A Quiet Summer?

There is an old adage “sell in May and go away”, which suggests that investors should sell their stocks in May and buy them back in November in order to avoid the subpar market returns that some associate with the summer/fall period. Long-term investors typically ignore these types of adages because intra-year movements don’t make much difference when one has a 5-10-year time horizon; buy to hold outperforms any seasonal strategy. Past movements of the market don’t necessarily tell one much about future movements, and market timing usually doesn’t work but can lead to huge and unnecessary tax bills.

We can think of numerous, summer/fall periods during this current bull market that proved unpleasant for investors. Recent summers have brought concerns about Greece, concerns about the U.S. losing its AAA credit rating, and concerns about China, each leading to sharp increases in volatility and negative return. Many investors have been calling for a similar increase in volatility this summer as risks have increased. Thus far, these predictions have fallen well short of their marks. Despite a lot of political commotion, the market has climbed steadily higher this summer with very few ups and downs.

Source: Data from NASDAQ, Chart by Farr, Miller & Washington

The chart above illustrates the calm that has settled over this market. The market hasn’t moved more than 1% in a day since May 16th! The 50-day moving average is almost a straight line. Terrorist attacks, the Manchester bombing on May 22nd, the London bridge attack on June 3rd, and almost daily reminders of the dysfunctional political environment haven’t moved the markets much at all.

We are delighted that the market continues to rise. Corporate earnings growth has accelerated in the first half of this year and analysts are predicting double digit increases for 2017 and 2018. Still, it is a bit unsettling to see the market appear to dismiss bad news almost completely.

So, have we come to the end of history, where the market slowly and inexorably rises, regardless of geo-political events?

We certainly don’t think so, and while we aren’t alarmed, we certainly aren’t complacent. Uncertainty comes in many forms. Just when earnings are solid, unemployment and interest rates are low, and investors have gone to the beach, an attention demanding event may be brewing.

The geo-political situation on the Korean peninsula took a turn this week with the rhetoric elevating to the Biblical. President Trump threatened “fire and fury” if North Korea continues to threaten the US. Almost immediately, North Korean state media said the country was considering a strategy to attack Guam. Wednesday morning, President Trump tweeted that the US nuclear arsenal is “stronger and more powerful than ever before.” Troubling rhetoric indeed, though as I write on Wednesday evening, still nothing beyond fiery words. However, even a minor skirmish along the Korean DMZ, or an incident in the Sea of Japan can change the calculus of Asian politics, Asian trade, and thus the world markets, in an instant. South Korea is the world’s 14th largest economy; Japan is the third largest.

The market’s benign reaction to the situation on the Korean peninsula appears to be another example of traders shrugging off potential bad news. This is what happens during bull markets. We are nine years into this current bull market and we all know that they don’t last forever. Market corrections, though nearly always unpleasant, are a normal part of life and our goal is to build client portfolios to enjoy further investment gains while enduring any market declines. The firm’s fairly straightforward strategy of building diversified portfolios of high quality individual stocks and bonds has helped our clients through the dot-com boom and bust and the housing boom and bust.

We remain vigilant, but not jittery, in our efforts to guide portfolios through an ever-changing environment.