July has seen a return to form as investors take on more risk in light of a dovish fed and the trade truce. There has been a general exodus out of defensive sectors like consumer staples and utilities, with money piling back into riskier parts of the market. The bigger money managers are moving into cyclical corners of the market, including banks and industrials.
The general investor sentiment seems positive, but fear is still the main driver of the market. With the S&P 500 cresting the $3,000 summit, doubts are quickly rising about the ability of the market to maintain its current valuation. Despite July's new investments, average cash holdings are still at their highest point since 2011. The top two fears cited in June by takers of the CNBC investor survey were the usual ones, the Fed and US-China trade, but these were overshadowed in July by a new fear: the fragile state of over-leveraged corporate balance sheets.
With companies carrying too much debt, the overall recession risk becomes magnified. A failure of monetary policy, in the context of both inflation and interest rates, would permeate throughout the corporate, mortgage, and banking segments of the economy as current debt levels become untenable. Are investors overextending themselves?