A Tired Market Takes a Breather


This week the Dow Jones Industrial Average and Standard & Poor’s 500 index both hit new all-time highs, but it sure didn’t feel like it.

Volume, which has spiked periodically on new highs—or on the days the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet, or Google) sold off big—has been average at best.

The Nasdaq Composite index and the FAANGs themselves have bounced back a bit from their recent correction, but they’re still off their record highs.

Wall Street’s so-called “fear” Index, the CBOE Volatility index, or VIX, is hovering just above ten again, again in complacency territory.

So, what, besides early-summer doldrums, is going on?

First, the big, brief sell-off in the FAANGs took a lot of wind out of investors’ sails. These stocks had everything going for them: strong sales and earnings growth, unassailable competitive positions, and a coolness factor that pushed their appeal way beyond that of a mere investment.

But when that aura of invincibility is shattered—as happened with the dotcoms and more established stocks like Cisco in 2000-2001—it takes a while for people to get their bearings.

Second, the Trump trade, which fizzled in early March and gave way to FAANG fever, was based on the hope that a Trump Administration and a Republican Congress would enact bold, “pro-growth” legislation, in particular cutting corporate tax rates and maybe infrastructure building, as well as regulatory reform.

That faded after the House of Representatives failed to pass the first GOP health care reform bill, which pushed back the rest of the Republican agenda. Now that the House has passed a new health care bill, Senate Majority Leader Mitch McConnell (R-Ky) is pushing for a vote on the Senate’s version soon, so he can clear the decks for his party’s true ruling passion: tax cuts.

So, the Trump trade is back to some degree, and financial stocks, which probably have the most to gain from deregulation and faster GDP growth, have rallied nicely in June.

But another early leader, energy stocks, are being clobbered  in a new bear market in oil prices, as West Texas Intermediate crude oil futures linger around $43 a barrel, a 20% decline from their 2017 high. Deregulation won’t help much when U.S. producers are throwing too much capacity onto a saturated world market.

Still, the good news is that supply, not demand, is driving this train. The economy is strong enough for the Federal Reserve to raise short-term rates and talk about unwinding its huge balance sheet. Long-term interest rates are low, and there’s no recession in sight.

So, although risk is definitely rising, I expect stocks to keep grinding their way higher in the weeks ahead.