I’m amazed at all the companies with share prices that have broken out to the upside since the beginning of August. A stock market rally in August—who would make that bet? Investor sentiment has been pretty good since the beginning of July, and it’s likely that the stock market appreciated since that time for the simple reason that it’s been a quiet time in the news department.
Second-quarter earnings season came and went, pretty much as expected. Corporate earnings are managed, and the majority of companies in the S&P 500 Index beat consensus, but with no real growth over the second quarter last year. Trading volume has been low because it’s summertime, but investor sentiment has held up. The news flow regarding the sovereign debt crisis in Europe has been relatively muted over the last couple of months, and this has helped a lot. It doesn’t mean the problems have gone away; it only means that the relative calm has helped investor sentiment stay positive.
The stock market’s recent stealth rally will be tested in September when Wall Street is fully back to work and the Federal Reserve makes its decisions. I think that institutional investors are now looking beyond the third quarter, which should be pretty lackluster in terms of earnings, and are betting that the fourth quarter will see an uptick in business conditions. This outlook, combined with little news flow, a fair stock market valuation, and investor sentiment that isn’t negative, is the reason for the rally. Factoring all the investment risk in the marketplace, stocks still make the most sense if you’re a long-term investor. Nothing else beats the inflation rate.
All kinds of stocks are hitting new 52-week highs in this market and investor sentiment for many individual stocks is robust. (See “Stock Market Leads the Economy—Many Dow Jones Components Doing Great.”) Finally, after more than a decade of what I view as a long bear market, the stock market has almost made its recovery. The NASDAQ Composite is the exception to the Dow Jones Industrial Average and the S&P 500 Index. Technology stocks got so out of whack with reality in 1999/2000 that it will be a long time before the NASDAQ Composite breaks 5,000 again.
When I think of the significantly reduced outlook for corporate earnings, the sovereign debt crisis in the eurozone, and the fiscal cliff building in the U.S., it’s difficult to be bullish. Yet I remind myself that the stock market is always forward-looking and the system likes to bet on the future, not the current reality. Investor sentiment isn’t uniform in the stock market. The Dow Jones Transportation Index is lagging other key stock indices, and this is worrisome. Regardless, I think investor sentiment is strong enough to keep the stock market ticking higher until the next Federal Open Market Committee (FOMC) meeting. Given all the investment risk, investor sentiment and the stock market’s performance this summer has been nothing short of amazing.