Is There a Cure for the Summertime Blues?

Sometimes I wonder what I’m gonna do
Cause there ain’t no cure for the summertime blues…

–Eddie Cochran, “Summertime Blues”

I know what you’re thinking. The first day of spring was only about three weeks ago, so why I am leading off today with the notion of “Summertime Blues”?

Well, in addition to being one of the great songs in rock history, and one whose popularity was taken to the next level by the likes of The Who, RUSH and Alan Jackson, the notion of upcoming summertime blues is what we could be looking at in financial markets this year.

Indeed, we’ve already seen the chatter go from “sell in May and go away,” to “sell now and go away.” And while selling now might be a strategy that serves some well, particularly if you’ve been in tech stocks in 2023, the better approach in my view is to let the data decide.

In today’s issue of my morning briefing, Eagle Eye Opener, we took a look at what conditions/market events would be required to keep markets from suffering the summertime blues, and what conditions/market events would need to take place that would usher in a big bullish summer party bash.

Let’s take a look at these right now, starting with the current macro drivers.

The current situation for markets is that regional banks have stabilized, there continues to be “dovish” Fed policy expectations, still-elevated inflation, mild deterioration in the labor market and slowing growth. The current market environment largely reflects the divide between what the market thinks/wants to happen (stable banks and less-hawkish Fed) and what is actually happening (inflation sticky, growth slowing).

As long as the market sees its “wish list” come true (a big ask), then current levels on the S&P 500 are justified. However, if those wishes aren’t granted, markets are over their skis by at least 5%.

For things to improve from the current situation, i.e., the so-called “better-if” scenario, we would need to see regional bank stress continue to subside and/or disappear. We also need the Fed to confirm dovish expectations, core CPI needs to drop towards 5.0% (it came in at 5.6% today), the labor market must deteriorate and economic growth needs to gradually moderate.

This situation would confirm the market’s positive hopes about the banks and the Fed and add to it disinflation and a normalizing economy and labor market — and in effect deliver the “soft landing” just about everyone wants. In this environment, stocks should rally hard, and rightly so as multiples and earnings should rise. If this environment were confirmed it would signal the end of this bear market, as this environment would be “Goldilocks” for stocks and bonds.

Now, for things to descend into the summertime blues, i.e. the “worse-if” scenario, regional bank risks need to re-emerge, the Fed hikes rates by 25 basis points in May and signals more hikes are coming, Core CPI stays sticky, or worse, disinflation reverses and the labor market and economic growth remain resilient.

This would truly be a worst-case, summertime-blues scenario for stocks, and it’d dash the hopes of investors that have underpinned the recent rally and open up the possibility of a substantial decline in stocks. This environment would be “stagflation” with the added stress of regional bank failures and a Fed powerless to help. The S&P 500 at 3,300 (about 19% lower from here) should be thought of as a “worst case.” But given market momentum, a technical-driven violation of that level can’t be ruled out if contagion gets a lot worse. This is pretty much a nightmare scenario for stocks.

So, by this summer, we should have all the data necessary to give us a read on whether the better-if scenario is upon us, or if that aforementioned nightmare scenario is the order of the day. If it is the latter, then we’ll all be lamenting that there ain’t no cure for the summertime blues.

If you want to get market insight like this on a daily basis, then I invite you to subscribe to my Eagle Eye Opener today. For the price of a daily cup of coffee, you’ll be armed with the intelligence to help you avoid any summertime blues.

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Ben’s Got Wisdom

“If you want to bring the cynics out of the woodwork, just succeed.”

–Ben Harper

Singer/songwriter/multi-instrumentalist Ben Harper is, in my opinion, one of the best musicians out there today. He has been making great songs for more than two decades, and if you don’t know his work, I recommend you check it out.

In this quote, Ben shows he’s got wisdom along with his musical prowess, as he reminds us that success and achievement will always be criticized by those who lack it. Hey, let’s face it, it’s easier to sling an arrow at someone than it is to build a fortress. So, don’t sling arrows. Rather, put your efforts into building your own successful fortress. Much more satisfaction, pride and happiness will come to you that way.

The Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods