August tends to be a tough month for the Market. Historically, it’s the beginning of the roughest period for stocks. Selloffs tend to begin in August, accelerate in September and bottom in October, which sets up a year-end rally. That’s the normal course of action, but as you know, this year has been anything but normal. So far, August has been a mild month, but it’s not over yet.
The US economy continues to grow and all indications suggest it will accelerate this Fall. Investors have been keenly focused on the Fed and whether they will raise interest rates again. Janet Yellen gave a speech today in Jackson Hole, suggesting a rate hike could be on the way. With globalization, today’s Fed has effectively become the central bank of the world. They have great influence on the Dollar, which impacts commodity prices and global trade. The rest of the world is keeping monetary policy very loose, with some interest rates in negative territory. It’s become highly controversial, but the US is holding up in solid shape. The Fed does not want to upset the balance.
Slow and meandering price action near all-time highs has been the theme for the month. There has not been a 1% daily move in the last 34 trading sessions. There is very little news flow going on with much of the world still in vacation mode. The mild Market activity has been a polar opposite from what happened a year ago this week, when the “Flash Crash” sent the DOW plummeting 1,000 points at the open. That was a brutal day, which led to the massive correction that didn’t end until February. Both the DOW and S&P have soared 20% since those February lows, and are up 6% for the year, reaching those new, all-time highs.
2016 has been eventful for so many reasons. It’s been one of the most difficult trading environments I’ve ever seen. There are so many cross currents at play, starting the year with plummeting oil prices and recession overseas. The bizarre Presidential election and the shocking Brexit vote continue to confuse and weigh heavily on investor psychology. But since February, stocks have gone straight up reaching new highs, with some recent sideways action to prove the uptrend. Leadership has changed all year, with fast rotations of strength between sectors. For much of the year the defensive Utility and Telecom sectors were leading, which is rarely Bullish. Lately, it’s Tech and Biotech and Energy taking charge, which is very Bullish. It’s been a stock picker’s market. We love it. We’re stock pickers.
I was back at the New York Stock Exchange last week. It has changed so much over the years. Electronic trading accounts for the vast majority of volume today. Very little is traded person-to-person anymore. Less than 15% of shares traded daily actually hit the trading floor on Wall Street. Transactions have been automated. Floor trading at the NYSE is managed by designated market makers, whose job is to help ensure orderly buying and selling for the stocks they handle. I did learn, however, that in response to recent flash crashes, 90% of the volume at the Market open and close are done on the exchange floor to ensure stability and transparency. Humans are monitoring activity and taking responsibility. That’s a really good thing.
We expect activity to pick up in September and are prepared for anything that comes our way. Nothing surprises us anymore. Have a nice weekend. We’ll be back, dark and early, on Monday.