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Stock Market Surprise?

By Terry Savage on July 19, 2021

A sneaky market decline set the stage for a volatile week. But those looking behind the headline new highs posted in recent weeks aren’t surprised. I write this as the market has opened down 700+ points, and media are calling for an opinion, or perhaps reassurance!

By the time you read this the market may well have rebounded into the close, and I will update. But if you tune in to media or check your smartphone and see the opening headlines, you might want some perspective. So here’s what I’m thinking:

The “chat” is that the market is “scared” of the spread of the Delta variant and concerned it will spur another economic slowdown – as travel slows and new contagion concerns hit everything from cruise lines to movie theatres to restaurants.
Have we seen the peak of the economic rebound? Lumber prices have backed off (though still above pre—pandemic prices), oil prices are off their peaks, homebuilder confidence slows, and consumer sentiment may dip.

But market technicians have noticed that despite headlines of new market highs for both the S&P 500 and NASDAQ in recent days and weeks, the majority of the stocks in those indexes were not participating.

Only 52% of the stocks in the NASDAQ composite are trading above their 50 day moving averages, despite the new highs.

Only 30% of stocks in the S&P 500 have outperformed the index itself over the past month. Since 1927, only 2% of days have seen fewer stocks outperform the index, according to the Wellington Letter.

Now NASDAQ market leaders (FAANG stocks) are facing significant issues. Facebook is being challenged by the government (for spreading misinformation about the vaccine). Meanwhile, Robinhood is pressing ahead with its IPO to raise $35 billion, despite a second quarter loss of more than $500 million. Some market historians think these are classic signs of a market “top”.

Only time will tell whether we are approaching a great buying opportunity – or whether this was a significant peak. I don’t think the bull market is “over” yet – mainly because of the massive liquidity being injected by the Fed, and the amount of money sitting on the sidelines, just waiting for an opportunity to buy bargains. But it could get very scary as the herd makes a sudden turn toward safety.

If you’re a trader, you can find your own expert advice (not mine!) and take your chances. But if you’re a long-time investor in a 40l(k) plan, you’ll want to continue with your regular program of contributions. Only for those just starting retirement, or nearing it, would I suggest – as I have been doing for the past two years – that you “rebalance” your portfolio down to the level of exposure that lets you sleep well at night.

One other thing to consider is your alternatives to stock market exposure. They don’t look so attractive either! (Remember, you need SOME stock market exposure for the long run – at last 20 years – to have the best chance of beating any future inflation.)

Perhaps the most interesting market today is Interest Rates. The 10-year Treasury note (which hit 0.50% early in the pandemic) had rebounded to yield nearly 1.7 percent a couple of weeks ago – based on optimistic forecasts for growth and worries about resurgent inflation.

This morning the 10-year is trading at 1.19% — a significant drop in yield. Buyers worried about stocks are rushing to the safety of Treasuries, pushing yields down.

Sorry, savers, but your CDs and MM fund yields will remain at dismal levels. But don’t rush to bonds offering higher yields. If the economy does slow significantly, the risks rise that the “junk” may not pay the promised interest.
And remember that the 10-year Treasury rate is used to set mortgage rates. So fearless homebuyers get another chance at 30-year fixed rate mortgages below 3%.

Hindsight is 20/20. I do not know, and you do not know, and the “experts” do not KNOW what will happen next. The best financial security is always to make a plan that makes sense for your personal financial and emotional needs. Then stick to it. Everyone who did that over the past few years has come out ahead! And that’s The Savage Truth?

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