The stock market has got off to a terrific start in the second half, with the S&P 500 closing above the 5,500 mark for the first time ever on Tuesday. Against this backdrop, a wealth manager weighed in on what’s in store for the remainder of the year.
Risk/Reward Unattractive: The next two weeks have strong bullish seasonality, said Lumida Wealth co-founder Ram Ahluwalia in a post on X, formerly Twitter. The wealth manager pointed to a BofA Securities sell-side indicator that is contrarian in nature, which is extremely bullish when the sell-side is bearish and vice-versa.
The indicator is currently in neutral territory, with a slight bias toward a sell signal, according to BofA, a snapshot of the firm’s note shared by Ahluwalia showed. But the level still points to healthy price returns of +13% over the next 12 months, he noted
Ahluwalia said at the current juncture, the risk/reward is not as attractive as it was a few months ago. The risk/reward may not be so favorable after tech earnings or going into the Democratic National Convention due to the rise of uncertainty, he said. The DNC is scheduled for Aug. 19-22.
He expects earnings revisions going into the third quarter to be positive and strong.
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Undiscounted Factor: Ahluwalia said the market hasn’t yet priced in a scenario where Democrats post a credible and competitive candidate to President Joe Biden. The incumbent is currently the presumptive Democratic candidate but rumors are adrift about the party floating an alternative following his dismal performance in the first presidential debate held last week.
“The optimal move for Dems would be a boring, but decisive non-controversial governor from a swing state – Pennsylvania or Michigan come to mind,” Ahluwalia said, adding that California Governor Gavin Newsom is a possibility. If Newsom were to be chosen, it wouldn’t confer the Democratic party any swing state advantage, he said.
Giving credence to his deduction, the Lumida co-founder pointed out that Newsom was one of the first elected officials to greet China’s Premier. “From state-level politics to global stage in one meeting…,” he said.
Market Implications: The wealth manager sees a credible competitive Democrat candidate scrambling some of the positioning in the markets. Under such a scenario, he sees downside volatility in the following sectors:
- Energy
- Financials
- China
- Healthcare/insurers
- Clean energy
- Potentially big techs, given the various antitrust suits
Most sectors Ahluwalia highlighted have been impacted either way by the Biden administration’s policies. The current regime for one is overwhelmingly pro-clean energy, having enacted the Inflation Reduction Act of 2022 through which it invested billions of dollars for tackling the climate crisis and advancing environmental justice. Replacing Biden or a Trump victory may not bode well for clean-energy stocks as a change of guard at the top casts doubt on the continuation of the policies.
As the saying goes, the market hates uncertainty and until it is resolved, the risk of a reversal in trader sentiment will likely persist.
The SPDR S&P 500 ETF Trust SPY ended Tuesday’s session at an all-time high of $549.01, up 0.67%, according to Benzinga Pro data.
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