BFA Weekly Newsletter
May 19, 2023
In my last e-mail I mentioned the adage, "Sell in May and go away; come back after Labor Day." Wall Street is chock full of adages, cliches and other advice to take as wisdom or dismiss. One adage timely now is, "Never short a dull market." While some stocks have done very well and others have collapsed, the market as a whole has gone sideways for two years. The Volatility Index (VIX) has fallen 27 percent year to date. From that perspective Wall Street has been dull. Will it remain so? Probably not for long.
I am not finding it easy to write every week about the dull stock market and it won't become easier until something happens. I will keep this one short. That something could be the S&P breaking out of its 3600-4200 range and rising further (it's 4210 today). It could be a surprise rate cut from the Fed or more increases, more trouble in the banking sector or progress in the Ukraine war. Or a recession. Or no recession.
The media cannot resist blaming the market's doldrums on the debt limit negotiations, but I disagree. First off, forget talk of a default. The Treasury will have taxes coming in from working Americans and the Treasury will cash your June 15 quarterly tax payment. In no month this year will interest to be paid exceed tax receipts. In most months the margin won't even be close. There will be plenty of cash to pay the interest and when needed principal on the national debt. Paying for much of the other spending is a different matter. Politicians can sort out the priorities. A trillion here, a trillion there. They always find a way. Life goes on.
While something political could shake up the dull market whether that would be a positive or negative is hard to say. Suppose Joe Biden decides not to run for reasons that are increasingly obvious. Both parties would have 12 months to figure things out amid a background of distrust Americans have of our institutions, the FBI, Justice Dept., CIA, intelligence agencies, congress, the White House and politicians on both sides. Americans are justifiably cynical. Some will demonstrate that by staying away from the polls next year.
Will the economy cause investors to come to life? At some point yes, it had better. But with the exception of sales at Wal-Mart and Target nearly all the economic data are negative. The Index of Leading Indicators has fallen for 12 straight months. Without economic growth standards of living will decline as prices rise faster than wages and personal income. Few politicians are connecting the dots. To my recollection President Biden hasn't ever mentioned the two words "growth" and "prosperity." To his thinking as a career politician those are irrelevant. Wrong. They are most important.
Hedge fund giant Paul Tudor Jones believes the Fed is through raising rates and that the stock market will be higher at year-end than it is today. I agree about the market, due primarily to the massive amount of cash on the sidelines ($5 trillion), negative sentiment and the inevitable rebound from last year's 20-percent decline. As for the Fed, I have said recently that the Fed should step aside and give the impact of the past year's rate boosts time to appear. That means pause. The fear many had last year was that the Fed, which kept rates too low for too long, will keep rates too high for too long. We will soon know. The Fed's record is not reassuring.
Best regards. JB