In June, in our mid-year outlook, we wrote that the market was higher, and narrower. In July we wrote that it was broader, and cooler. August gives us a third pairing, and it is the one that asks the most of us: the market was broader, and costlier.
Broader, because the widening we noticed in July continued and deepened — the average stock did better than the index, and American companies turned in what Seaport Research Partners describes as one of the strongest reported earnings seasons in years. Costlier, because in the same month the government sold thirty-year debt at the highest yield in a quarter century, and because the Federal Reserve spent the last week of August reminding everyone that the inflation fight is not finished. Both halves are true. The work of the month is holding them together.
The clearest evidence of the first half is the simplest. Through August 28, the capitalization-weighted S&P 500 was solidly positive on the year — and equal-weighted equities, mid caps, small caps and dividend-oriented indices were all ahead of it. Bespoke Investment Group put numbers on the rotation itself: from May 18 through August 21, the equal-weighted S&P 500 gained 9.3 percent against 3.7 percent for the capitalization-weighted index. The market kept advancing. It simply stopped requiring the same small group of stocks to do the advancing.
Continue reading the full August commentary — including what the record earnings season looks like once one-time gains are stripped out, why the thirty-year auction was less alarming than the headline, and what the firm is watching into September.
To continue reading, please download the full Moran Monthly Digest here.