Cruel Summer
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
There are a lot of interesting things going on and the typical lazy summer is turning into a busy, even cruel summer. This week's musings are inspired by Summer song released in 1983, "Cruel Summer" (not to be confused with Taylor Swift's song by the same name) by Bananarama. 
The song was a top ten hit for the the band (one of only two) and has been covered multiple times over the years. Here's some trivia about the song:
This song sold more than 200,000 copies and is certified silver. The song reached #8 in the U.K., but it wasn't a hit in the U.S. until a year later in 1984. It ultimately reached #9 on the U.S. charts.
Unlike many songs today, this song was actually written by the three band members - Sarah Dallin, Siobhan Fahey, Keren Woodward.
This song was featured in the 1984 film, "The Karate Kid."
The music video was filmed in New York city, which was the first time the band members had ever been to New York. Unfortunately for the band, this was also their first introduction to cocaine, which according to one band member, is evident in the video. Fahey recalled, "When you watch that video, we look really tired and miserable in the scenes we shot before lunch, and then the after-lunch (post-drugs) shots are all euphoric and manic."
"Strange voices are saying
(What did they say)
Things I can't understand
It's too close for comfort
This heat has got right out of hand
It's a cruel, (cruel), cruel summer
Leaving me here on my own
It's a cruel, (it's a cruel), cruel summer
Now you're gone"
Here's what we've seen so far this week...
Cruel Summer. Markets have been rotating from the over-inflated Mag 7 and Mega-cap Tech names to other areas of the market over the past two weeks. 
This has been a welcome sight for bulls that want the current up cycle to continue. Before today's trading, Small Caps and Mid-caps are still out-pacing the S&P 500 Index and the Nasdaq Composite (tech-heavy) Index. International equities are lagging the S&P 500 a little this week, but still performing better then the Mega-cap Tech names. 
However, markets are struggling to gain traction this week due to outside forces. First, there was the attempted assassination of presidential candidate Trump over the weekend. For the time being, that has pushed the betting odds of a Trump victory higher and rumors are swirling of Biden potentially dropping out of the race (not stepping down as President). 
All this to say, markets like uncertainty. When political situations dramatically shift from a stable situation to more chaotic, markets tend to react negatively. Second, comments were made this week by J.P. Morgan CEO Jamie Dimon and by candidate Trump himself suggesting that the Fed should not lower interest rates before the election. 
This has caused the probabilities of a September rate cut by the Fed to drop just slightly from almost a certainty to a 93% probability today. This has created a little bit of doubt about a rate hike coming soon. Still, the number of new lows being made on the U.S. stock market are slight compared to previous recessions. 
The number of new lows is well below the "danger zone" and no where near the levels seen in August of 1999, October of 2007, or February of 2020 - all periods just prior to or at the beginning of a recession. When we look under the hood at the 5-day change by industry, we can see the rotation happening. The Mega-caps (in red) among the S&P 500 constituents are down while the out-of-favor names (in green) are rising over the past 5 days. Similarly, the majority of stocks in the S&P 600 Small Cap Index are in green. It's still early, so we need to see weekly rotations continue to occur. 
Based upon what we're seeing, that looks likely. Small Caps just saw the 2nd largest weekly inflows ever. In addition, small caps experienced the 4th largest weekly inflows just a few weeks ago. Due to the vast under-performance of small and mid-caps this year - a subject we have covered in detail the past few weeks - there's a good chance this rotation can continue. From a fundamental standpoint, things continue to look good for the economy. Next week, we'll get the first release of 2nd quarter GDP. 
The Atlanta Fed's GDPNow has risen substantially after cratering earlier in the month. The projection has risen from +1.5% to +2.7%. The projection of consumer spending is a big reason why the number was revised higher. Since the low forecast of +1.5%, the consumer spending component has been revised by 2x. As a reminder, consumer spending is close to two-thirds of GDP. 
Earnings drive stock prices and so far the results look good. It's early, but of the 14% of S&P 500 Index companies that have reported 2nd quarter earnings, 80% have beaten earnings estimates. The St. Louis Fed's Financial Stress Index is at -0.79, which is a far cry from the elevated positive levels seen prior to the 2000 and 2007 recessions. 
The National Financial Conditions Index is also in negative territory (-0.51), suggesting loose financial conditions. Both of these indices moved into positive territory, meaning financial conditions were worsening, prior to the Dot.com crash in 2000. This makes the current situation different as the current rise in stocks is coinciding with still loose financial conditions. That being said, it's no surprise we're getting a pull back as historically, whether the election involved a "lame duck" President or a sitting President in year 4 of his term, late July and early August are typically soft for equities. Until we get a warning signal that the fundamentals are breaking down and the technicals are following suit, it's steady as she goes.
It's a cruel, (cruel), cruel summer...
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Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
Past Performance does not guarantee future results.