Welcome to the second half of 2017. On the first day of trading the Dow Industrials trade up 129.6 points (+0.61%) hitting another record of 21,479.27. So what is the big deal, the market hit a number of new records in the first half?
Well for one thing, it was right in the middle of a four day 4th of July holiday. Traditional investors shy away from these times. What if North Korea launched a ballistic missile on July 4th (which they did): where would you be able to liquidate you position?
Another thing to consider is the seasonal history of the market. The second half of the year, particularly between August and November, has historically been unkind. More market corrections, crashes and general financial misery have taken place during this period.
And of course there is that gnarly issue of the markets overvaluation. Only twice in the past twenty years has the multiple on the S&P 500 been higher. Neither of those times proved to be pleasant for investors.
And finally there are the actions of the United States Federal Reserve to keep in mind. Sure they talk about an interest scenario that could see 3.5% rates next year but that is a while off. In the meantime let the July barbeque sizzle and the craft beer flow- it’s risk on!
It Is Not As Crazy As It Looks
One of the hallmarks of market excess comes not just when prices reach record levels but when investors narrow their focus on one or sometime two sectors. This was the case in 2001 with the Internet bubble.
This is not the case in 2017. Technology has been this year’s leader advancing 15%+, nearly double the general market. However during June, tech stocks fell 5% while the market increased 0.6%. The big name stocks in the group a.k.a. FAANG lost more than $100 billion in value. If investors were narrowly focused, this action would have brought the market down for sure.
Meanwhile, the moribund financial stocks have come to life lately jumping nearly 7% in June. Before that financial stocks represented dead money for almost all of 2017.
Even energy stocks have bounced lately gaining 2.0%+ in June. That still leaves investors in the group holding a 12% loss for the year but this is part of something considered healthy.
When investors move from group to group over time, it’s a signal that perhaps some thought is going into decision making not simply investors chasing mindless greed.
The CBOE Volatility Index, known as the VIX jumped 15% in June after meandering around the 10-12 levels for months. There are many ways of interpreting the VIX but a little volatility after months of going nowhere could be a sign of healthy concern. Obviously this is an important indicator especially if it should continue to spike going into July and August.
Another classic bullish indicator appeared on the first trading day of July. Adherents to Dow Theory watched as both the Dow Industrial and Transportation Averages high record levels. Is Dow Theory relevant in a period of high frequency trading and other competing investment styles? The answer is probably far less so than in the past. Nevertheless, it does confirm a certain investor belief in a balance to the economy and that is healthy.
Whatever your beliefs happen to be, enjoy the prosperity, neither good nor bad lasts for long.