The rotation back into tech and growth stocks has picked up momentum on the prospects that recent rampant inflation fears are a bit overblown. The retreat in Treasury bond yields and the more tranquil bond market suggests the spike in prices is more transitory than the extremes some market observers and investors have been suggesting. In turn, NASDAQ’s midyear rally appears to be running ahead of schedule.
We remain in the transitory inflation camp. Sure it will likely be higher than the recent past. The recent uptick of 5% CPI growth is more a product of the historic reopening. The job market, especially in the service industry, remains tight. The service industry was clearly hit the hardest. Soaring demand as the economy reopened quickly caught a lot of businesses flat-footed. Price gains also reflect temporary supply bottlenecks and sharp price drops in 2020 make inflation comparisons to 2021 look larger. When the dust settles the rate of inflation is likely to cool down later this year if the bond market is any indication.
Seasonality and cycles have been back on track since September 2020, but pent-up demand, free money, business innovation and some stellar science that created the vaccines have continued to keep stock prices elevated during the first two months of the Worst Six Months. This red-hot economy is not likely to cool down until next year. However, we do expect a pause and some sideways movement after mid-July.
In the updated chart here of the “S&P 500 One-Year Seasonal Pattern” we have highlighted the midyear rally with a yellow oval. Also noted is the mid-July peak. It is after this peak that the “Summer Market Volume Doldrums” detailed on page 48 of the 2021 Almanac begins in earnest.
If we have truly made it to the other side of the pandemic and the market and economy are beginning to return to their normal cycles and seasonal patterns, the prospects for a pullback during August and September are higher as illustrated by the red line post-election year pattern. Post-election year Augusts rank #11 for S&P 500 and NASDAQ, and #12 for the Dow. September is not much better in post-election years ranking 9th for S&P 500 and DJIA, 10th for NASDAQ.
NASDAQ Best 8 MACD Sell Signal Update
Our bias for the year remains clearly bullish in keeping with the base and best case scenarios of our 2021 Annual Forecast and we still expect to see the S&P 500 finish the year above current levels in the 4300-4500 range or higher. But after mid-July the market is poised for a pullback during the weaker end-of-summer months August and September as perennial vacation and leisure seasons kicks into post-pandemic high gear.
We are still waiting for the Stock Trader’s Almanac NASDAQ Best 8 Months MACD Seasonal Sell Signal to trigger. With NASDAQ’s midyear rally picking up steam as of the June 24 close it would take a one-day decline of 475.36 points or 3.31% to trigger NASDAQ’s Best 8 Months MACD Sell Signal.
The latest news on the deal struck between President Biden and the bipartisan Senate infrastructure group for a major infrastructure initiative is long overdue and welcome news indeed. We have been clamoring for this for years over the past several administrations. If they can really pull it off it will be a boon for the country, the economy and market over the long haul. We are rooting for this, but delays, setbacks and partisan bickering could spur a market pullback.
Positives abound with improving employment numbers, robust GDP forecasts, strong earnings and guidance from Wall Street and rising vaccine rates. But negatives from inflation, international machinations especially with China, Russia and Iran, Covid-19 variants, supply bottlenecks and tougher year-over-year comps. Consider using this midyear rally to reposition your portfolio for the August/September summer doldrums and prepare to pounce on the next Stock Trader’s Almanac Best 6/8 Months Buy Signal for the yearend rally.