While most analysts were focused on the banking crisis, the threat of a U.S. default, more interest rate hikes and other potential blow-ups, stocks rallied.  And then they rallied some more.  The S&P 500 jumped 8.3 percent in the second quarter and is up 15.9 percent this year.  A small number of large-cap technology stocks account for much of that gain.  The average S&P 500 stock rallied 3.5 percent in the second quarter and 5.9 percent this year.        

What fell the most during the 2022 bear market has rebounded the strongest in this bull market.  That is normal activity.  Tech stocks were the worst last year and the best so far this year.  Same for Bitcoin.  Dividend payers led last year but have lagged this year.   

The market is no longer in a seasonally strong period and some analysts are finally turning upbeat so I don’t expect a big advance this summer.  After a pause we could see strength re-emerge in the fall.  There are reasons it will.   

One reason is that people are still grossly underinvested in stocks. That is especially true of high net worth investors.  After last year’s selling wave they are focusing on preservation, not growth.  They like cash, and with money-market funds yielding five percent you can see why.  But a money market fund is less attractive when stocks rally five percent or more in just a couple of weeks. 

Professionals are underinvested in stocks, too.  I have mentioned hedge funds and private equity in recent articles and the risks they are taking by being underinvested in stocks…or worse shorting them.  Stocks have historically been the best asset class by far.  Short them?  Nimble traders can try that, investors shouldn’t. 

Then there is inflation.  The year-over-year inflation rate has fallen from its high at 9 percent to 4-5 percent.  I expect core inflation to settle around 3 percent, down from the current 4.6 percent.   

I discussed the positives (too much sideline cash, falling inflation) but there are more than a few potential negatives that could send stocks lower.  There always are.  Most are well known and for that reason are reflected in current prices for stocks and bonds.  What can send stocks lower is when the good news that investors are anticipating arrives.  There is a Wall Street adage for that (and everything else).  “Buy the rumor, sell the news.”  We’ll be more cautious when the good news arrives and analysts turn more upbeat.   

David Vomund is an Incline Village-based Independent Investment Advisor.  Information is found at http://www.VomundInvestments.com or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.