Equity Market Tendency for July
June 28th, 2024
As we approach the most volatile time of the year for stocks, we are cognizant of the requirement to be open minded and nimble. The third quarter of the year is the time when economic growth fades following the rapid rise through the spring and investors find little desire to be aggressive buyers of stocks. But this is not your average year and hoping that average patterns play out is not a strategy that we desire to pursue.
Following what has been a strong first half of the year for stocks, there is much hope for the economy as interest rate policy gets set to turn a corner and pull back for the first time in over four years. This could be perceived both positively and negatively. The reining in of the cost of borrowing could unfurl some of the bottlenecks that have resulted from tight monetary policy, but the easing of conditions would cast a vote that the economy is no longer in the hyper-growth phase that helped to support corporate fundamentals and equity prices to this point.
Historically, the only time to completely abandon risk (stocks) is during periods when coincident indications of activity point to an economic contraction, something that some data-points (eg. jobless claims) have started to provide concern over. However, a broader spectrum of coincident indicators have yet to conclude the same. We’ll have to weigh all of these factors accordingly if and when third quarter volatility sets in.
While the S&P 500 Index is back into record high territory, holding support at the 50-day moving average, the new high engine has been sputtering and less than half of market constituents are above their own 50-day averages. Looking at the number of new 52-week highs on the NYSE, that number has been on a declining path since March, remaining below the 175 threshold that we use to gauge sustainable bullish trends.
Similarly declining is the percent of stocks in the S&P 500 Index that are above their 50-day moving averages, recently struggling to get above 50%, highlighting that the majority of stocks have yet to adopt this hurdle as a point of support. The trends and levels of both of these breadth indicators are lack-luster, certainly giving reason to be selective with portfolio exposure.
The summer rally period through the first few weeks of July should help to support a broad spectrum of stocks as they benefit from inflows, but, beyond this period, the sustainability of near-term strength is questionable as the market gives way to normal volatility through the third quarter.
As for the equity market tendency for the month of July, overall, the month tends to warrant a positive bias, at least for the first half. Of course, we highlighted the summer rally period that spans the first few weeks of the month. While the back half of the month is not as favorable, the S&P 500 Index has managed to gain an average of 0.9%, overall, for the first month of the third quarter. However, only 52% of periods over the past 50 years have produced gains. Returns have ranged from a loss of 7.9% in July of 2002 to a gain of 9.1% in July of 2022. As already alluded to, the front half of the month tends to be the period to benefit from positive equity market returns. The last two weeks of the month have averaged a decline of 0.09% with 40% of periods closing lower. Anticipation surrounding earnings helps to provide the early month lift, but once the results have been disseminated and digested, investors book their profits before running off on their summer vacations.
