So
far, August has been a month of relaxation. For us in Canada, August brought a
long weekend. For investors on Wall Street, August in the past has
traditionally been a month of tranquility. If we go back 100 years we will note
that August has been a profitable month for the Dow Jones Industrial Average,
pulling out with average gains of nearly 1%. This, however, has not been the
case in the past 20 years, with the Dow falling 1.04% on average. In fact, the
last couple of months have shown what analysts at The Wall Street Journal are calling a “market that cried wolf” scenario.
Whenever the market slumps, market watchers begin to question whether stocks
are heading for a tumble. Over the past few months, however, each of the
impeding warning signs have been nothing but false alarms causing everyone to
compare the market to the analogy of the childhood fable. “Every time
volatility spikes, the calls come out, ‘the wolf is here!’” Jonathan Krinsky,
chief market technician at MKM Partners, wrote to clients on Monday. “While no
one knows for sure whether the wolf is actually coming, there are signs that
perhaps now, more than in a long time, he is close.”
Many
would not consider the words of Mr. Krinsky as a stretch. We have the facts and
they may be an occasion for panic when thinking what the month of August could
bring us. In the past three Augusts, the Dow suffered from declines in excess
of 4% (including last August, in 2011, and in 2010). It is no doubt that
investors will have these numbers in mind when thinking about where to put
their money especially when considering the 2.7% Dow plunge last week and the
70-point dip on the first of August. And how could investors forget the
dreadful month of July when the Dow fell 263 points. What was expected to be a
relaxing summer month exposed investors to a potential hike in interest rates
from the Federal Reserve amidst growing global tensions. One can imagine, then,
how Wall Street is in a bit of a wait-and-see mode as August trading progresses.
Thus
far, conditions are not as auspicious as investors would like them to be. The
S&P 500 dropped 2.7% last week. This was its worst weekly performance since
June 2012. It recovered some of the aforementioned loses yesterday but still
stagnates at – 2.5%, which is below its latest record high hit late last month.
Mr. Krinsky has been one of the more keen observers on Wall Street. Yesterday
did not surprise him at all. “What matters now,” says Mr. Krinsky, “is whether
the market can sustain the strength it showed Monday and make a new a high. If
so, it would be evidence that the recent selling pressure has eased and that
the stock market has again sounded a false alarm.” What he is now calling for
is for stocks to suffer a sizable pullback before continuing their march
higher. But again, the market seems to be calling “wolf” here again as such a predicted
setback has not surfaced as of yet.
Other
strategists don’t share the same views as Mr. Krisnsky. On Monday, Credit
Suisse strategist Andrew Garthwaite maintained his S&P 500 year-end price
target of 2020, which is more than 4% above current levels and would represent
a 9.3% gain for the year. “Bull markets do not die of old age,” Mr. Garthwaite
said. “Such periods of steady gains tend to be brought to an end by either
recession (as in August 1990), a debt crisis (October 2007) or huge equity
overvaluation (as in August 1987 or March 2000). None of these events appear to
us to be an imminent risk.”
What
we are seeing are two contrasting and competing views. While it may be true
that a wolf may loom nearby, none of the prerequisites for a meltdown are in
place. The only option for investors today is to wait and see how August plays
out. Only time will reveal whether the wolf is on the front porch or not.
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