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  • Scott Poore, AIF, AWMA, APMA

Market Too Frothy?




Markets head into the July 4th holiday near or at all-time highs and things don't feel as great as one might think. AI-related names have driven broad indices higher, but is there room still to run?

This week's musings is inspired by another Summer movie favorite, "Brewster's Millions." The film was released in May, 1985 and was largely panned by critics. Here's some trivia about the movie:

  • This film had fairly standard budget of $15 million, which was mostly Richard Pryor's salary. The film made more than $45 million at the box office, so all-in-all, it was a commercial success.

  • The film is an adaptation from the 1945 film of the same name. The original movie was based on the 1902 book by George McCutcheon. Lawrence Gordon obtained the rights to the novel in 1982 and the project spent three years in development. The script was written by the same writers of "Trading Places."

  • In a few of the baseball scenes, a train passes through the Bulls' outfield. This was a common occurrence in baseball fields of the 1930s and 1940s.

  • In the earlier incarnations of the story (novel & 1945 film), the hero was only required to spend $1 million. However, by the time the 1985 movie rolled around, inflation made the spending of $1 million too easy, so the producers changed it to $30 million.

Here's what we've seen so far this week...


Sick Of Spending Money? Some anecdotal data suggests consumers are getting more cost-conscious about their spending habits. It doesn't mean consumers have stopped spending, but dollars are not going as far and the average spender is carefully allocating dollars. It reminds me of the scene where Brewster's long-lost relative is explaining the rules of the game:


Rupert Horn: "Let me tell ya a little story, Brewster. When I was seven years old, my daddy caught me smoking a cigar. Locked me in a broom closet for two days and two nights with nothing more than a box of cigars and a book of matches. No food, Brewster. No water, just those @$#%! cigars. Wouldn't let me out till I finished every last one of them. Taught me one HELL of a lesson! I'm gonna do to you what my daddy did to me. I'm gonna teach you to HATE spending money. I'm gonna make you so sick of spending money that the mere sight of it will make you wanna throw up!"


The excess savings acquired through massive government spending during the pandemic is just about dried up. Higher inflation and higher interest rates have made consumers more cost-conscious.

Consumers on the lowest end of the income spectrum are definitely feeling the pinch from inflation. The upper 60% or so of the income spectrum, continue to have checking and savings account balances. However, if the Fed fails to lower rates soon and inflation were to climb in the short-term, expect consumers to pull back on spending.

Despite comments made by the Fed this week regarding being careful about future rate cuts, the market continues to increasing price in a rate cut at soon as September. Futures on a September rate cut of 25 bp have risen to their highest levels of 72%. There's been some speculation this week by market pundits that rate cuts could begin in July, but may also include more than just one cut in 2024.


Does The Emperor Still Have Clothes? While the concerns over market breadth and some soft economic data are real, there is not a sense of euphoria that would lend to a bubble ready to burst. However, it does beg the question, are we ripe for an intra-year pull back? It reminds me of a scene in "Brewster's Millions" when Monty is facing questions about him blowing through his money and people questioning his integrity. Monty turns to his newly hired haberdashers for their "unbiased" advice:


Monty Brewster: "Gentlemen, do you think I'm a lowlife?"

Tailor: "Oh no, Mr. Brewster. Not with these clothes."


The good news first - while markets are making all-time-highs, investors are not all that thrilled with the markets. That's a good thing. The Fear & Greed Index of investors shows a reading of just below Neutral into Fear. The Index has been shifting back and forth between Neutral and Fear for the past few weeks, again, while equities are making new highs. When Greed is present at market peaks, that's when we should be truly worried.

Still, the market is top-heavy and a short-term correction in those names would be a healthy thing. The Mag 7 names are familiar to most investors, but the GRANOLAS are similar stocks in Europe that comprise an over-sized portion of the European stock index. The GRANOLAS are commonly known as the following: GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L'oreal, LVMH, AstraZeneca, SAP, & Sanofi. Compared to one year ago, Mag 7 and GRANOLAS make up a larger contribution to the relative index returns. As we have discussed on our blog over the past couple of weeks, well diversified portfolios will likely under-perform the broad equity indices until we get some kind of pullback in Mag 7 or GRANOLAS names.

The good news is that a strong 1st half to the year typically bodes well for the 2nd half of the year. When the S&P 500 Index is up 10% for the first 6 months, the 2nd half is positive 82% of the time, with the average return up 7%. If the Fed cuts once or twice, it would give consumers a much-needed break. Inflation has been moderating lower, so if that trend continues it would also provide a tailwind for consumers.


What would you do - take the $1 mil or go for it all...



 

Disclosures


The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.


Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.


Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.


Past Performance does not guarantee future results.

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