😵‍💫 The stock market recovery that wasn't

Hey hey, happy Monday.

Wow, we have a lot to catch up on, don’t we? Our July 4th excursions, our favorite cookout recipes, a stock market that refuses to fall…

Today, a five-minute read on that last one, although my inbox is open for recipes or saucy summer stories.

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If you have the pleasure – or misery – of following the stock market regularly, you’ll eventually realize its day-to-day moves don’t make much sense.

The S&P 500’s best day in recent history (up 10.6% on October 13, 2008) happened when governments around the world announced bailouts for big banks on the verge of death from the Great Financial Crisis. On March 13, 2020, stocks jumped 9% after President Trump declared a state of emergency for the COVID pandemic. The S&P 500 has risen after eight out of the 10 worst jobs reports in the past five decades, and dropped during three of the 10 best jobs days.

Take a walk down memory lane, and you’ll see this irony stretches all the way down the street.

When Wall Street deals with a confusing day, the experts usually shrug their shoulders and chalk it up to more buyers than sellers (and vice versa). 

Today, by my count, we’ve dealt with 64 confusing days in a row. Table-flipping levels of madness that have me on the edge of pulling my hair out.

The stock market has jumped 26% since April 8, and just recently notched fresh record highs. An implication that things are better than ever for America.

Or…maybe not. Tariffs are still plaguing our news feeds, companies are still agonizing over all the uncertainty, and people aren’t shopping Prime Day like they used to.

And objectively, the economy and earnings are in a worse place than they were at the height of the Liberation Day meltdown.

No, really. The numbers say so. Earnings expectations for the next 12 months and economic momentum (as measured by Citigroup) were both lower on June 30 – the first record high in four months – than they were on April 8.

When stocks fall 10% or more – a correction, in Wall Street terms – it’s generally a sign of cracks in the economic foundation. The damage ends up somewhere between a paper cut and a full-blown crisis.

Usually, it takes some semblance of repair – a band-aid, a tourniquet, a whole team of surgeons – to lead the market back to its original highs. Yes, the stock market often rebounds before the hard numbers improve. But it is rare to see a complete recovery back to record highs without a glimmer of improvement or help.

The COVID crash of 2020 was the only other selloff in which earnings expectations and economic momentum were lower at a new high than at rock bottom. And I know, I know, I’m about to say the most dangerous phrase in finance, but…this time is different. Back then, the government unleashed trillions of dollars in free money and stimulus into the U.S. economy after unplugging the country and plugging it back in. Those lovable nerds at the Federal Reserve also brought interest rates down to zero. The world felt dire, but there was a groundswell of hope underneath.

Today, not so much. That’s not even a political statement. The Fed can’t do anything at the moment, and the latest bill out of Congress doesn’t change much on the investment front.

Back to these 64 days of confusion. If conditions are truly worse than they were a few months ago, how can we explain record highs?

I have a few theories.

🥊 Houdini’s law

Harry Houdini came back from the dead and performed his most gnarly escape to date: extracting the optimism out of what was an incredibly daunting scenario post-Liberation Day.

Kidding. There’s no magic involved here. But I do like to conjure up Houdini’s spirit when talking about expectations and reality.

Houdini died from an unexpected punch to the stomach. Market rallies – and subsequent recoveries – often work the same way. They die when we turn blind to risk and can’t see a punch coming from around the corner. Then, we get socked, and we’re immediately braced for the worst. Ready for the worst-case scenario…even if it never materializes.

The first sucker punch was Liberation Day. Afterwards, we were braced for the world to end, yet it…didn’t end. Every headline that didn’t reek of despair and every data point that didn’t scream recession was seen as a reason to buy.

🎢 Trump-etary policy

On a related note, I’ve heard an interesting hypothesis here around the Trump administration’s trade policy.

We all think of interest rates or government spending sprees as the de facto policy levers for the stock market. Inject more cash or make it easier to borrow money, and voila, the capitalist machine whirrs on!

Trade policy could be an emerging third lever. Easier trade policy doesn’t necessarily grease the wheels of the financial system, but it does promise better-than-expected conditions ahead. People prepare for this by buying stocks, even if only because they expect their neighbor to do the same. On a grand scale, those purchases add up fast.

Mechanically, Trump-etary policy doesn’t make a lot of sense. Beneath the surface, the government is collecting more and more tariff revenue by the month. Nothing is changing except our expectations, and all the while, the trade valve keeps cranking tighter. That, and long-term interest rates, have jumped on trade headlines, making mortgages and auto loans indirectly more expensive.

But how can you deny a chart like this?

Investors are hanging on every word the man says.

If this is you, understand that this is eventually a mirage. If your wallet is squeezed by tariffs, the pressure will eventually show up in the stock market. I also wouldn’t time my trades around a guy who seems to have an inferiority complex with head Fed nerd Jay Powell, but you do you.

🤑 The cash obsession

When people have money, they’re going to spend it. Or invest it. Maybe save it, but more likely  blow it on Labubus. This should be a law of physics by now.

Well, Americans broadly are sitting on a lot of cash and wealth in general. Money market assets are one of the craziest charts of this generation.

Americans hold 20% more in cash than they did five years ago (again, taking inflation into account). Household assets are at a five-decade high relative to debt.

The wealth effect is a real phenomenon, and the stock market may still be running on its fumes. I know we all don’t feel wealthy and the inequality gap is widening, but on a broader scale, the American population is still flush with cash. Ready to buy the dip, too.

Cash levels and financial strength are two underestimated advantages for the stock market right now. But I don’t think a glut of money keeps us immune to the pressure of a slowing job market. 

🍎 The simplest answer

Here’s my best answer, even if it sounds like a copout.

Some market moves are just inexplicable.

Markets can stay irrational longer than you can stay solvent.

Men go bald faster on Wall Street for a reason.

But just because you can’t pin a rally to anything doesn’t mean you can fight it.

Since 1950, bull market rallies in the S&P 500 have averaged 5.4 years in length and around 20% in annual gains. Many of those days rarely made sense, even to the most seasoned experts.

I’m not telling you to shrug your shoulders and blindly buy stocks at any price. You can take a measured approach to investing while knowing that some forces aren’t working in the stock market’s favor.

There’s no need to be a hero. Let your investing goals dictate what you do here.

Thanks for reading!

Callie

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