Running out of steam?
The S&P 500 rally looks like it’s running out of steam. We’re still in a golden cross configuration (A golden cross occurs when the 50-day moving average is above the 200-day,) It’s a sign of long term upward momentum but on a shorter-term basis it looks vulnerable. That’s why I’m advising readers to keep some cash on hand but no more than 10%. If the market corrects, as I expect, that cash can be put to work at (possibly) much lower prices.
I must admit being a little flummoxed by the bullishness in the market. Not to sound like a permabear, but I always pay attention to downside risk, and I counterbalance that with considering the upside potential as well. As of today, it looks to me like the market has gotten ahead of itself and is due for another correction. (A correction is a decline of 10% or more from the most recent high-water mark.)
Some of the issues that I see as problematic for stocks include:
1.Tariffs. Uncertainty about how they will play out in the end and whose Ox will get gored.
2.Inflation. Related to tariffs, inflation ticked higher in June, and I’m concerned that it may tick higher still in July and August.
3.Economic stagnation. Some of the numbers coming out are decent, and some are less than that. I think we’re going to have a hard time getting past 2025 without a recession, but my economic model says there will be no recession this year.
4.Employment. Like the stock market, the jobs reports lately have been surprising to the upside, but that could change quickly. For now, it’s a positive for the economy.
5.Debt, deficit, and debt servicing. Prior to the passage of Trump’s Big Beautiful Bill, we already had a $1.3 trillion deficit, and that was just for the first six months of 2025. This new bill will likely increase the deficit in the years to come. We have a national debt of $36 trillion, all of which needs to be serviced. We’re paying an average of 3.4%, which works out to annual payments of $1.2 trillion. That’s more than the $850 billion we will spend on defense this year.
6.A major policy mistake. Top of mind is the threat to fire Fed Chair Powell. If we lose an independent Fed, political forces will take control and that doesn’t sound good to me.
Meanwhile, back to the stock market.
The Mag 7 are once again leading the charge higher. Nvidia (NVDA) is now worth $4 trillion. Not bad for a gaming chip maker that saw where the market was headed and turned its gaming chips into AI chips. Brilliant.
Other segments that are doing well this year are foreign markets, both in the developed (up 18.4% YTD) and developing (up 14.6% YTD) countries. This is the year to be invested overseas. Europe is up 20.9% and Asia is up 23.4%. The S&P 500, by comparison, is only up 7.1% YTD.
Bitcoin setting records
You can’t publish a list of winning assets without singling out Bitcoin and its smaller siblings. Bitcoin is up 26.5% YTD, while gold is up 27.7%. In the case of Bitcoin, it feels like speculation to me. In the case of gold, it feels like a hedge against inflation and geopolitical calamity.
Defense contractors are up 18.7% and Industrials are up 13.3%. Utilities are nearly tied with Technology, with both showing a 10% gain YTD. But there are some areas of the market that are weak.
Chief among them is the U.S. Dollar, down by 6.8% YTD. Volatility is down as the rally keeps going longer and longer. Construction is down 8.1%, Transports are down 7.6%, and Healthcare is down 4.1% YTD.
What’s an investor to do now?
If you’re a true ‘buy & hold’ investor, the answer is nothing. But I don’t know very many true B&H types. Lots of investors claim to be B&H but in reality, they are market timers just like the rest of us. Every time you postpone a purchase, or take money off the table, you’re timing the market. There’s nothing wrong with timing your entry and exit points. The trick is to do it as infrequently as possible. You’ve heard it a hundred times – the trend is your friend. That means both up and down trends. Once a trend gets started, it tends to perpetuate itself. That’s why I have economic and stock market models – to observe changes in the intermediate to long term trends.
Ride out the market storms.
If you want to ride out the corrections and bear markets, you’ll be fine eventually. But you will only gain back your money. You won’t get your time back. Bear markets last about a year on average, and those are years you will never get back. I think it makes more sense to prepare for bear markets and take some defensive steps to mitigate the damage they can cause.
I think it’s reasonable to assume that, given the right signals from the market and the economy, you should be able to reduce the amount of damage done to your portfolio by hedging or by raising some cash. I am not a proponent of going all-in or all-out because the numbers just aren’t there to support it. But you can cut the damage in half if you pay attention to what’s happening around you.
Why listen to me?
I have been teaching, coaching and mentoring full time since 2008. In that time, I have developed a superior track record, although I’m far from Buffett or Lynch in that regard. My published model portfolios have returned an average of 15.1% per year. Compared to the very long term average of the S&P 500, which is ~10%, I beat the market return by 50% per year.
I suggest that you take a few moments to browse through my offerings and take a closer look at my track record to see whether you could benefit from the many things I bring to the table. I do one-to-one coaching, consulting, and mentoring for an hourly fee. I sell access to my 12 model portfolios on a monthly or annual basis. I write weekly articles about the market and the investors who make it up. I write a premium monthly newsletter that’s available to members, and I write blog posts whenever the inspiration hits me.
That’s all for now, and I’ll see you down the road.
Erik
