All Quiet On the Western Front
For those frustrated and tired with politics and the elections, stay away from the stock market. As hard as it is to believe, the markets are worse than Trump and Clinton. On one hand, some really smart, successful professionals are pounding the table that trouble is coming and investors should get out before the markets implode. Yet last week the three major averages (Dow, S&P 500, Nasdaq) reached record closing levels on the same day. Contrary to the warnings, this trifecta is usually a sign of a strong market. 1999 was the last time it happened.
While it has been a confounding year for the capital markets, the recent action has been a different vexation from the volatility in the first and second quarters. After Brexit and July’s upside breakout of the 2-year trading range, U.S. stocks have been quietly moving sideways. This slithery stretch is somewhat misleading. While the financial media correctly broadcast that the averages are setting new records, those not following closely believe that the markets are having a terrific 2016. Not that a mid-single digit return is that bad. But for those not faithfully following developments, one could easily believe all of the records translates into a blockbuster move. As you can see, the year-to-date returns are respectable but not off the charts.
2016YTD
DJIA +6.5%
S&P 500 +6.8%
Nasdaq Composite +4.6%
Russell 2000 +8.9%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends
This calm stock market landscape is out of character. In fact, according to The Wall Street Journal, volatility in the equity markets is the lowest in 20 years. During the past 30 days there were only 5 trading sessions where the S&P 500 moved more than 0.5%. That is the fewest in any 30-day period since 1995.[i]
These non-volatile markets have another notable feature. Low trading volume. Market volumes are typically lower during the summer as there are thinner trading desks and this year is no exception. As an example, the trading volume in the SPY (the S&P 500 exchange traded fund and one of the most widely traded stocks) has been below its 50-day moving average for the past 30 days.
This quiet and calm has some worried that it is a prelude to trouble. And to be sure, there have been cases of stock market problems after periods of tranquility. Also, the S&P is up over 20% during the past 6 months as measured from the February lows to the recent highs. It’s natural to expect a hesitation or correction after such a move.
As mentioned above, there have been several high profile investors emphatically telling everyone to get out of the markets. George Soros, Carl Icahn, Jeff Gundlach, and Stanley Druckenmiller have all warned that they believe there is significant market risk and that investors should get out. It’s important to note that these warnings began earlier in the year and prior to the recent run up to record levels, so they haven’t been accurate (yet!).
The bears have a lot of ammunition. The capital markets are being manipulated and controlled by central banks and the markets are starting to lose confidence in these policy makers. Further, trillions of dollars of sovereign debt trade at negative yields as a result of central bank actions. Fiscal deficits are at record levels, and economic growth, where it can be found, is anemic.
And despite this environment, we find U.S. stock markets at record levels. This points to an additional concern – U.S. stocks are not a bargain. There are countless ways to value securities such as price-to-earnings, price-to-sales, dividend yield, book value, etc. None of them currently result in “undervalued”.
Given these intense cross currents is there any surprise that investors are confused? Within the glass half-full world, we think that July’s breakout to the upside is important. The S&P 500 had been in a 2-year trading range which was roughly 1,800 to 2,100. That the move out of this range was to the upside is a material event. Moreover, it advanced in the face of the negatives covered above.
Secondly, some think that the U.S. economy is ready to expand beyond the stagnant performance of the past few years. This could be the unknown helping last month’s move. If this does take place, global stock markets should continue to move higher.
Returning to the ursine view, there are plenty of reasons for pessimism and in addition to those economic obstacles, there is social acrimony. The country is polarized and the divide is growing and will continue past the election. This has a chance to impact issues beyond the economy and politics. It is a risk that is difficult to quantify.
David Tepper, another high profile hedge fund manager, recently confessed he was unsure of the markets’ direction. He offered that he wouldn’t be too long or too short and he concluded that having an above average cash balance made sense. We would concur and add that keeping an open mind towards the markets will be a good approach.
[i] The Wall Street Journal, August 23, 2016
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional
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