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Index Month / Year to Date
Dow Jones +2.38%/+11.87%
S&P 500 +2.05%/+11.53%
Barclays US Agg. Bond Index +0.43%/+2.71%
10-yr Treasury 2.30% at the end of June and 2.29% at the end of July
July saw a continuation of the stock market’s disconnection from economic realities, and that trend reached new heights of irrationality in early August when the Dow Jones Industrial Average hit 22,000 for the first time ever.1 As Wall Street cheered, Donald Trump quickly claimed credit for the milestone—in truth, the market has been on an emotion-fueled upward trend for more than eight years. Though Trump’s election did add more fuel to the rally, the reality is that corporate earnings and other economic indicators continue to lag far behind the overinflated market.
With GDP growth still barely at two percent and the Fed still unable to manufacture inflation or artificially manipulate long-term interest rates, the economy is nowhere close to where it needs to be to theoretically justify a record-high stock market. Ultimately, this stock market is levitating without fundamental support. It’s like the floating woman in a magician’s trick where the magician runs a hoop around the woman’s body to show there’s nothing suspending her from above or her supporting her from below. It looks impressive, but it’s just an illusion.
Either way, staying invested in a record-high market in the midst of a long-term secular bear market cycle really just amounts to gambling when the stakes are especially high. As discussed in other newsletters, true investments (as opposed to gambles) are those that offer transparency and a contract. Most options in the fixed-income realm—which we specialize in at Sound Income Strategies—are contract based and therefore qualify as true investments.
As August goes on, there are signs the stakes may be getting even higher for buy-and-hold market investors. The S&P 500 Index recently saw its biggest one-day drop in almost three months in the wake of growing tensions with North Korea. It was the first hint in quite a while that Wall Street isn’t entirely immune to geopolitical issues as it continues to focus hopefully on Donald Trump’s economic promises.
No one knows what might happen in the coming months, of course, but with so much of Trump’s economic agenda riding on congressional approval this fall, Wall Street’s resilience is sure to be tested again and again.
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