Spokane Journal of Business

Stay cool during late summer stock market lull

With traders at the beach, investors should be wary

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It’s August. The traders and the Fed are at the shore, so there’s sort of no reason to do any buying or selling. Unfortunately, that appears to have been the thinking for most of this year—so far.

At the time this was written, we didn’t have the monthly results for August available. Nonetheless, with seven months of market activity now in the books, the year-to-date results appear to be partially the result of a lot of waiting for the Fed, while occasionally being distracted by overseas events.

Further, with the second anniversary of the end of the bond bull market having occurred on July 24, and with relatively higher rates becoming a reality, traders are keeping everything pretty dang close. That’s due, I believe in great part, to the basic trading tenets of the last 30-plus years in bonds and the last six for stocks being all about to change. 

Those changes have had traders and money managers wanting to increase exposure in the areas they think will benefit while closing those positions that did well “in the old days.” So, not many net new positions and still a lot of cash sitting around getting dusty. When you have uncertainty and this active portfolio adjusting combination going on, you get occasionally volatile, yet narrowly traded, markets. Matter of fact, S&P said that, through July, this year has the narrowest trading range for the U.S. markets ever. Here’s what I mean.

Looking back to the data we had through July, we did have two of the three major U.S. stock market indicators close the month with both weekly and monthly gains. The NASDAQ outperformed the other two with a 2.8 percent gain for July. The S&P 500 gained nearly 2 percent during the same time. The Dow managed just a 0.4 percent gain for July but remained off 0.74 percent for all of 2015. 

As an aside, this is one of the challenges with simply trusting your investments to a majority of index-based vehicles. You will potentially get what the index gives you and no more—or less, to be sure. In a market such as we’re in now—and, in my opinion, the kind that may continue—those fund managers who are accomplished at trend identification and stock selection again will be providing great results for investors. We, at Opus, are agnostic in that we don’t favor either kind of approach; both can work effectively at different times in the market cycle.

Oil prices continue to look for a sustainable level as the top producers in the Middle East continue to pump at record levels in order to fight for market share, despite the current (operative term) global gut of crude. Stockpiles are still close to the highest levels in 80 years and additional drops come when there’s talk of adding yet more supply. 

While certainly having an adverse effect on energy and related shares so far, what’s bad for oil prices and the oil producers is often good news for the rest of the economy. Transportation of all sorts is essential for the global economy to function. Therefore, lower oil prices can act as a stimulant for large parts of the global marketplace.

Gold prices fell 6.5 percent in July, marking the biggest monthly decline in more than two years anticipating that the Federal Reserve will soon raise rates. I’m of the opinion that its slide is a long way from being done.

With it not paying dividends or interest, the holding costs for gold make it not worth having in a period of rising interest rates. Until and unless inflation becomes a challenge, there’s no reason to hold this. And more correctly, I believe, there are other more liquid investments that do pay dividends or interest that are better investment choices than gold, even when inflation is an issue again. 

After all, going back to its actual market peak price in January of 1980 and adjusting it for inflation since then, gold topped at $2,358.21. It hit its best price since then on Sept. 6, 2011, when it traded at $1,920.36. So tell me again why you’d ever want to invest in something that has provided a negative return over the past 35 years.

Lately, it seems that the majority of the financial media would have you believe that lower commodity prices are a bad thing. They also told us the high prices of three and four years ago were bad things. Consistency isn’t a primary requirement in financial reporting, it would appear.

So, we hear that this price weakness indicates a weakening global economy. For sure, it’s not good news for the producers of such things.

The fact that we’re currently in a period of relatively slower global growth is the main cause of the drop in prices. However, there’s a well-used phrase in the commodity pits that goes, “The cure for high commodity prices is… high prices.” Seems to me we’ve simply moved into the downward part of that cycle. 

Over time, commodities in general have tended to become cheaper due to increases in tech applications for planting, harvesting, mining, and extracting. I believe what the late Julian Simon had to say. He believed that “the only scarcity that exists in the world is human ingenuity.” To see what happens when that gets harnessed, look around. Everything we have today is due to that ingenuity coming to life.

On Wall Street, the markets are likely going to be continuing their sideways dance now that we’re deep into summer. So, be wary of headline-driven markets as little action likely will have a large effect on an index.

Across every type of financial market, cycles vary dramatically in price and duration. This includes stocks, bonds, oil, interest rates, currencies, gold and other commodities. This is a great reason why it’s essential to properly allocate your assets in order to spread your overall portfolio risk, as well as increase the possibility of additional returns over time.

We expect the breakout of this trading range to go higher, but given the market’s recent technical deterioration, a correction—a normal part of any bull market—is always possible.

So stay cool, in all senses of the term.

Michael Maehl is an independent financial adviser and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services company. He can be reached at 509.747.3323 or m.maehl@opus111group.com.

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