Over the past few weeks, my family has been watching the Olympics nightly. Starting with swimming and continuing into track and field with the occasional skateboarding or basketball event, we are certainly enjoying our nightly sports fix. Francis has watched so many different sports that he has decided he wants to try each of them.
Not only is the actual competition enjoyable, but some of the athlete stories allow you to get to know the competitors. While only a few athletes have their stories shared, one can surmise that there are many more stories like them. From health issues, loss of loved ones to disruption in training, it goes to show all athletes have overcome something to get where they are today. It does not just affect sports, rather every one of us has something to overcome in life. It is how we respond to these events which makes us who we are.
Speaking of ‘going for the gold’, six months and counting. That is the current monthly winning streak for the S&P 500 Index. To take that a step further, this key equity benchmark has posted gains in 13 of the last 16 months—dating back to the March 2020 low. With stocks nearly at a double from those lows, it has indeed been hard to complain about what stocks have provided recently.
The primary upside equity catalyst in July appeared to be another healthy earnings season. So far, with over 60% of S&P 500 companies reporting results, 88% have beaten their earnings estimates. This would be the highest ever recorded if it stands, according to FactSet—and well above the 75% five-year average. Considering the recent decline in interest rates, which help with equity valuation calculations, and you could get another tailwind to the market.
Meanwhile, the Federal Reserve Bank (Fed) has, so far, remained relatively quiet about its plans to roll back its historic accommodation. Its recent two-day meeting closed with very little new information. Monetary policymakers are still discussing a plan to taper bond purchases that we expect to see discussed later this year.
Second-quarter U.S. GDP was reported in the last week of July. Although the 6.5% reading (quarter-over-quarter annualized) was below the Bloomberg consensus forecast of 8.4%, consumer spending exceeded expectations. Consumer spending is positive as consumers account for nearly 70% of the economy. Moreover, inventories declined at their second-worst rate in 12 years, setting up a possible boost in coming quarters when those inventories are replenished. While the post-COVID economic rebound has certainly been robust, supply chain issues continue to take some edge off growth.
Although we have received a lot of good news in recent months, we have now come upon a typically volatile period for stocks. The months of August and September have historically been a bit choppy as trading volume tends to dissipate and it may take less selling to move the major averages lower. Additionally, traders and politicians tend to be on vacation which can also exacerbate any potential volatility. Volatility is to be expected, especially in the second year of a bull market which has historically brought more ups and downs.
Looking ahead, our stock market outlook remains positive as fundamental drivers have been robust, though we acknowledge that valuations are elevated. The latter point puts us on the lookout for a pullback that we believe is overdue, given the S&P 500 has not fallen as much as 5% since October 2020. The typical trading year brings several 5%-plus pullbacks and potentially one correction of the 10% variety. Market volatility is like the stories and lives of Olympic athletes. What is most important is how you react to the volatility.
Have a great weekend.