year, it “feels” like those choppy periods we more than it shows.  But recall also that it has only been this last week where we broke above that trade range from March through nearly all of June.

We have a message – do not be shocked if we see markets testing that breakout range for support during a “summer swoon” in July.  By the way, embrace it – as it will be a very good thing for long-term investors.  Just when you think “the crowd” is too bullish, remember what happens on a week or two of red ink.

Net-net, 2021 stand in a small group – 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.  How rare?

Over the last 25 years, the only other year that saw such steadiness in the first half of trading was 2017.  Think of that – in all other years over the last 25 we have experienced MORE choppiness and setback – and yet, the crowd can’t see risk as a good thing.  Further, when you look at the S&P 500’s history, there have only been 14 other years where the largest pullback through June 30th was less than 5%.

This next snapshot shows you what happened in all the other years like this (so far):

Pretty positive backdrop indeed – suggesting again we pray for a dip as the support is significant.  Again, the bar chart above shows the performance of the S&P 500 during the second half of each prior year where the first half’s largest pullback was less than 5%.  Of the 14 years shown, the S&P 500 tended to see positive returns in the second half with gains in 13 of the 14 years shown for a median gain of 10.2%.  The only down second half was in 1986 when the S&P 500 fell 3.5%.

But…

Ah yes, you knew there was a “but” coming, right?

Even though the second half data is generally very positive as noted above, July has some history of being “the summer swoon.”  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.

Why do I point this out?  Well, because 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.

Pray for it – it just sets the stage for a better finish.  

So, let’s see what “The Ides of July” have taught us before:

Take the term “brutal” as the joke it is meant to be.  While there were red months in the 80’s 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%.  My best guess?  First, don’t be worried when you hear a lot about this data – anything that can drudge up concerns will be manna from heaven for the financial media.  My second best guess?  July could be choppy and make everyone look foolish, providing little for the bulls or the bears.

All the while, the beat goes on…and earnings continue to accelerate!

And Fear Remains Embedded

Oh yes – this my friends is a good thing.  Note that a year ago, the Fear Index stood at 47.  Midday yesterday it was 41.  On a chart showing what happened in between, it looks something like this:

Now, seriously, think of the logic unfolding here.  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, in the middle of a global pandemic shutdown that no one had ever experienced.

Incredible right?  I repeat – pray for a summer swoon.

Dead Ahead…

Do not be surprised if they crank up the noise on the “delta variant.”  While deaths are not rising due to it, hospitals in other areas appear to be seeing rising beds filled because of it.  In a quiet summer, with the crowd away having well-deserved fun with family and friends, expect the volume to be loud to get your attention.

All the while, we will continue to witness the complete reshaping of the entire economic structure we call “business.”  The latest stats on earnings are pretty clear.  Keep these in mind as a mental backdrop when the fear-driving stories hit the front page:

Total Q2 earnings for the S&P 500 index are expected to be up +61.1% from the same period last year on +18.0% higher revenues

This follows the +49.3% earnings growth on +10.3% higher revenues in 2021 Q1.

The magnitude of positive earnings surprises in Q1 – and the persistent positive revisions to earnings estimates, strongly suggests the final Q2 earnings growth tally to be significantly higher than the current expected +61.1%.

The Bottom Line

Enjoy your time with family and friends.  Like every summer, the chop is ahead.  Don’t fear it – expect it.  And then, tighten your belt for the next leg up.

Remember, things are usually not as good as they look – and never as bad as it feels.

Remember this too:  51% of all trading days in the market have closed in the red since 1982.  And during that time, the DOW rose from 901 to 34,500.  Don’t sweat the small stuff…

And…if you are heading out early for the long July 4th weekend – we wish you a fantastic time.  Relax, enjoy, stay healthy and safe!

Until we see you again, may your journey be grand

and your legacy significant.