There are more gains ahead for the markets in the second half, says Bespoke's Paul Hickey

Key Concepts

• Market recovery after a 20% drop
• Historical patterns of market rallies
• Potential for further gains in the second half of the year
• Impact of tariffs on inflation
• Role of oil prices as a tailwind for lower inflation
• Buy-the-dip mentality
• Earnings season as a potential headwind
• Federal Reserve (Fed) rate cuts

Market Recovery and Historical Patterns

• The market has recovered significantly after a 20% drop.
• Paul Hickey of Bespoke Investment Group notes that negative headlines and widespread fear often signal a good time to buy or stay invested.
• Historically, two-month rallies with 20% gains are more often the beginning of a rally than the end.
• The median gain over the next year after such rallies has been 23% based on ten prior instances.
• Examples of similar situations include 1982 (within 3% of 52-week high), 1991 (at 52-week high), and 1998 (within 2-3% of new high).

Potential for Further Gains

• Hickey suggests there's potential for more gains in the second half of the year.
• A key factor is the possibility of inflation not materializing as expected.
• This could lead the Fed to cut rates for positive reasons (economic strength) rather than negative ones (recession fears).

Sectors and Tailwinds

• Industrials were a favored sector at the beginning of the year due to expectations of deregulation and increased activity in the US.
• Tax cuts from 2017 are likely to be partially retained, providing further economic stimulus.
• Lower oil prices, despite geopolitical tensions in the Middle East, act as a significant tailwind for lower inflation.

Market Sentiment and Earnings Season

• The market has shown a "buy the dip" mentality, with strong performance during trading hours (open to close) since 1993.
• Earnings season is identified as a potential headwind because sentiment is less negative than the previous earnings season.
• The previous earnings season had a low bar for reports, which was easily exceeded.

Tariffs and Inflation

• The pause on some tariffs is expiring, but Hickey doesn't expect a return to the April 2nd levels.
• He believes the US has gained some concessions from trading partners and that extensions are likely.
• Hickey uses the analogy of "free beer tomorrow" to describe the constantly delayed inflationary impact of tariffs.
• If the June CPI report doesn't show a significant inflationary impact from tariffs, the Fed will have less justification to maintain a wait-and-see approach.
• 14% of the US economy is imports.

Conclusion

The market has shown resilience and potential for further gains, driven by factors like lower oil prices and the possibility of the Fed cutting rates due to controlled inflation. While tariffs remain a concern, their inflationary impact may be less severe than anticipated. Earnings season is a potential headwind, but overall, the outlook is cautiously optimistic.