The ancient Greeks would refer to the so-called “dog days” of early August as the period in which the star Sirius, also known as Alpha Canis Majoris or dog star, brought on both the hottest days of summer, while at the same time proffering up the possibility of sickness or catastrophe.
That description, perhaps, is an apt way to think about the financial markets during this month of August as we deal with the pandemic. As a result, we find ourselves having to deal with greater turbulence than has been the traditional reputation of August.
Yet, despite the angst about the outlook this August, there is cause for optimism. The financial market’s performance in presidential election years has been stellar. For example, during August the S&P 500 index has been on average up about 0.63 percent.
However, during election years, August has been up about 2.87% on average, according to Dow Jones Market Data. And July also did its part.
The S&P 500 registered a 5.5% gain in July. The benchmark index is now up 1.25% on the year, having rebounded from March’s historic correction to claw back all the value it lost amid the ongoing coronavirus pandemic.
And you know what that means. Greed will once again take hold of those who believe that they suddenly are handed the keys to the investment kingdom.
As a bit of an antidote to that way of thinking, you might want to ponder the words of the late Jack Bogle, the founder of Vanguard, whose gospel was, ìDo not try to beat the stock market.î
Unfortunately, after observing hundreds of investors over the past half a century I would have to concur that investment success on Wall Street often leads to greed and disappointing results.
Meanwhile, Bogle also held the opinion that the best approach for the great majority was to hold stocks and bonds in a broadly diversified, low-cost index funds and to forget about picking individual stocks.
On that point I would totally disagree. Yes, you should have patience with the markets, not something that is always easy to do nowadays.
The economic environment brought on by the COVID-19 pandemic, in combination with the Fed’s low interest policies, has meant that you are almost forced into an investment position comprised primarily of equities.
I would remind the naysayers that it always has been possible to achieve satisfactory investment returns regardless of the environment. Despite COVID-19, earnings during the second quarter exceeded expectations, which no doubt contributed to the S&P’s exceptional month.
Of the 312 companies on the index that had reported their earnings as of the end of July, 82% delivered results that exceeded analysts targets. They did so with aggregate earnings that were nearly 22% above projections, according to Refinitiv data going back to 1994.
Corporate America’s outperformance comes amid devastating indicators for the economy at large. The nation’s GDP contracted 33% year-on-year in the second quarter, according to data released by the government. A second consecutive quarterly decline that officially sent the U.S. into a recession.
The pandemic has shut down huge swaths of the nation’s economy, pushed the unemployment rate above 11%, and forced tens of millions of Americans to rely on federal unemployment benefits that expired at the end of July.
Though many observers are worried that matters may only get worse for those on Main Street, Wall Street remains on an unabated tear. The tech sector’s success drove the Nasdaq Composite up 6.8% in July, while the Dow Jones Industrial Average gained 2.4% this month.
Still, there are signs that many on Wall Street are concerned that the abysmal economic data and its potential impact on the stock market will mean that we will be paying the piper down the road.
One indication of this that the value of assets such as gold and U.S. Treasury securities, often thought of as a traditional safe harbor when the bears come out to play, have uncharacteristically climbed in lockstep with equities. Gold prices have chalked up all-time highs, while U.S. Treasury securities have seen yields hit historic lows.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.