Weekly Update (07/10 – 07-17): Summer Doldrums, Bears Licking Their Wounds

Hi all –

I hope you had a wonderful fourth of July and are enjoying your summer. Hopefully, you have been able to find some time to relax and spend time with friends and family. I wanted to provide a high-level market update for the week to show what we are seeing in the market currently and, more importantly, where it may be going.

With summer months upon us, the market remains directionally biased upward. Inflation data is coming in mixed – with some numbers such as recent jobs data somewhat strong, while underneath the surface, cracks in the bearish narrative are emerging.

Inflation is running at 4% YoY, while core-PCE, the measure the Fed really focuses on, is somewhat higher due to services-oriented inflation.

The fever-pitch among mainstream media outlets about the necessity of a recession seems to be melting away, in favor of the more nuanced argument put forth by Ed Yardeni, (Ph. D in economics from Yale) who has characterized our economic backdrop as one of a rolling-recession type of environment (different sectors may experience a recession, but not provide enough slowing to bring down the whole economy). Case-in-point, with industrial PMI readings below 50 (think of PMI as the level of economic activity in the industrial economy, below 50 is recession for that sector, while above 50 is expansionary for that sector), we are technically in a recession among industrial sectors such as autos, and other types of manufacturing.

While the industrial economy is important, it is not the main driver of the US economy at large. The US economy is 70% consumption oriented. Consumer-based GDP is still strong, and thus the real-time GDP data are still in expansion-mode.

Due to this mixed backdrop, strength among consumer sectors, and particularly among things like leisure, travel, restaurants (discretionary services); with weakness in the industrial economy; in our view, the chances of a goldilocks soft-landing scenario have improved. Goldman Sachs believes there is only 25% chance of a recession this year. Fed President Austan Goolsbee of Chicago has recently echoed the sentiments that we may be heading for a goldilocks outcome; while noting that wage data is notoriously lagging, rather than being a leading indicator.

We are also beginning to see data in the jobs numbers, such as the number of temporary workers being hired, starting to soften. This component of the jobs data decreased.

Typically, as temporary jobs decrease, this is a canary in the coalmine of broader hiring trends in the US. If the trend of jobs softening continues, it will lead to further wage disinflation, and a general cooling in broad inflation. We are also seeing JOLTS data (a ratio of job openings to people searching for jobs) slow significantly; another sign pointing to future disinflation.

We believe that July’s inflation print may be a watershed moment for investors watching inflation, because the 1.2% June 2022 reading will fall off, and possibly be replaced by a .2% June 2023 reading, meaning inflation could fall by an astonishing 1 percentage point in a single month.

We have been optimistic on the market ever since it bottomed in October 2022, and our view has consistently been that looking at the Month-over-Month inflation data will ultimately be the dominant strategy for investors, because it is more accurate than the distorted Year-over-Year data the Fed fixates on.

Certain sectors such as industrials are becoming increasingly attractive due to the fact that the best time to buy industrial stocks is when PMIs in the industrial sector have bottomed, and have begun to increase.

The bears’ favorite argument about market “breadth” being bad has been crumbling for the last month or two, as small caps and mid cap stocks begin to participate in the market rally, in earnest.

Overall, this is starting to look convincingly like a new bull market, rather than just a bear-market rally.

We know from the data that bull markets tend to last 70 months on average and be about 9x more powerful in percentage terms than their bear-market counterparts. So, if we are in a new bull market, buckle up. At the same time, be sure to appreciate the potential that we are not in a new bull market, as the data still carries a lot of COVID-related distortions that make this economic cycle quite different from past ones.

Finally, we are encouraged by the recent Fed stress test on the large US banks. All the systemically important banks passed with flying colors. Now, large banks such as Goldman, JP Morgan, and Bank of America, will be looking to raise their dividends. We had been anticipating such an outcome and believe the fundamentals of the banking sector continue to improve. Similarly, we feel confident in the long period of time without another small bank failure. While there may be more one-off bank failures in the future, it doesn’t seem like one-off bank runs will be enough to put a dent in the American economy.

As always, please do not hesitate to reach out to us with questions. Thank you for your trust and confidence.

John Bay, CFA, UCLA MBA

Chief Market Strategist

Meet the Marathon Team

Charles G Brown, IV | Chief Executive Officer, Financial Advisor | cgbrown@meetmarathon.com

Jacob Foley | Chief Operating Officer | jfoley@meetmarathon.com

Connor Gallivan | Financial Advisor | cgallivan@meetmarathon.com

Indrani Namilikonda | Client Services Coordinator | inamilikonda@meetmarathon.com

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