Bow Wowwwww! They don’t call it the “Dog Days” for nothing. Imagine being a pooch in summer, wrapped in a fur coat in the days before air conditioning? This pretty much describes the behavior of most stocks during the summer. Trader’s desks are empty, clients are enjoying the beach, or cruising in their yachts (big time investors all own yachts, right?), and activity in the northern hemisphere slows to a crawl.
The markets have drifted lower this summer, a pattern that has characterized much of the year. I was curious so decided to look back at stock market behavior during the summer for the past five years of the bull market that began in 2009. Between April 30 and September 30 the Dow Jones Industrial Average fell in four of those five years. This confirms my personal observation over a forty year career: yes “Sell in May and Go Away” is not a bad piece of advice. If past is prelude, we should see equities rally in the fall.
Of course, I do not manage your money by adages. Rather, in summer I tend to be a little more reluctant to enter new positions and a little faster to abandon those that have become questionable. Thus, for some clients with large positions, your holding of Kinder Morgan Inc. was trimmed, as explained in my email to those affected. I’ve even trimmed Apple for a few clients whose holdings reached above 10% of portfolio value. Both stocks have had a rough few months, and while seemingly in unrelated industries, there appears to be a common root cause: China. As one of the world’s largest economies, flagging Chinese demand for imports of everything from oil to iPhones , has put a damper on earnings forecasts and thus on share prices for a wide variety of firms. Greece was getting most of the headlines, but China is the real story. The other phony headline, in my opinion, is interest rates. An uptick in the Fed Funds rate has been so over hyped and is so embedded in trader assumptions that only a surprisingly large increase could tank this market. We have an economy that is clearly expanding, though not booming, and there is clearly a danger to the U.S. and more importantly to international economic expansion if the U.S. Federal Reserve were to go on a rate raising crusade. Not going to happen .
While it is becoming much more difficult to find true bargains, I do not see a bear market in the works. I’ve raised most clients’ cash holdings as a disciplined investment approach meaning there is no obligation to “trade and trade” for trading’s sake. Warren Buffet says his favorite holding period is “forever”. I’m not that inflexible but I do believe it is better to hold cash than risk owning over priced stocks or bonds, and believe me there are many overpriced items out there…Tesla and Netflix being prime examples. We appear to be in a period that will require patience and faith in the long run. I hope you will continue to have both.