We have written before that the financial stress index produced by the St. Louis Fed is a very reliable indicator regarding potential dark clouds in the economic and financial horizons. As can be seen in the graph below (updated as of the end of July), the index – which is comprised of 18 weekly data series – has been designed to average zero (zero implying normal financial conditions) and currently stands at the lowest level on record. The below zero reading implies that the stress level is below average. This achievement has taken a considerable amount of time to be reached (since 2009), and also indirectly reflects global financial calmness. Hence we cannot exclude the possibility that the low levels of market volatility (the VIX fear index) could also be attributed to this record low level of financial stress.

We are of the opinion that this is one of the reasons that the Fed projects to start shrinking its balance sheet in an attempt to normalize monetary conditions. The below-normal level of financial stress keeps rates and spreads low at this stage of the economic cycle and encourages risk taking, hence the market’s record high levels (the DJIA crossed the 22,000 level yesterday).

At the same time strong earnings and solid sales growth allow more risk taking in anticipation of higher market valuations, at a time when the Institute of Supply Management (ISM) reports strong business activity. Furthermore, the global PMI (Purchasing Managers Index) signals solid and steady improvement in manufacturing operations. We still believe that the information technology sector remains very attractive and any deeps could be considered buying opportunities for selective entities.

However, from an historical standpoint we cannot exclude the possibility of entering into the late-cycle of the economic upswing, and therefore the normal question would be which sectors could benefit the most during such economic stage. We are of the opinion that two sectors – given the current economic, political, and financial circumstances –could benefit significantly, namely health care and consumer discretionary. The former traditionally has performed well during the late stage of an economic upswing and given demographics, political developments and pharmaceuticals’ pipelines we consider the sector a solid investment pick. As for the consumer discretionary sector, we believe that global growth dynamics and rising incomes allow more room for consumer spending.

Allow us to close with a thought on what could be called the shallow manifestation of market cruelty: While market rhetoric could be concerned with projected reality based on beliefs, market dialectic can only attain its goals in a self-existing realm of discourse. Market dialectic tries to discover the real syllogism of underlying forces by making use of inductions, whereas market rhetoric tries to discover the means of persuasion by making use of enthymemes. The problem with the latter is that in its “syllogism” one of the propositions is missing because it is presumed to exist already in the mind of the one to whom the argument is addressed. Hence propositions are settled as beliefs and standing conclusions could self-feed an illusion that gives force to an argument.

Are we living in a market rhetoric which is enhanced by enthymemes?