Common Cents & Heat Waves

The rally in the stock markets thus far in July has been a long time coming. While we haven’t mopped up all of the red ink from the first half of the year, this respite from the carnage has been welcome. The $64,000 Question remains: “how much longer will the rally last?”

People that do what I do for a living can be frustratingly vague. At times, we can come across as bordering on being obtuse. Such is the way of soothsayers and fortune tellers. Simple Tricks. It doesn’t matter if you are reading tarot cards, tea leaves, entrails, or stock market trend lines. If we could look into the future with crystal clarity, we would probably be at the horse track, if you catch my drift.

So, it is with some measure of trepidation I answer the question about the potential length of this recent rally. Here goes nothing: “the easy money betting against the US stock market is undoubtedly over. However, that doesn’t mean prices will continue to go higher at the recent rate of growth.

In all likelihood, the markets will pull back a little at some point and bounce against previous resistance. If and when the S&P 500 breaks, say, 4,200, then we can breath easier. In the meantime, if you don’t mind taking some risks and potentially having a sleepless night or two, go on ahead and tip a toe in the water. Try to buy the dips as best you can and/or ‘dollar-cost average’ your purchases over an established time frame.”

So much for a simple yes or no, am I right? Regardless, this is decent advice most of the time. After all, investing is a marathon and not a sprint. Further, the best time to buy depends on your time horizon and tolerance for risk.

I don’t mean that to be as cavalier as it sounds. However, with a few exceptions in history, you will be happy in 10 years if you buy today.

Of more concern to me, is the heat that has enveloped much of the northern hemisphere this summer. While you expect temperatures to be blistering during July/August in Birmingham, it will get into the upper 90s in Boston this weekend. This will change! That is sweltering stuff in a section of the country where not everyone has an air conditioner.

Frankly, that is the least of it.

Abnormally high temperatures across much of the country have led to extremely dry conditions. In fact, much of our nation’s “bread baskets”, the Midwest and California’s Imperial Valley, are in some form of drought. Drought Map. Intuitively, the lack of rain/water is, shall we say, problematic for agriculture.

If water doesn’t fall from the sky, farmers have to get it from somewhere. Obviously, excess demand from reservoirs and/or the water table can create grave long-term problems if drought conditions persist. While they usually don’t, what happens if they do?

This is important, because I have had a number of people ask me about grain prices and the war in Ukraine. Essentially, how will the latter negatively impact the former for the consumer? To each query, I have responded: “the Eastern Europeans will figure out some way to get their foodstuffs onto the market. Of more concern to me are the drought conditions in parts of our agricultural heartland.”

Basically, just how badly will high temperatures and the lack of rain impact the domestic growing season? I can’t imagine it is a question of if. Production. Yes, I am pulling out some strange hyperlinks today.

Don’t get me wrong. I am not predicting any sort of famine, or what have you, in the United States. Our commercial farming industry uses advanced risk management techniques and increasingly hardy seeds to mitigate the downside of such difficult growing conditions. Even so, technology and improved processes can only work for so long.

At some point, the La Nina effect in the Pacific has to end. If you aren’t familiar with La Nina, the following two paragraphs from Progressive Farmer sum it up:


“La Nina during the U.S. growing season is a challenging crop weather maker for corn going into pollination–which is still ahead for the majority of the corn crop. When La Nina is in effect, upper-atmosphere high pressure tends to be the dominant feature during the midsummer period. That upper-atmosphere high is, in turn, a pattern that brings drier and hotter conditions to the central U.S. If soil moisture is short when the dry and hot pattern sets in, corn pollination can be affected, and lower yield is possible.

Prospects for this kind of stressful heat and dryness when La Nina features are dominant in the Pacific make the time frame during the first week of July very important. Late-week forecast maps show daily chances for shower and thunderstorm activity for much of the western and northern Midwest with total rainfall of more than 1.5 inches. This would be very useful moisture as corn goes further into pollination and soybeans approach the blooming and pod-setting stages. However, forecast models have a tendency to overstate the precipitation totals, so actual rainfall amounts by July 6-July 7 will garner plenty of attention.”


So, we need La Nina to hit the bricks. But how do we go about doing that? That will be an ongoing question for a very long period of time, with no real practical solutions on a global scale. The reason I say that is simple. In order to get global consumption patterns and/or greenhouse emissions to slow from current levels, emerging economies will have to agree to limit their growth moving forward. I don’t find that likely.

For instance, let’s assume a goal is to get to 60% of current per capita electricity generation in the United States. Currently, the following site suggests is around 12,487 kwh. Electricity. So, 60% would be 7,492 kwh. If what is good for the goose is good for the gander, let’s assume the other 9 of the 10 most populous countries in the world will be able to reach the same level. These would be India, China, Indonesia, Brazil, Mexico, Pakistan, Nigeria, Bangladesh, and Russia. Population. 

So, IF all of these countries consumed/generated the same amount of electricity per capita (60% of current US per capita), the global economy would somehow have to produce an additional 17.035 trillion kwh. This despite a 1.662 trillion decrease in the United States. That would be roughly a 66.4% increase from the estimate the has for total global electricity consumption in 2020.

This to just get to 60% of current per capita usage in the US!

So, are Americans really up to the task? Better put, are Americans up to the task while allowing emerging markets to continue to grow, potentially sharply? Since energy usage and economic growth have a positive correlation, are we willing to let global living standards converge? Understanding doing so will necessitate a sharp increase in both consumption and energy usage elsewhere and a sharp decrease here? Intuitively, the growth in the emerging markets will require fossil fuels if the time horizon for the convergence is in years or decades instead of centuries.

I am not trying to be a fatalist or defeatist. We should all try to do our part to reduce our impression. After all, there should be little debate that the 8 billion humans on the planet have some impact on the environment. As the signs on hiking trails say, leave only your footprints.

So, increase the thermostat a couple of degrees during the summer and lower it by the same amount during the winter. Drive a car with better gas mileage and reduce the size of your dinnerware if your willpower alone isn’t strong enough. Shoot, that last one is good advice for your truly. What is the old expression? A journey of a thousand miles begins with a single step?

In the end, I am not sure I have accomplished anything. However, the recent heat wave has me concerned for a number of different reasons. First, what does it mean for this year’s fall harvest (as the summer one is mostly already in the barn)? Second, if human consumption is the reason for the heat waves, how can we be both realistic and fair at the same time? After all, no one wants to move backwards.

With that in mind, after moving backward for the first 6 months of the year, the stock market should move forward between now and December 31st. That is if the good Lord is willing and the creek doesn’t rise…and the latter probably won’t, what with all the droughts and whatnot.


Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and thank you, as always, for indulging me this week. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris
Chief Economist & Broiling


Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.