Thursday, September 9, 2021

Sell in May and Go Away… Better Slow Your Roll

The title above is one of the most famous sayings on Wall Street.  For the decades that I have been in this business, all I have heard from professional traders is that you sell in May, go to your summer estate, and come back in the fall.  The theory was that in the old days trading stocks from the Hamptons without automation was very difficult and so rather than risk the negative effects of the market, you just sell everything in May and buy back in when you return from holiday.  In this posting, I will show you how big of a mistake that was this year.

I also want to cover some items that I find interesting.  At the current time the economy in the U.S. is slowing and that is a very good thing. Many would be surprised by this, so I will attempt to explain.  Also, I want to revisit the September 11, 2001, terrorist attack which was a scary time for all of us in the U.S., and a particularly scary time for stock market investing.  I want to cover that event to illustrate an important point, which is to be fully invested at all times.  I also want to emphasize the most important thing we as advisors can do on behalf of our clients.  And finally, I want to go over why China is having such a difficult time with the newfound wealth that their entrepreneurs are realizing.  The Chinese government hates income inequality, but maybe this time there are just too many millionaires to overcome their fear.  

CiCi dreaming about money

Before I cover these topics, I wanted to give you the score card for the month of August.  Remember, August, by many, is considered to be one of the worst months for investing.  While the evidence indicates that September has historically been the worst performing month and August second, this past month was quite excellent.  The Standard & Poor’s Index of 500 stocks was up 3% during the month of August and its one-year return is up 31.2%.   The NASDAQ Composite was up 4.1% during the month of August and is up 30.5% for the one-year period then-ended.  The Dow Jones Industrial Average was a lagger this month, up only 1.5% and its one-year performance at 26.8%.  

As a comparison, the Bloomberg Barclays Aggregate Bond Index, was down 0.2% for the month of August and for the one-year period it is also down 0.2%.  As you can see, all the major market indexes were up substantially during the one-year period and the bond index was negative.  You do not have to be a “rocket scientist” to figure out that a 10-year treasury today is paying 1.36% and the rate of inflation may be as high as 4% over the next year.  Even if the rate of inflation is half the projected rate, holding bonds will still give you a negative real return over the next one year.  Given that cash earns you exactly zero and the likelihood that bonds will have a negative rate of return over the next one year, investing in stocks may be the only game in town.  

Every day I hear from new investors who have no interest in investing in the market at all-time highs.  When they express this, I ask them exactly what all-time high they are referring to in the year 2021.  Just for the record, through August 31, 2021, we have had 53 all-time highs on the S&P 500 for the year 2021.  I know it is remarkable, but through 

Reid and Caroline ready 
to take on the world

August we have already generated enough all-time highs to rank 5th over the past century in the terms of record highs.  The record continues to stand at 77 in 1995, yet we are at 54 only through August.  There is a good chance that we will exceed the 1995 record closing.  So when you say that you are unwilling to invest because the markets are sitting at all-time highs, you may be disappointed as the markets continue upward. 

You may also be surprised to learn that the S&P 500 was up 3% during the month of August.  This is its 7th consecutive monthly advance during 2021.  Remember we are only eight months into the  investing year, which means only January was negative for this index.  In the history of American finance, this is only the 15th time this has occurred since 1950.  That is quite a remarkable run and coupled with the outstanding investment year we had in the year 2020, you can see the huge gains that investors sitting in cash have forever forfeited.  

Back to my comments on the title of this posting regarding sitting in cash during the slow summer months, 2021 refutes that argument in a huge way.  If you sold in May and did not return until September, you missed out on three full months.  Just look at the performance of the indexes during that fateful 3-month period.  The S&P 500 index for the last three months was up 8%.  The NASDAQ Composite was up 11.1% for the last three months and the Dow Jones Industrial Average was up 2.9%.  As you can see, the last 90 days were quite satisfying.  I know it seems like every day there is a new crisis to report in the national media, but as you can see, stock market performance continues to move higher notwithstanding the negative news everywhere you look.  I recognize that there are many things to worry about, but at the end of the day financial performance affects stock prices more than sensational news.  

As I have pointed out repeatedly, the most important component to stock prices rising are earnings.  Now we have almost the final tally of the S&P 500’s earnings for the 2nd quarter of 2021.  At the current time, we have 91% of the top 500 stocks in the U.S. reporting and a stunning 89% of those have shown year over year earnings growth.  That kind of earnings recovery hasn’t been seen since the end of the financial crisis in the 4th quarter of 2009.  

Reid excited for his first day 
of kindergarten

I do not want to sound simplistic when I say stocks may be the only game in town, but clearly that might be the case.  With market returns for the last year above 30%, I cannot imagine how investors in cash and bonds must feel.  Over the last one-year period, cash has earned virtually zero and bonds were either zero or negative.  So, in stocks you get a 30% gain and in those other assets you have losses.  It doesn’t seem like there are many other players in the investing world other than stocks.  

As I have emphasized to you, the big difference and change in Wall Street over the last few decades is the absolute tsunami of money that flows into the market daily from 401(k) plans.  No longer do the big cats control the flow of money as there is close to $1 billion a day flowing into the markets from small investors’ 401(k) plans.  This money comes in during good times and bad times and continues to stabilize the market at a higher level.  No longer can the hedge funds distort the market in a big way without suffering major risks of the small investor creating losses.  This change in the flow of money is good for all investors and provides very important stability to the U.S. retirement plans for older employees.  This could be nothing but a positive for those investing in the future.  

I referenced earlier one of the most important functions that we, as advisors, can provide to our clients.  In my opinion, that most important attribute is our ability to keep investors invested during difficult times.  I will explain that further in my analysis of the September 11, 2001, sell-off later in this posting.  But over the last couple of years, it has become self-evident.  In March 2020, we received an avalanche of phone calls from investors wanting to get out of the market. Of course, their fear in 2020 was the damage that the COVID pandemic would have on the economy.  As they called with their fear of the upcoming market, we tried to explain as best we could that they did not realize what the economy would do with an infusion of over $3 trillion from the Federal Reserve.  As we now know, the recession lasted only two months in 2020 (March and April) and at the end of the year the S&P 500 had a total return of 18.4%.  

I have several clients who call me on a regular basis panicking that they want to turn their investments into cash for various reasons, many of which are not economic.  I think my most important role is to try and calm their fears and keep them invested.  When you think about it, over the last 19 years, since 2003, the S&P 500 index has only been down two of those years.  If you calculate that, it’s roughly 10.5% odds of losing money in the S&P 500, but 89.5% odds of making money.  Therefore, you do not have to be a Philadelphia lawyer to understand you are always better invested than not invested.  An even more compelling number is that since 1970, the average rate of return for the S&P 500 has been 10.98% over that time.  Once again, history tells us that you are much better invested than trying to time the market.  If you could get rich timing the market, then you would be on the list of the wealthiest Americans.  As of today, there is not one single market-timer who makes that list.  

Caroline before her first day
 of 2nd grade

There is no question that over the summer months the economy has slowed down.  I am here to tell you that that is nothing but good.  The level we were functioning at in the first quarter of 2021, was just not sustainable.  The U.S. economy cannot grow at 6%+ without major disruptions.  We have seen that since the first of 2021, with the shortage of goods in the supply chain and the over-the-top need for employees to satisfy job positions.  There has been displacement in the automobile construction due to a lack of microchips and, of course, the shortage of construction supplies in the building industry.  The fact that the economy is now slowing will give pause to the Federal Reserve’s perceived need to cut bond purchasing and to increase interest rates.  Just as Federal Reserve chairman Jerome Powell indicated, the increases in prices most assuredly would resolve their own issue as the summer wore on.  The fact that the economy is slow now gives the Federal Reserve time to slowly transition into a more stable economy, earning a GDP more in the range of 4% rather than 6%.  

On Friday, the Federal Reserve of Atlanta reduced its estimate for the growth in the 3rd quarter to 3.7% GDP.  Only the previous day, that estimate was 5.3% growth.  Yes, these are huge moves to the downside, but are warranted by the supply chain issues and the shortage of products in the production cycle.  Also, quite frankly, it has a lot to do with summer vacations and a general slowdown in activity during those months. But I think this is getting ready to move to a higher level come the 4th quarter.  

Finally, this week the supplementary unemployment benefits will end and workers that were on long-term unemployment will be faced with either finding a job or doing without.  In addition, across the country schools are starting and childcare, which was such an enormous issue during COVID, will now decline.  At the current time there are roughly 11 million job openings posted and only 8 million unemployed.  At some point those numbers have to become closer.  

Last week the job report for August was a disappointing one at 235,000 new jobs.  But you must realize that this survey is taken in the middle of August and as we all know, August is a major vacation time up until the time school gets back in session.  But there were whirls of good news in this report that the media seemed to ignore.  For the month of August, unemployment dropped from 5.4% in July to 5.2% in August.  When I was studying economics back in the dark ages, the U.S. economy was considered fully employed at 5%.  We are very close to that level.  

In addition, during the financial boom before COVID, unemployment was around 4% and we are quickly reaching that higher level of employment.  There was also great news for wages in the report.  Wages went up 0.6% in a month and have increased 4.3% from a year ago.  When you consider the number of people employed in the U.S. a 4.3% increase in wages will do a lot to create additional commerce where these people have a discretionary income to support their families.  If you were expecting that I would write that the economy had slowed and that was a bad thing, you do not follow the Federal Reserve’s actions very closely.  In respect to Federal Reserve increasing interest rates, “bad news is always good news” and “good news is always bad news”.  This report very clearly will slow down the Federal Reserve’s action to slow the economy since it is slowing with its own momentum and, more likely than not, any interest rate increases will not be until 2023.  Even though the consensus growth of GDP for the year 2021 is at 6.6% growth, it would not surprise me to see that lowered to a more sustainable and more important growth of 4-5%.  

Fresh air isn’t so bad after all…

This year we will observe the 20th year of the terrorist attack in the United States on September 11, 2001.  I watched several features over the last week about September 11th on Netflix and Apple TV that were quite excellent.  If you do not remember the sense of terror we all felt on that day, I recommend you go back and watch these specials to reflect the anxiety and fear we all experienced.  

Many do not remember that the attacks were on a Tuesday around 9:00 am.  The stock market was just getting cranked up when the full impact of the terrorist attack was realized.  In fact, the New York Stock Exchange was within the shadow of the World Trade Center and many feared that the U.S. Stock Exchange would be damaged or destroyed when the two towers fell on that fateful day.  I vividly remember watching the second plane strike the second tower in my office at Colony Square.  Within the hour security guards came to our suite and told us to evacuate the building given the unknown nature of the attacks.  I thought to myself, if they are abandoning a B-rated office building in Atlanta over the attacks in New York City, we must really be in trouble.  I went home like most Americans and watched continuous television for hours before finally going to bed. 

It was a foregone conclusion the next day when the U.S. Stock Exchange could not open due to the damage in the building.  In fact, never in the history of the New York Stock Exchange had it been closed four continuous days, and it looked like this would be the first time this would happen.  We received an enormous avalanche of phone calls expressing outright fear and a desire to liquidate as quickly as possible.  I think we did our best work in convincing our clients that as horrible and as devastating as this attack was it was likely to be short lived.  This was a prime example of my philosophy of staying invested at all times.

On September 10, 2011, the Dow Jones Industrial Average closed at 9,605.51.  After finally opening six days later, the market bottomed on September 21st at 8,235.81 suffering a 15% decline in the 10 days after the attack.  I vividly recall the market swinging at hundreds of points a day during this sell-off.  A 100 point drop today is not as near important as 100 points were during 2001.  However, with the Federal Reserve’s help the market was stable even though it was highly volatile.

Do you realize how long it took for the market to fully recover after this sell off?  Exactly 90 days - after the September 11, 2001 attack, the Dow Jones Industrial Average closed up 9,888.37 for a 1% gain form the day preceding the attack.  If you sold into this sell-off, you clearly would have done a disservice to your investments. What was even better news on March 11th, exactly six months after the terrorist attacks, the market closed at 10,611.24 which was exactly a 10% gain from the day preceding the attacks.  Therefore, in the intervening six months after the worst terrorist attack ever on American soil, the Dow Jones Industrial Average had increased 10% over the levels preceding the attack. 

For Ava, the sky’s the limit!

Having been in this business for nearly five decades, I have seen many selloffs and many recoveries.  If you think about it just for a second, the day after the markets opened after the September 11th attack, the market closed the Dow Jones Industrial Average at 8,235.  Today that same index is 35,369 which means it has gained 368% in the intervening 20 years.  If you had stayed invested during that entire time, your portfolio would have increased almost four times the September 11th value.  

There has been a lot of publicity and questions by U.S. investors as to what is going on in China and their crackdown on some of their most high-profile companies.  Do not believe for a second that China is not a communist economy.  It is absolutely true that the government in China is controlled by the communist party, but their economy is clearly the second most powerful in the world.  What has developed over the last 40 years is an economy in China that is growing exponentially and correspondingly adding millions into the middle class.  Anytime you read statistics about the Chinese economy, you need to think that in the United States we have 330 million people, but China has 1.4 billion people.  Therefore, everything they do would need to be almost four times greater than the United States to be in a comparable basis.  But what has happened to the economy is very much hated by the communist government.  As you know one of the bedrock philosophies of communism is that everybody would be treated equally and there will be no winners or losers in that economic race.  Because of the newfound wealth of the Chinese companies, multibillionaires are being created on a regular basis.

The Chinese government now has decided that they have seen enough prosperity with their entrepreneurs, and they are anxious to get back involved in these businesses so they can ensure their wealth.  They recently shutdown an IPO of Jack Ma for no other good reason other than this IPO would have created too much wealth in one person’s hands.  Interestingly, Jack Ma has not been in the public eye since the Chinese government pulled the plug on this IPO for him.  

Chinese government has been coming out against cryptocurrency in every form or fashion.  They have shut down the miners of cryptocurrency and have closed down any exchange that allows for the trading of it.  The reason for this is very clear. One of the major advantages for those illegally moving money is cryptocurrency does not leave any audible trail.  Therefore, the Chinese government cannot control the movement of cryptocurrency exporting China into the United States, etc.  Rather than try to fight the trend it is easier to outlaw the trade, making it nearly impossible for those wanting to transfer funds out of China and into overseas markets.  

Elizabeth Flores’ three-legged pup
 smiling big for the camera

In recent weeks, the Chinese government has attacked some of the best-known industries in the world located in China.  They have basically shutdown the Uber of China and have placed enormous restrictions on any internet-based company located in China.  As you know, many of the U.S. based internet companies are forbidden by the Chinese government to operate there.  

It is pretty clear to me that the Chinese government is scrambling to regain control of their industries from the American securities markets.  Shortly after the Chinese version of Uber went public, the Chinese government moved in and essentially shut it down since they were forced to remove their app from further use by consumers.  Shortly after the IPO in the United States, the stock dropped close to over 40% and would you be surprised to know, after that drop the Chinese government agreed to invest in that company.  What is clear is that the Chinese government will do whatever necessary to ensure that individuals are not more powerful than the government.

As we enter September, which historically is the worst month of the year, you need to reflect on the fact that we have had seven straight positive months in the S&P 500.  This unprecedented run after the banner investment year of 2020 has left the S&P 500 almost 40% higher from when it began in January 2020.  While I do not expect that the market will move dramatically higher immediately, I do expect that the market will trade higher by the end of this year than it is today.  While it would not be a straight line up, I believe the market will grind on a slow basis with high volatility throughout the rest of the year.  As pointed out above, even with the extraordinary volatility, an investor is always better of being invested than not. 

As always, the above comments are based on my personal research and opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins