An End of Summer Market Update

 An End of Summer Market Update. 

I thought I’d give a very brief update on where I believe things currently stand with the markets.  I said in my May email letter and in my July investment letter that I thought stocks had become over sold.  I based that on fundamental economic facts, valuation, and proprietary money flow analysis data that I monitor.  Well, from their lows in Mid-June until mid-August major market indices rallied nearly 17%, erasing about half of this year’s losses.  My guess is we rallied a few weeks ago to what is probably current fair value for the markets based on the economic and external data.  Since then, equities have struggled.  That’s partly because of the economic data, partly that we’re in the middle of summer, partly because Wall Street is on vacation and partly because that same data suggesting then we were over sold in June had entered an overbought phase in August.  We’ve now given back about 6% of this summer’s rally. 

This being the week of the Labor Day long weekend, markets will be in vacation mode until the holiday passes next Monday.  There is a higher probability of volatile and listless trading until then.  What happens next will largely be dependent on the upcoming economic data, news on the inflation front and other the headlines, such as the war in Ukraine.  Probability suggests equities could be volatile and range bound between now and sometime closer to the elections.  Probability also suggests that markets will be more prone to rally when they understand which party’s going to be in charge of the House and Senate come 2023.  Wall Street would very much like divided government, meaning one of those two branches flips into control of the Republicans.  Currently, it looks like there’s better odds of that happening in the House than the Senate. 

For reference points of the range in which I think stocks will trade until we get some clarity on the elections and maybe inflation, I would use this summer’s market bottom in June {currently about 8% lower and index levels from about ten days ago {also about 8% higher} from today’s prices.  That means we’re more or less stuck in "no man’s land" as far as valuation is concerned, hence the volatility and chop we’re currently experiencing.  This is a great environment for traders and frustrating for investors.  Of course, events could change this analysis but that’s where I think we stand as of this writing.  I will use weakness to strategically make purchases of ETFs I find attractive given what I think 2023 is shaping up to look like.  

Remember, markets discount future economic growth and so, as hard as it is to believe, the investment world is already looking out six to eighteen months from now.  That means investors are turning their gaze to 2023 and even early 2024!  Assuming we get runaway inflation under control, then the economic picture looks brighter out there than perhaps it does today.  Probability suggests that given what we currently know of things that markets are perhaps 10-12% undervalued looking out that far.  Of course, I’m prepared to change that analysis if the facts change, but that’s what I see as the last vestiges of summer slowly slip by. 

I’ll be back in touch sometime in early fall to update you on my thinking then.  Until then enjoy summer’s last waltz.  Seems like only yesterday we were welcoming in the sun for Memorial Day.  Time flies.