It’s the rally everyone loves to hate. Why? Because very few got it right. Most fund managers missed this rally entirely… thinking it was only a matter of time before things collapsed. The thing is – they haven’t. I will admit – I also got this wrong. My initial target at the start of the year was 4200. If that broke – I was looking at resistance around 4500. The S&P 500 now trades 4536 – making me look foolish (and it won’t be the last time I am sure). We’re now just past the mid-point of the year – with the S&P 500 up 18.2% YTD. Remarkable by any measure. What are Wall St saying about the second half?
Can Consumers Continue to ‘Shop ’til they Drop’?
Never underestimate the US consumer’s willingness to spend. And from mine, that’s been the story of this year. Consumers have used whatever means available to spend, spend, spend. With ~70% of US GDP consumption based – that has also meant the economy managed to keep its head above water. But what does it look like going forward?Do consumers still have ultra-strong balance sheets to keep it up? And are rates eventually going to bite? I ask this because if US consumers are closer to maxing out their credit cards (with more than $1T in debt)… the odds of a recession sharply increase.
Why Is it Different This Time?
Whenever history looks like repeating – it’s worth asking what’s different this time? I say that because the past is never a guarantee of what’s ahead. Put another way, if you are making decisions on that basis, you might be suffering from “confirmation bias”. And that can be a blind spot. My (possible) blind spot is I think a recession is more than likely within the next 12 months. As such, I am only willing to put about 65% of my portfolio in risk assets. If I felt a recession was not likely – I would meaningfully increase my exposure. My bias is to lean into historical data (and leading indicators) which have reliably predicted recessions in the past. That feels logical. But I could be wrong.
S&P 500 Meets Resistance
There’s a few good reasons to be bullish: (i) Q1 earnings were better than feared; (ii) Bank deposits have stabilized; (iii) Inflation is slowly (but surely) working its way down; (iv) The Fed is closer to its terminal rate; and (v) We’re yet to see any major deterioration in credit. All of those are positives for risk assets. However, stocks have run a long way fast and are due to take a pause. I think that’s what we will see…
For a full list of posts from 2017…