Both investors and traders alike in the U.S. enjoy the relaxation of Summer and, as a result, trading tends to taper off a little. Volumes for trading on the exchanges tend to slightly decline as people take off work and are rightly concerned with other things besides their portfolio. This year, we can add in other concerns such as inflation, labor shortages, and strained supply chains. Eddie Cochran may have said it best in his hit, "There ain't no cure for the summertime blues." As such, we sometimes get into a trading pattern I like to call "the Summer Doldrums." Let's take a quick look at what's been going on this week in the markets...
Economic Calm. It's been a light week for economic releases, but the consternation has been ever-present. The worry this week was focused on Inflation, and rightly so. The CPI number came in at +0.6% for May, which was higher than market expectations. However, it is slightly lower than April's 0.8%. The worry is that both wage inflation and price inflation will become ingrained in the economy before the Fed acts. The next couple of month's will be important to see if the Fed is correct about what they call "transitory" Inflation or if they are wrong. Weekly Jobless Claims, while higher than expected, decreased for the 6th consecutive week. This trend is important to note as labor shortages abound. On that note, Job Openings hit a 4-year high with 9.3 million jobs available. Jobs are certainly available, but people need to be incentivized to take them - hence the rise in wages per last week's Jobs report. Lastly, the flash reading on Consumer Sentiment was a welcome surprise as sentiment rose more than both expectations and last month's reading - jumping 5 points month-over-month. As a reminder, both of the Fed's economic indices (National Financial Conditions and Financial Stress) are the best they have measured in years.
Market Expectations. It's difficult to pinpoint where the market might be headed in the short-term. As I noted, the Summer Doldrums don't allow for much market activity, so any slight news - positive or negative - could move the markets one direction or the other. The last pullback in the S&P 500 Index this year was during the first couple of weeks in May. That resulted in a -3.9% decline. The last half of October of 2020, we saw a decline of 7.5% for the S&P 500 Index. As a reminder, we experience pullbacks during the year of approximately 8% at least 76% of the time. Could we experience a pullback during the Summer months of June or July? Absolutely. However, it's interesting to look back at the statistics for negative June or July periods over the last 20 years. June has recorded 9 negative returns since 2000 (or, 45% of the time) and July has recorded 8 negative returns since 2000 (or, 40% of the time). Yet, when July is negative, it is accompanied by a negative June 63% of the time. We are not finished with June yet, but the S&P 500 is up 0.88% so far this month. If June finishes the month positive, statistically-speaking, July has strong probability of finishing positive. We'll have to wait and see.