After spending the first three weeks trading somewhat meekly in a very tight trading range, stocks broke out strongly on the upside in the last full week of the month and held serve as August concluded. Though led initially by the largest-of-the-large FANMAGs, the rally spread across virtually all shapes and sizes of stocks. A fully diversified equity portfolio will have risen about 2.5% for August, standing in sharp contrast to the nearly 2% decline as of August 2020.

This came amidst all sorts of potential negative catalysts.

The Delta variant has come to dominate the news headlines much the way the original COVID did for the first 14-15 months of this seeming never-ending story. A very messy – a true understatement – geopolitical situation in Afghanistan was excoriated in all quarters, with many pundits suggesting its fallout could jeopardize the prospects for Congressional approval of both the bi-partisan infrastructure bill and its far broader and far higher in dollar terms, call it ‘soft infrastructure’, legislation that will have to be passed in reconciliation. There is also that ‘pesky’ debt ceiling issue, from which Congressional relief must be provided, which harkens back to the summer of 2011 when the Tea Party wing of the GOP basically held all of Washington as well as the financial markets hostage while the political machinations of approval played out.

That said, the financial markets and the banking systems are still sitting on mountains and mountains of cash, the liquidity which has always soothed whatever savage beasts might lurk in the market shadows. First that liquidity provides a buffer of buying power on any dips of perceived consequence, which certainly came to bear that last week of August, and then secondly that liquidity ends up powering economic activity, providing fundamental justification for not just the dip-buying’ but also the higher highs that we’re already seeing as August concludes. Clearly, the financial markets are, for the moment anyway, concluding that as annoying as those catalysts might appear, their collective negative impact is either negligible or purely transitory.

Economic Activity showing vigor as of late

There are already anecdotal indications that economic activity, which indeed palpably slowed in early August, is shaking off the Delta blues and showing some vim and vigor. Wal-Mart and Target are reporting their highest foot traffic counts ever in back-to-school store sections, obviously benefitting from nearly two years’ worth of pent-up demand. Employment data continues to beat even the most optimistic expectations, which should more than effectively replace the incomes soon to be curtailed from the expiration of extended unemployment benefits. Corporate profits have vastly exceeded all records, providing even more oomph for future employment and capital spending initiatives.

No doubt responding to already record highs, Wall Street strategists have begun to raise target levels for both 2021 and 2022 for the major market indices. When the S&P 500, now nearly 4600, faded in the first several weeks of August down to an intra-day low of 4371 with all those negatives bombarding Street consciousness, the median target was for a further decline to below 4100. Not even two weeks later, that number is back over 4500 with some looking for 4800+, and one suggesting a 6000 by the end of 2022. As the saying goes, ‘from your lips…….’.

Liquidity reduction on the horizon?

Of course, all good things will eventually come to an end. The likeliest culprit of all will be the reduction of said liquidity, which always has and always will be a product of a change in Federal Reserve policy, away from the massively accommodative to indeed a formal tightening. But there is nothing to indicate that this is on even the most distant horizon. Chairman Powell’s commentary last week at its annual Jackson Hole strategy summit suggested that the Fed would only ‘taper’, i.e., reduce the rate of growth, its liquidity provision near the end of the year, never mind shift into reverse. Students of market history might remember that the May 2013, Wall Street ‘taper tantrum’, which then came out of nowhere versus today’s highly forecast and dissected eventuality, led to a very quick 6% sell-off, only to have the markets rally another 20% before then end of the year. Anybody who sold into the tantrum was highly regretful only a few short months later.

In the past two months, I had re-introduced my analog of Rain Delay to describe the potential late-summer and early-fall financial market environment, when the ongoing secular bull market goes into some sort of duration and magnitude hiatus, before re-emerging with gusto towards the end of the year. That seemed to be entirely operative as of August 20, much less so on August 31. But such is the nature of markets during periods of many, many moving parts. September is often less-than-inspired for portfolio returns as what are often the summer doldrums wash their way through into the cooler months when return tendencies are far more positive.

We continue to overweight stocks in client portfolios. If we do get any pullback of any consequence, we do have some dry portfolio powder to deploy as appropriate, depending upon individual client objectives…and it’s also possible that said dry powder can be deployed into further strength, rather than waiting for a Godot-like non-appearance of weakness. Maybe we’re taunting the market gods to suggest that we’re in a ‘heads we win and tails we win too’ position. But that’s truly the way I feel right now.

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