TGIF! The Dog Days of Summer

The Dog Days of Summer are here.  It’s the time of year when Americans morph into vacation mode.  The weather is hot so activity slows.  It’s  the same for investment Markets.  Earnings Season is winding down.  Economic data slows.  Volatility usually heats up, but volume is low.  Since 1950, August has been the second worst month for stocks.  Only September has been worse.  History has shown that Market sell-offs start in August, gain momentum in September, and bottom in October.  That leads to a year-end rally, and the strongest stretch for stocks.

There’s every reason to believe that scenario plays out this year.  International issues have finally impacted our Market.  The US economy is growing, but not at a fast rate.  The Fed is very likely to begin raising rates by year end.  The 6-Year Bull Market is finding some resistance here.  It has absorbed a lot since its post-crisis beginning, and has demonstrated great resilience in the face of some serious issues.  Selloffs have been buy opportunities.  We see it continuing.  We have been anticipating a correction, and have acted accordingly.  We’ve raised cash and we’ve put on some hedges to protect against potential downside risk.  We’re in defense mode and it’s working.

The labor department reported 215K jobs were created in July, basically coming in line with estimates.  The unemployment rate held firmly at 5.3%.  This wasn’t a compellingly report because 2% GDP growth requires about 200K monthly job creation.  July’s 215,00 new jobs got there but not by much. Lower oil and gas prices don’t seem to be having the anticipated positive impact on consumer spending.  Virtually all commodity prices have fallen.  Inflation has been absent.  The strong Dollar is no doubt playing a role here.  There are no guarantees that the Fed raises rates in September.  But there is a high probability that they find themselves behind the curve if they don’t get in front of it soon.  We still see the first rate hike next month.

Sentiment has soured of late, which is generally a positive event as a contrarian indicator.  Bull Markets usually end when there’s euphoria; think days and the Housing bubble.  It’s not the case today.  We see a correction as a healthy and normal process to confirm and re-set the uptrend.

Enjoy the Dog Days.  We’re on it.

By: Mike Frazier

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