I have heard a lot of complaints this summer about the heat and humidity here in Atlanta. Every time I do and just laugh and wonder if they forgot what summer in Atlanta feels like? It is understandable as we have had multiple mild summers in a row, but this summer we are back to normal, which for Atlanta means 90 degrees, 90 percent humidity, and a thunderstorm every evening. This isn’t the best time of year to be in the ATL.
We seem to be getting back to normal in the markets as well. The old saying used to be that traders should “sell in May and go away.” That isn’t because summers are always negative, it is because summer is much nicer in the Hamptons than it is in Manhattan, not to mention Atlanta. The serious traders historically would take their profits in May and spend them on the beaches of Long Island, then return in time to get the kids back in school after Labor Day. As a result, volumes would go down during the summer and only the amateurs, and/or people who had no choice, would buy or sell any stocks. When that happens, we get strange nonsensical movements that most often correct themselves once the professionals return from summer vacation.
This summer that has meant the market has flip-flopped from the so-called Magnificent Seven stocks being the only thing working, to everything but the Magnificent Seven working. This bipolar action has been attributed to everything from Fed Policy to the presidential election. With Fed policy, the idea is that when the Fed lowers interest rates, if they actually do, then the economy will be stimulated and stocks other than the artificial intelligence (AI)-driven Magnificent Seven will rebound, especially small company stocks that are thought to be more sensitive to overall economic activity.
On the other hand, if it appears that the Fed may wait longer to lower rates, then the Magnificent Seven zoom ahead as they will grow with the AI movement and regardless of the overall economy. Similarly, there is a thought that another Trump administration would be good for economic growth while being bad for international trade, so smaller companies will do well while the big technology multinationals will be hurt by trade restrictions.
When President Biden dropped out of the race, the same people said, “Hold on.” Kamala would be good for the status quo, which would mean slower growth and more regulation. That means the big multinationals will be winners and the small companies will be losers.
Both sets of “experts” are fooled by randomness. As author Nassim Taleb pointed out in “Fooled by Randomness,” markets move randomly and then the professional pundit class searches for an explanation. Frankly, I don’t buy either of those explanations. I think it is as simple as we are finally having a normal summer.
In the meantime, prudent investors don’t try to trade anyway. We can enjoy our summertime, knowing what we own and why we own it. We are owners of companies not traders of stock, and the real world in which companies actually operate is doing pretty well. The initial reading for GDP for the second quarter came in at 2.8 percent. According to data from FactSet, with 41 percent of S&P 500 companies having reported their second quarter results, 78 percent have beaten estimates for earnings. The blended rate of growth of earnings, which includes actual earnings for those who have reported and estimates for those who have not, is 9.8 percent as of July 26. That is pretty solid growth.
Having said that, it is summertime and markets have been very strong year to date, but some short-term volatility should be expected and we might even get a short correction. There will be plenty of things for pundits to blame it on – elections, Fed policy, and global tensions all provide plenty of fodder for the pundit class. In the meantime, we should remember that prudent investing is done from the bottom-up. It is much easier to analyze the future of a specific company than it is to estimate the economic consequences of lower interest rates or one administration versus another.
Regardless of all of that noise, people will adopt AI. Smartphones will be purchased and used, as will groceries and clothes. People will still go on vacation, especially over the summer. Four years after the pandemic we continue to move closer and closer to normal. There are crowds at the Olympics, it is hot and humid in Atlanta, the Braves are already starting to choke down the stretch, and the market is being silly. Welcome back to normal.
Warm regards,
Chuck Osborne, CFA
Managing Director
