Note: This article was written Wed. 9/7, two days before the current spate of volatility began, as expected.
In my last letter, in the midst of the so-called “Brexit crises,” I emphasized that the underlying economy was fine and markets would recover. Before we knew it, the S&P 500 was back to where it was – and then continued on to a new high. It was a great example of the importance of staying invested (appropriately for your risk tolerance), to wait until the market winds take off.
You simply never know when markets will kick in. And often times they “climb a wall of worry.”
Now that markets have hit a new high the “winds” have quieted to nearly a dead calm. Using closing prices, the S&P 500 traded in a 1.54% range in August–the smallest monthly range since August 1995. In fact, only six months have had a narrower monthly span, going all the way back to 1928! The term “dog days of summer” could not have been more suitable this year.
But August is behind us and we are entering the so-called “dreaded” month of September. What’s in store and what might create a bumpier road, at least in the short term, for investors?
Before we begin, let me remind you that I share Warren Buffett’s long-term view. As he said in his 2015 letter to shareholders, “For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs (Bloomberg – Warren Buffett’s 2015 Shareholder letter, Annotated).”
Nevertheless, it’s important to be aware of shorter-term risks that may lie before us in this first autumn month.
First, we’ve been hearing chatter the Federal Reserve might hike interest rates as soon as September. “I believe the case for an increase in the fed funds rate has strengthened in recent months,” Fed Chief Janet Yellen said near the end of August. By itself, the statement really isn’t earth-shattering, but it is a signal she’s eyeing a rate hike later this year.
While it seems unlikely the dovish Fed would insert itself into the election by rocking the boat, that possibility exists.
If not rates, then what? Record highs signal investors aren’t fretting over the upcoming election. With the exception of the political junkies, voters historically don’t really get engaged until after Labor Day. Yet, a tightening in the race could create additional uncertainty as we head toward November.
Then there is the ever-present possibility that international woes could wash up on our shores. Recently, we had a front row seat to the emotional responses wrought by China and Brexit. Once investors realized overseas worries weren’t mucking up the shores of the U.S. economy, cooler heads prevailed.
I won’t belabor the point by lifting up every rock that might provide a September surprise, but now is a good reminder that volatility can strike anytime. And after a sleepy August, with fresh market highs, I wouldn’t be surprised if something triggered a pullback sometime soon.
When it does, (note, I say “when” not “if”), it shouldn’t be a case for any alarm. If you’ve been working closely with us, your financial plan is designed to reduce overall risk while keeping our focus on the long term.
And a quick review of the economic data reveals an economy that, though still sluggish, has recently gained a bit of momentum. It’s not the fast-paced growth we experienced during the 1980s or the “brimming with confidence” economy of the late 1990s. But the improvements are cautiously encouraging.
Thanks, as always, for the opportunity to serve you. We appreciate your confidence and trust. Please give us a call if you have any questions or needs.
Greg
