“However beautiful the strategy, you should occasionally look at the results.” — Winston Churchill
How about that? As soon as we released our Mid-Year Outlook predicting the bull market to broaden out, we find the Dow Jones Industrial Index up nine days in a row.
- The Dow is currently on a 10-day winning streak, which is good news for markets.
- Historically, most winning streaks such as these saw higher returns six and 12 months ahead.
- The U.S. economy has accelerated over the past year, defying calls of recession amid the Fed’s aggressive rate hikes.
- Recent data suggest a major slowdown is not in the cards.
This is the longest win streak since September 2017. The last time the Dow got to 10 wins in a row was August 2017. Incredibly, 2017 saw three separate nine-day win streaks, the most for any one year since 1955, which had a record of four. The longest win streak ever took place in January 1987, right as the stock market had one of its best starts to a year. But we all know what happened later that year as the rubber band was stretched too far.
What does it mean? There have been 28 other nine-day win streaks going back to WWII, and reviewing the results shows future strength is quite likely. In fact, the Dow was higher six and 12 months later nearly 86% of the time. Even more surprising, the past nine of these nine-day win streaks saw the Dow higher a year later every single time. The bottom line: These are common events in bull markets, which is exactly where we think we are now.
Let’s briefly discuss the elephant in the room. Many people don’t like to use the Dow anymore, as it comprises only 30 stocks and is price weighted. While we understand that argument, we would still rather know this data than not. And let’s not forget the Dow has more health care and financial exposure than the tech-heavy Nasdaq. As a result, the Dow has greatly lagged other indexes this year. But what happens if cyclical areas, such as industrials and financials, start to lead? Or health care, the second largest sector in the market and a big part of the Dow? While the Dow is old, it may still have a few tricks up its sleeve as a signal should those areas start to lead, as we expect to happen. As Churchill is quoted above — the results are what really matter to investors — and we think the results could be quite positive.
It’s a Bird. It’s a Plane! It’s … the U.S. Economy!
We just received a tremendous amount of data to round out the economic picture in the second quarter (Q2).
In sum: Not only is there no recession, but the economy does not even appear to be headed for a “landing” at this point.
We acknowledge this could change, but thus far the data doesn’t indicate much weakness. However, the monthly data can be volatile and subject to revisions. So, it helps to look at the last three months. Let’s walk through some of the highlights.
Consumption was Strong
- Retail sales rose at a 4.7% annual pace in Q2.
- Core retail sales, excluding categories such as vehicle and gas station sales, rose at a 6.3% annual pace.
- Even after adjusting for inflation, “real” retail sales rose at a 1.9% annual pace in Q2 and are currently running 6% above the pre-crisis trend!
The Supply Side is Coming Back
- Vehicle production rose 7.6% in Q2.
- Production within the aerospace industry rose 4.7% in Q2.
- High-tech industries are running hot, with production up 3.9% and almost 17% above pre-pandemic levels.
- Production of business equipment outside of vehicles and high-tech also appears to have bottomed, which is a positive sign for CapEx.
Construction is Booming
- Single-family housing permits and starts rose 11% in Q2.
- An index measuring homebuilder sentiment continues to move higher, indicating that builders are becoming more positive about future demand.
- Total housing units under construction (single-family and multi-family) are near an all-time record.
- Combined with the boom in manufacturing construction, it’s not surprising that construction payrolls have increased by 88,000 this year and are about 339,000 above pre-pandemic levels.
All This Points to Strong Economic Growth
The Atlanta Fed puts out a “nowcast” of quarterly real GDP growth that is updated with major economic data releases. Right now, it says the economy grew 2.4% in Q2, after adjusting for inflation.
If that is close to actual GDP growth, it would mean the economy grew 2.6% over the past year. That is not only stronger than the average 2.3% pace of growth between 2010 and 2019, but it also matches the pace of growth over the three years prior to the pandemic (2017-2019) when economic growth picked up.
Amazingly, the economy accelerated after a poor first half of 2022 even as the Federal Reserve hiked rates aggressively, taking the federal funds rate from 0.25% to 5.25%.
Meanwhile, the unemployment rate has remained steady at 3.6% over the past year, and headline inflation fell from 9% to 3%.
It really doesn’t get better than that. Perhaps more importantly, there is no reason to believe a major slowdown is in the cards.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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