The American Heritage dictionary defines “doldrums” as a period of stagnation or slump. As we have officially begun the summer of 2014, the question arises as to whether the financial markets are heading into a period of potentially side-way’s performance. This period is commonly referred to as the “summer doldrums”. Once again the time has arrived for the numerous market experts and educated economists to wax on about how the period between July and August are punctuated with low trading volume and lackluster performance. These so called ‘experts’ have consistently created an inherent fear of the summertime markets and have investor’s constantly asking the question of whether they should “sell in May and go away”?
The truth of the matter is that the summer weather, and the associated vacation plans of investors and traders, is not responsible for the financial markets performance. What happens after the first day of summer on June 21st will be a reflection of company fundamentals such as revenue and earnings, economic indicators such as unemployment and housing, and geopolitical events. As we say goodbye to this spring and hello to summer, a brief review of the economic data of this past week indicate that we may actually be in store for a very pleasant summer for the financial markets.
Key talking points from this past week:
The “sell in May” philosophy did not become a reality. In fact, we have seen remarkably low volatility as investor confidence and spending seems to be very positive. The Federal Reserve’s focus has seemingly become set towards a slow and gradual reduction of the “quantitative easing” program so as to not upset the delicate pace of slow economic growth. At the same time, the European Zone (Euro Zone) announced a package of historic measures aimed towards stabilizing the European Union and the Euro currency. Germany has emerged as the leader to ensure that the PIGS (Portugal, Italy, Greece & Spain) do not derail the economic recovery. However, critics of the economic recovery and financial market stability will point to slower GDP growth rates in China and their over-expansion of housing and building infra-structure.
Gold and oil prices moved slightly higher for the week as Iraqi insurgents (ISIS) fought over control of many towns just outside of Baghdad. This activity could become one of those geo-political risks which could derail our enthusiastic outlook for the summer. The 30-year mortgage rate increased ever slightly to an average offering of 4.22% to indicate that attractive lending is still available. On Wednesday, the Central Bank indicated its expectation that unemployment will fall to 6% by the end of this year. In fact, employers added 217,000 jobs to their payrolls during the month of May.
Corporate profits are on the rise as the forecast of earnings increases for the second quarter of this year (versus a year ago) are predicted to be in the range of 5.4% according to Factset. The Fed is also sending signals that there doesn’t appear to be any desire to change the interest rate environment. Shrugging off the news about Iraq, investors showed their enthusiasm for equities as the S&P 500 index is approaching an all-time high of near 2,000 and the Dow Jones Industrial Index (DJIA) is very close to approaching a new all-time high of 17,000. It appears that many financial factors are now falling in place to ensure that there will be nothing dull about this summer’s financial markets. The probability factor of having a “doldrums summer” appears to be an increasingly lower probability.
The final note:
When investing, time is your friend. A long term strategy must be maintained throughout any period of short-term disruption. The summer is but a short period within the confines of the investment market place. After this past winter we can now embrace the new summer with enthusiasm for not only the warmer weather, but for a warmer economic and financial environment!
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