Get Ready. It’s Gonna Be A Hot & Cold Season
Comedian Steven Wright once said, “babies don’t need a vacation…but you still see them at the beach.” With Memorial Day in the rear-view mirror, and the markets entering their 6th straight month on edge, it’s time to consider what the summer will bring. As I see it, there will be bears on the beach. But there will be bulls too. And, as always, there will be pigs. And those pigs will get roasted, as they do in any season.
This is a time for humility and focus, not “wild-ass” guesses about what’s next. In that spirit, let’s consider what investors should care about and not care about, and what some key market indicators are saying as we start the month of June
WHAT DOESN’T MATTER
- If there’s a recession this year
- If there’s a recession next year
- If inflation tops out at 9%, or settles down around 4-5%
- If the Fed does this, that or the other (whatever they do, it doesn’t matter)
- What the P/E Ratio on the S&P 500 is
- What companies say about their earnings next quarter
- What most TV pundits say…about anything that might in any way reflect what they own in their portfolio (“talking your book” is a given for most in my field)
- How China handles its Covid lockdown policy
- Who wins the U.S. House and Senate in November
WHAT DOES MATTER
How stock, bond, ETF, commodity and currencies actually change in the coming months, and how sustainable those moves are
That’s a pretty short list of what matters. And that is, now and always, my point about investing in 2022 and beyond. The only thing that matters is the “what” (happens to prices of investments you own). Yet so much time and energy is wasted on the “why.” That’s what fills the list of what does not matter above.
There is clearly a bull market in one thing right now: distracting investors from what really matters. This started as a product of the internet age, then really went parabolic when social media took over our lives. We’ve never had more information at our disposal, and we’ve never used less of it.
This has led investors to over-simplify in places they shouldn’t, like assuming whatever happened in the past will automatically happen this time. The place to simplify is this: price patterns reflect what the whole market is doing collectively. And since so much of investing today is done by investors who truly do not care about what they are buying (indexes buy what’s in the index, algorithms buy what the computer says to buy), everyone else can get sucked in.
Rather than spend your summer getting pulled in by a low tide, or tossed around by the waves, understand what markets are today: emotions playing out in rapid fashion, based in part of real events, but ultimately on one thing: buying and selling pressure in reaction to a wide variety of disconnected factors.
Summer 2022: not the usual
I have a hard time believing that after the raucous start to 2022, the summer months will be as sleepy as they usually are. There are encouraging signs of a bounce of some magnitude for the general stock market, and interest rates are showing potential to dip back down a bit, after a surge higher to levels that make US Treasury competitive with hiding your money under the mattress.
The S&P 500 passed its first of many “is this the bottom?” tests late last week, when it popped back over the 4,000 mark. That was the easy part. There is some room to cruise up as high as perhaps 4,400 or so before the strong downtrend from January will come into play. So, could we see another 8-10% rally on top of what we had last week? It’s on the table, at least. But there’s not much evidence that we’ll see a return to new highs (4,800-ish) any time soon. The market will tell us, we don’t have to guess.
On the flip side, if the market fails to make much progress beyond the frantic 2-day buying spree, it could get much worse. By my count, there has been 1 rally of significance this year. That was in early March, when the S&P rallied about 11% in 15 days. Where was it 15 days after that? Right back where the rally started. If that happens again, a lot of hopeful investors may throw in the beach towel, so to speak.
The focus area for traders and investors is the Nasdaq 100 (QQQ). That group of heavyweights carried the market much further than it had any right to. Ultimately, market logic tells us that a drop like the one we’ve had should not be the end of that. We’ll see if the summer resolves it. If not, markets have a history of delaying their most fierce price movement until the autumn.
For bonds, the summer picture may be a bit cheerier. The 10-Year U.S. Treasury Bond yield did a “transposition move,” spiking higher from 1.3% to 3.1% during the January – May period. I would not expect a full retracement of that move, but a moderation or dip back down is more likely than it appeared a few weeks ago.
The more tenuous price action is in the “credit bond” market. I said at the start of the year that this group of Corporate, High Yield, Muni and Convertible Bonds, as well as Preferred Stock would be the most treacherous and shocking areas of the market in 2022. So far, so good on that.
Bonds of all types have been marked down in price in a way few investors are used to seeing. Yet in late May, they suddenly spiked back up. That’s either a big relief for bond investors or a panic buying scenario that will lead to deeper declines this summer. We’ll see. Either way, I’ll stick with my view that bonds are, collectively, the worst investment on the planet. OK, maybe except for Dogecoin.
Like I always say, the markets tell us an ongoing story. All we must do is listen. Please listen carefully this summer.
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