Bull markets can be strange animals. While they are being cheered on to new highs, everyone is watching, overanalyzing, and waiting for them to end so they can hit the exit before others. Because of this, every data point that shows a sign of weakness is greeted with headlines and calls for the coming end. But the most common aspect of these predictions is bull markets never seem to end for the reason everyone predicts. Instead, they will do what makes the most people wrong.
Given the power of the market bounce since the pandemic selloff of March 2020, everyone has been expecting the rate of change of the market move to slow and potentially rollover. Just looking at the math, this should happen sooner rather than later as year-over-year comparisons are beginning to become much more difficult. So far, however, this hasn’t been a problem.
Heading into the summer months, many have begun to call for a selloff. We may get it, but at least in July, the market was able to continue to march higher, climbing the mythical “wall of worry.”
Market leadership came from the growth sectors, which had been lagging. This change in leadership is a very important point to monitor. The hallmark of a healthy bull market is sector rotation. Since the U.S. election last November, leadership in the market has come from the cyclicals while large cap tech stocks sat on the sidelines. As we began to question if the cyclicals had gotten ahead of themselves, we saw the large cap technology stocks take over as overall markets regained new highs. Much like watching a duck swim along the water, on the surface all looks calm, but beneath there is a lot going on.
For those calling for a top, it is notable that through July there was a tone change in the market. The rise of the delta variant has caused many to question if the market has gotten ahead of itself and had priced in too much good news.
The bond market was the first to sniff this out, as bond yields collapsed from 1.5% to 1.15%. This caused massive sector rotation, with the reopening stocks taking most of the pain. Energy ended its eight-month winning streak and financials followed bond yields lower.
So does a return of the virus kill the bull market?
Probably not as there is simply too much underinvested cash in the system that must go somewhere. As we saw on the first dip caused by the delta variant headlines, “buy the dip” is alive and well. In this scenario, equities are the beneficiary as they are the only game in town; bond yields are low, cryptos have been weaker of late, and commodities struggle with the cyclicals.
But we are far from being completely in the clear. There are lots of concerns on the horizon, the question is: have they all be priced in at these levels? As we saw this earnings season, good news and numbers have been sold, leading to a concern that we have reached peak everything. If all the good news is already in the market, the only surprises we will get are negative.
We are entering the seasonally worse stretch of the calendar for equities. August until October can be volatile with quick selloffs that come out of the blue. As markets have had a great run to start the year, having a more defensive positioning for the next few months may not be a bad option. The bull market should continue but it’s probably not as much of a straight line as many have grown accustomed to.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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