Our Perspective on the Midsummer Rally

We aren’t superstitious, so here is a statement we are comfortable making: The S&P 500 closed Monday up 12.5% from its June 16 low and the MSCI World Index isn’t far behind at 10.7% since its low the following day.^[i] It is impossible to know whether this is the initial upturn of a new bull market or a short-lived false dawn. But the past few weeks have much in common with a typical rebound, which we see as reason for encouragement.

No, neither index’s bounce is a symmetrical “V” off the low. The S&P 500’s closing level Monday is roughly in line with its level on June 6, a whopping seven trading days before the low. It has taken about six weeks to retrace that journey. But it is also quite a swift rise—far from an L-shaped languishing around the bottom. Tech, which got hit disproportionately on the way down, is now leading. The upturn thus far also pairs with a hefty dose of pessimism. We have seen oodles of warnings that it is a bear market rally—a temporary respite presaging deeper declines later. Seasonality chatter is returning, with some arguing the S&P 500’s weak average returns in the past 25 Augusts and Septembers point to tough times ahead. Others argue that stocks aren’t really cheap, despite the drop in P/E ratios, because earnings have much further to fall. This, they claim, points to stocks falling alongside earnings from here in order to reach truly cheap levels. And looming over everything is the constant drumbeat of recession doom.

We can’t and don’t rule out renewed declines from here. But this type of sentiment is a hallmark of young bull markets. Fisher Investments’ founder and Executive Chair Ken Fisher calls it “the pessimism of disbelief”—the tendency to ignore good news or see positives as fleeting or soon to morph into something bad. You have no doubt seen this with any good economic data that hit the wires over the past six weeks. Most coverage couches expansionary data as sure to trigger additional Fed rate hikes, implying more trouble ahead. Falling oil and gas prices hit headlines not as a relief, but as a symptom of weak demand—a dawning recession. Big eurozone economies’ Q2 GDP growth? A last gasp before natural gas shortages wreck output, according to the popular take last week.

This is all quite reminiscent of the sentiment landscape as stocks recovered from 2020’s lockdown-induced bear market. Many argued the bounce would prove short-lived, pointing to record-fast drops in economic data and rising COVID case counts. Further back, as eurozone stocks recovered from their regional bear market in summer and autumn 2012, naysayers pointed to still-high Spanish and Italian yields, the bloc’s ongoing recession, allegedly elevated Grexit risk and much, much more. And after stocks’ low during the bear market that accompanied the global financial crisis in March 2009, pessimists harped on the auto bailouts, municipal bonds, tanking earnings, the continued recession and other alleged storm clouds. On all occasions, stocks saw through the noise and focused on the future, which turned out to be brighter than almost anyone could fathom.

Again, we aren’t saying now is exactly like then. Inflection points are impossible to pinpoint without significant hindsight. A temporary rally exceeding 10%—basically the bear market inverse of a bull market correction—isn’t unheard of. Perhaps this is one. Perhaps the yield curve, which has continued flattening, turns deeply negative and an awful recession ensues. But perhaps and possible aren’t probable, and markets move most on probabilities—specifically, the likelihood that reality exceeds whatever expectations stocks have already priced in. Right now, based on all the headlines we are seeing, stocks have baked in very dreary outlooks, meaning that anything short of disaster would probably qualify as a bullish positive surprise. In our view, that argues for positioning for a recovery today. Even if it isn’t already underway, the new bull market is likely close by, ready to deliver the returns investors seeking long-term growth will need.