Frequently, financial commentators reference the stock market’s tendency to “climb a wall of worry.” What does it mean? Simply put, it means many naysayers doubt almost every bull market. There is always a vocal group of skeptics who point out a myriad of rational and possible potential events that could derail the market’s ascent. In this sense, stocks are said to “climb a wall of worry” during a bull market.
Without a doubt, this year is as good an example as any of the old adage, as the market continues to move higher despite the continued negative headlines. If we think back through the first six months, some of the concerns included:
- War in Ukraine
- U.S./China Tensions
- Interest Rate Increases
- Bank Failures
- Inflation
- Budget Ceiling Crisis
- Political Dysfunction
- Recession Concerns
And while almost all of these are still making headlines, the market seems to be brushing them aside, continuing to move higher. The most recent brick in the wall of worry came this week when The Conference Board released its latest Leading Economic Index (LEI) report. The report was pretty gloomy, dropping for the 15th straight month, dragged down by a weakening consumer outlook. It also showed a -4.2% decline over the last six months, a steeper decline than the prior six-month period (June to December 2022).
Directly from The Conference Board, “The U.S. LEI fell again in June, fueled by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators. “The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the U.S. economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”
But given this type of news, how can the market move higher? It is undoubtedly due to various factors; however, the simplest explanation may be that negative expectations are already priced into the market, so when bad news comes, it doesn’t necessarily drive prices down. Moreover, when the announcements aren’t as bad as expected, they can actually move the market higher. Regardless of why, as we noted last week, healthy bull markets always have bumps along the way. The market will not go up every day, week, month, or year. And that’s why it’s essential to have a plan that you can stick to through good times and bad, which will allow you to break through the wall of worry.
Economy
- U.S. equity markets were mostly higher, with the S&P 500 up +0.7%, the Nasdaq down -0.6%, and the small-cap Russell 2000 up +1.5%. While markets were solid, both The Conference Board’s LEI and retail sales reports showed the potential for economic challenges on the horizon.
- Retail sales in the U.S. rose 0.2% MoM in June, following an upwardly revised 0.5% increase in May, but below forecasts of a 0.5% rise. Increases were seen in sales at miscellaneous store retailers (2%); nonstore retailers (1.9%); furniture (1.4%); electronic/appliances (1.1%); and clothing (0.6%).
- Annual core inflation rate in the United Kingdom decreased to 6.9% in June from May’s 31-year high of 7.1% and compared to forecasts of 7.1%.
- The number of Americans filing for unemployment benefits fell by 9K from the prior week to 228K on the week ending July 15, the lowest in two months and sharply below market expectations of 242K.
- The NY Empire State Manufacturing Index fell 5.5 points from a month earlier to +1.1 in July, beating market expectations of -4.3. The latest reading suggested business activity in New York State flattened, even though new orders increased and shipments expanded.
Stocks
- U.S. equities were in positive territory. Energy and Healthcare were the top performers, while Communication Services and Consumer Discretionary lagged. Value stocks led growth stocks and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased two basis points to 3.84% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by high-yield bonds and government bonds.
