Enough for now? It’s the question to consider at moments like these, with the stock indexes running hot and investor attitudes swinging from decidedly downbeat to downright optimistic over a matter of months. To start the year, it was a bold and minority position to predict the U.S. economy could land softly, that inflation would drop fast and the Federal Reserve would ease off the brake even while growth stayed resilient. Now, especially after the sturdy June jobs report as week ago and the reassuringly cool CPI print on Wednesday, this is something closer to the prevailing view. At least for now. In several ways, we have pretty much the same backdrop now as at the start of the year: Real GDP running near 2% or so, S & P 500 forecast earnings for the next 12 months hovering just above $230, the Fed projected to take rates up to between 5% and 6% before stopping. Most of what’s changed is the perceived downside risks around those conditions. Oh, and stock prices. Those are a good deal higher, both an effect and a cause of the burgeoning good feeling around a benign economic outcome following a year of intense recession anticipation. The market all year has been acting as if inflation and the Fed’s aggressive war against it were mostly 2022 problems. Now, folks increasingly believe it. Scares along the way kept investors cautious. The ramp in Treasury yields after hot January economic data, the regional-bank stress of March that sparked so-far-unrealized credit-crunch fears, the extreme narrowness of market leadership that spread more furrowed brows than FOMO. The scares lately have become briefer and less frightful. The wobble in early July after a blockbuster ADP employment report sent Treasury yields flying was over in a day. Passing these tests, and now having seen market strength broaden significantly since the end of May, belief is replacing doubt. Going ‘all in’ As Bespoke Investment Group put it late Friday: “To say that sentiment turned more bullish this week would be an understatement. Inflation data has improved, but the easy comps are behind us, and while earnings season has started off positively, there are still thousands of companies left to report, and it’s not as if expectations for the financials were particularly high.” Here’s one gauge of trader positioning rising toward “all in,” the National Association of Active Investment Managers weekly equity exposure index bumped above 90 (it can surpass 100 at times when these tactical trading advisors are leveraged long). As the chart shows, it’s up a lot from the neutral zone on May 31. But in bull markets, this isn’t in itself an “offsides” setup, as exposures stayed near these levels much of late 2020 to 2021 as the major indexes climbed. Similarly Deutsche Bank’s gauge of aggregate investor positioning finished last week at an 18-month high. Here again, it’s in the upper part of its typical range, though bull markets can sustain such readings for a while. The price action itself is getting somewhat stretched, though not quite at alarming extremes. Here’s the Nasdaq 100 against its 50-day moving average. The index closed 8% above that medium-term trend line on Friday, a fairly big gap. Circled are moments in the past three years when this spread was higher than now, by up to a few percent. Not exactly a bell ringer of a sell signal, but probably enough to expect at least a pause or pullback before too long. The pending special rebalancing of the Nasdaq 100 to address over-concentration by reducing the weightings of the half-dozen largest stocks was likely priced in early last week, at least in terms of the known mechanical impact. But it serves as a reminder of the structural imbalance that has built up in this cluster of giants. The spicier parts of the market have conspicuously started to run hard. The Roundhill MEME ETF of buzzy retail-trader favorites is up by about a third since Memorial Day. The most heavily shorted stocks have been ripping faces off the bears for weeks now, the likes of Upstart and Carvana up some 30% last week alone. All of this has been percolating just as the seasonally bullish tailwinds — typically strong into mid-July — are due to wane for a while. While earnings forecasts look surmountable for the second quarter, and the early reports from several banks were ahead of expectations, the stocks either shrugged or sagged. And last quarter, the S & P went choppily sideways for the first month of reporting season. Bulls earn benefit of the doubt It’s understandable to bristle a bit at the outbreak of positive feelings, given the longstanding macro warning signs that remain and the fact that the bar seems higher for fresh news to please the consensus. Some of us have a deep GenX-style aversion to trusting what’s become popular (“I was into the bullish thesis before it was cool…”). Still, it’s crucial to stay open-minded. I don’t stack all these factors up in order to present evidence that some important and dangerous market top is at hand. Markets don’t always immediately punish investors the moment most of them turn comfortable. The underlying market trend remains decidedly pointed higher until proven otherwise, with the bulls having earned the benefit of any immediate doubt. Earnings appear to be troughing, credit conditions are firm, leadership from industrials and consumer cyclicals is reassuring and the Fed is going slowly and in easily digestible increments from here. It would also be surprising if a decisive market peak were to occur while Wall Street strategists remain, on balance, stubbornly sidelined, with the average year-end S & P 500 target 5% below Friday’s closing level. It’s worth remembering, too, that while valuations seem full the S & P 500 was some 6% higher a year-and-a-half ago and since then nominal GDP is up 9% and corporate earnings are running 6% higher. And, as noted here before, whatever frothiness has built up around AI plays, it’s hard to call it an outright bubble unless and until it spawns an IPO boomlet. Summing it all together, things simply seem more balanced from here. There seems no longer a sharp edge in betting against a crowded bearish consensus, as there was at the start of this unexpectedly rewarding year.
