I hope you had a profitable and enjoyable week. All of us wish you and your families a safe and relaxing Fourth of July (Independence Day) celebration. We should all be grateful for our freedom and the opportunity of living in a great country.

June ended with a good week in the markets. You may not be aware, but investing (long) in the market before a major holiday tends to have an upward bias. In fact, there are seasonal and calendar effects (as well as Presidential, which we have consistently covered throughout the weeks).

Therefore, it was no surprise that we enjoyed an upward bias and positive returns (the best surprise was the small-cap rally that continued from earlier in June) this past week.

This was certainly helped and boosted by the economic news that showed the May Core PCE (Personal Consumption Expenditure) index that came in at 4.6% versus 4.7%, the number expected by most economists. Even though that data point was a mere 0.1% less than expected, it sent the signal that the Fed Chairman and his Open Market Committee might evaluate the slowing inflation scenario as one more case for pausing or skipping more rate hikes.

Investors stepped up their buying. Or, at least, this is what market commentators conveyed. My interpretation: There remains over $5 trillion in money market funds. People see the daily financial news that the markets continue higher. FOMO (fear of missing out) takes over, and they start putting money to work in the markets. Not knowing what to buy, they turn to purchasing the biggest and most well known stocks.

Also, big money managers and institutions were rebalancing and executing window dressing maneuvers so that they could show their clients that they got rid of the poor performing stocks and were increasing the weightings of the best performers.

Their hope is that if they are underperforming for the year, they can demonstrate to their clients that they have made recent stock and asset category decisions to put them in a more favorable position. This doesn’t always work.

The last (and perhaps most significant) factor at the end of a month/quarter is that companies are buying back their stock (reducing dilution to increase the potential ROI of the stock price), and they do this unnoticed. With lighter-than-normal volume (people are on vacation and Wall Street managers start their weekends early), these subtle moves amplify the upward bias in the last week of June.

June Was an Excellent Month for The Bulls

We ended the month and the quarter on Friday with a surge higher in stock prices. This surge came after a pause in the middle of the month that gave many market technicians, (or so they thought) proof that we would start another leg down. Boy, were they wrong, as the market over the last two weeks showed its strength and a broadening out.

Small-caps started an impressive run earlier in June. That was evidence that small companies are shaking off higher interest rates (and threats of still higher interest rates), and they are seeing growth and pricing power that helps the soldiers line up with the generals.

This year, so far, has certainly been about the mega-caps. The big 7 (Amazon, Apple, Google, Microsoft, Netflix, Nvidia, and Tesla) all had a good quarter and defied the pundits who said they were too big to continue growing at above average rates. Apple hit the $3 trillion mark, making it the first company to do so and its brand the most valuable in the world.

We wanted to provide a summary of just how “good” these markets (and their different segments) have been:

I don’t know too many investors who would have thought these numbers were possible coming out of 2022. Let’s recap just how resilient this market has been.

 June:

• S&P 500 up 6.1%, the best month since January 2023
• Nasdaq up 6.2%, the fourth consecutive positive month
• Dow up 4.4%, the best month since November 2022

Second quarter, 2023:

• S&P 500 up 8.3%, the third straight quarter of gains
• Nasdaq up 15.1%, back-to-back positive quarters
• Dow up 3.4%, the third straight winning quarter

Year-to-date (first half of 2023):

• S&P 500 up 15.9%, the best first half since 2018
• Nasdaq up over 38%, the best first half since 1983

Please review the chart above. You will see the obvious and significant disparity between growth and value on the blue and green lines (Russell 1000 Growth & Russell 1000 Value, respectively). I cannot recall this big of a difference between growth and value (over 23+%) in a long time.

The Wilshire 5000 (made up of 5,000 stocks) also exhibits more broad-based market participation than most people expect or having been talking about.

Investors Entered 2023 Fearful and are Now Experiencing Greed

We remind you that all through the past six to 12 months, we have expressed some degree of caution. Like others in our industry, we saw higher interest rates as harmful to the investment landscape. Providing a fair and balanced narrative, we have tried to provide a pro and con dialogue so that our followers remain vigilant of the perceived market risks.

While this is wise, like others, we did not foresee the rapidly changing positive sentiment readings. However, our formulaic and algo-based quant models did catch these changing tides.

So, what is driving the positive markets and better economic news?

Surprisingly, most investment analysts came into 2023 believing we were headed for a sharp contraction in GDP and earnings growth. While we have seen an earnings slowdown (-6% expected in this quarter’s upcoming earnings), GDP has stayed strong (first quarter GDP was revised upward to 2.0%). Additionally, unemployment has stayed very low and job creation has been robust -- surprisingly so.

Actually, this period (from 2020 and COVID-19 to the re-opening of the economy) has brought elevated inflation, but it has also produced one of the fastest periods of economic growth in history.

The economic growth, along with declining inflation numbers and robust consumer spending that stays strong, has resulted in the Economic Surprise Index surging.

A Surge in the Global PMI

Surprising and unexpected positive economic bias is also showing up around the world. Growth in GDP is often preceded by the PMI. This is also why we continue to contend that the Fed will raise at least one, if not two, times more in the future.

An even better indicator that people are adapting to this high inflationary period and not suffering through it as much as during 2022 is contained in the Misery Index. Given that unemployment is very low, most people are working (who want to), and the rate of inflation is declining, the recent reading on the Misery Index provides a positive bias towards the economy.

The major areas of strength (and profits) in the market exhibit just how resilient this economy is. The strongest market sectors that have also produced the best returns so far this year include industrials, technology (fueled by the enthusiasm of Artificial Intelligence), home construction, automobiles, and travel-vacation experiences. The fact that these areas of the market are doing so well puts serious doubt that a recession is in our near future.

As previously mentioned, our investment models have been participating fully in these profitable areas of the market. Quite frankly, I think it has been quite a while since we have been able to take as many profit targets in one month, and some of them were executed soon after investing in the new position.

Here are the 10 best stocks to have owned this year. Those that have an asterisk have either been in one of our investment portfolios or are currently in one today.

Yes, our investment models have owned 9 of the 10 stocks on this list. Currently, our models are invested in 8 out of the 10 stocks listed above, some with a smaller percentage because we have recommended subscribers to take off part of the position at a predetermined target, thereby locking in a meaningful profit.

What’s Next?

No recession? Bank of America believes that inflation could be headed for a big drop and cooler prices without having to endure a recession. Strategists continue to point to the inverted 2- and 10-year Treasury yield curve, the bond market’s notorious recession gauge.

This “gauge” has successfully predicted numerous downturns, most recently in 1990, 2001, and 2008. BofA, however, thinks the indicator is predicting a hard landing for inflation, not the economy. They believe we will avoid a recession. Yet, the NY Fed puts the probability of a recession in the next 12 months at over 50%.

Morgan Stanley agrees with this prognostication. Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management (whom I have worked with in the past), sees a huge hurdle ahead for commercial real estate and particularly office properties that have seen rising vacancy rates and falling property values since the pandemic.

“More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350-450 basis points,” Shalett wrote. For those reasons, Shalett and the bank’s analysts “forecast a peak-to-trough CRE price decline of as much as 40% worse than in the Great Financial Crisis.”

Ms. Shalett has certainly had an effect on Mike Wilson, the Chief Market Strategist and overriding market voice of Morgan Stanley. Mr. Wilson believes we may still see the S&P trade down near the October lows, and he has an end of year forecast of 4000-4200 on the S&P 500.

While the home construction sector has been good for investing, there has been a significant shortage of available homes in major markets. Given that many people took out low mortgages during the pandemic (or refinanced), older homes are not turning over as people stay in their properties.

So, homebuilders are scrambling to build new homes in new developments. Looking at the charts, It even looks to us that homebuilders may be breaking out of old resistance and could continue to move higher.

However, we thought we might share a chart from our partners at Decision Point that demonstrates the current difficult environment for homeowners who require a mortgage to complete their purchase. My take that is many of them are taking out Adjustable Rate Mortgages (ARMS) in anticipation that the economy will slow and rates will come down in the future and allow them to refinance.

Where are the hot markets for younger homebuyers that are buying these homes?

What’s in Store for The Market for the Remainder of 2023?

Truthfully, at this point, with all of the economic data contradictions, neither us nor many analysts know for certain what will occur in the markets for the remainder of the year. We are entering what is typically an unfavorable period (third quarter) and one that may be marked by a surprise in earnings, potentially to the downside.

We have written extensively in previous pieces about what happens if the market is up over 10% for the first six months. This is a favorable statistic, and you can review the chart we posted in last week’s article.

Here is another chart that further points out the positive bias the markets should have given the first half’s stellar performance.

Now, here is a rundown of some other market factors that occurred during the past week.

Risk-On

• Friday saw a big gap-up across the major indices which was led by the S&P 500 (SPY), which put in a new closing high for the 2023 calendar year.
• All major market sectors were positive for the week, with safety plays such as consumer staples (XLP) and utilities (XLU) underperforming. This is a risk-on indication.
• Energy plays look to have led the market up this week after reversing from oversold conditions.
• The McClellan Oscillator recovered nicely and is back into strongly positive territory for the S&P 500.
• Risk gauges have improved back to fully risk-on.
• Cash volatility has been languishing at lower levels.
• The number of stocks that are above key moving averages has improved significantly for both the S&P 500 and Russell 2000, with SPY now showing a bullish stack on this indicator.
• Examining trends by market cap reveals that even though the entire market surged higher this week, mid-caps (MDY) were the clear leader, at least on a short-term basis.
• Growth stocks (VUG) closed at a new high once again, marking the highest close in over a year.

Risk-Off

• Strangely, volume patterns are showing only one accumulation day over the past two weeks for each of the 4 major indices despite their strong performances on price.
• Regional banks (KRE) barely closed above its 50-day moving average, and it still looks to be at risk of a continued breakdown.

Neutral

• Along with the price on the S&P 500 making new 2023 highs, the number of stocks within the S&P 500 index making new highs in price is at its greatest level for 2023, as well.
• For the S&P 500 and Nasdaq Composite, the 52-week new high/new low ratios and various moving averages are providing a very confusing and mixed read.
• The 20-year treasury bond (TLT) continued to coil upwards within its long-term wedge pattern. However, it failed to confirm this week, as it closed beneath both its 50-day and 200-day moving averages by a few ticks.
• Global equities (EEM & EFA) continued to lag the US market, as more established foreign markets remaining in a warning phase.
• Soft commodities (DBA) mean reverted this week, but it still closed in a bull phase.
• Gold (GLD) remained in a warning phase, while oil (USO) refused to either make new lows or take out resistance at its 50-day moving average.

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More By This Author:

Fed Skips, Bull Runs Wild But Is the Market Ignoring The Fed’s Message?
The S&P 500 Enters A New Bull Market - But There Are Signs It May Be Getting Stretched
Remembering The Past & Looking To The Future