PATTERNS | CROUCH CONNECTION, SEPTEMBER, 2016
“One of the best ways to navigate the stock market is to look for patterns that repeat. There is a tendency for certain action to reoccur, because market players and algorithms make it self-fulfilling. Buying dips is one simple example.”
James “Rev. Shark” DePorre, one of the more insightful market strategy writers, started his column on September 7 (realmoney.thestreet.com) with comments I found to be unusually perceptive. He went on:
“There is a bigger pattern that has occurred a number of times in the past year and we are seeing it once again. The pattern is that the Fed starts making more hawkish comments. Various Fed members appear and start talking about how things are improving and that a rate hike may soon be appropriate. Eventually, Janet Yellen comes out and confirms these hawkish comments, like she just did at Jackson Hole a little over a week ago.
After this setup for a rate hike occurs, we start seeing weak economic reports again. Apparently, the Fed's capacity to predict the strength of the economic recovery is impaired. They were terribly wrong back last December, when they were very anxious to raise rates, and now we've had several weak economic reports in the past week. Jobs news, ISM Services and German industrial production all were disappointing.
The next step in the pattern is that the market rallies because interest rates are not going down. That is what really drives the bears crazy. They can't believe that this market is still willing to celebrate lousy economic news when the central bankers have little ammunition left. These policies have been largely ineffective for six years. We still have not seen any robust economic growth, but equities, commodities and bonds keep running.”
As I write this on September 11, we have recently experienced the consequences of the latest irrational comments by Fed officials. The normally dovish Eric Rosengren, President of the Boston Fed, said in a speech Friday that “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy” (that is “Fed Speak” for raising interest rates). The result was the almost 400-point drop in the Dow Industrials.
Recent patterns would lead us to believe that the Fed would cool their comments and actions as a result of the increased volatility in the markets, followed by a resumption of the market march higher. Should we expect this chain of events to turn out any different than similar patterns over the past several years? We believe probably not.
Granted, there are reasons for concern about our economy. Let’s name a few:
ELECTION JITTERS. Trump supporters are afraid of Hillary Clinton and another 8 years of Democratic policies. Clinton supporters are paranoid of Donald Trump and his promises to undo (maybe too abruptly) all of the Obama policies of the past 8 years (and upset the Wall Street applecart). Uncertainty is never good.
LETHARGIC BUSINESS SPENDING. Business investment in the United States has been anemic recently in spite of record low interest rates, which historically have encouraged business expansion and hiring. Economic uncertainty (heightened by election jitters, the slowdown in oil drilling and the strong dollar) has caused many businesses to behave cautiously and defer spending on new employees and equipment.
SOFTNESS IN RETAIL. Retailers like Dollar General, Genesco and Tractor Supply have recently reported that their customers seem to be under stress and are not spending as freely, particularly on bigger ticket items.
WEAK FARM PRICES (corn, soybean, wheat, beef) seem to be beginning to cool the economy in the Midwest where agriculture is important to the overall economic climate.
AUTO SALES LEVELING OFF. August auto sales fell 4.8%, suggesting that the boost we have been enjoying from robust car and truck sales since the Great Recession may be cooling off. We don’t, however, expect sales to fall significantly, as the average age of the U.S. auto fleet is currently about 11 years old, compared to a recent historical average of about 7.5 years, according to this week’s Federated Investors report.
There are many other things we could mention, both positive and negative, but I believe this list captures the big picture. Remember, we are investing in some carefully selected companies, chosen because we believe their businesses can survive whatever surprises the markets may present. We are always looking for situations that we believe offer attractive returns with modest risk.
“Time is the friend of the wonderful company, the enemy of the mediocre.”
Regardless of all the reasons to be concerned, the all-important employment statistics coming out of Washington are just not consistent with a recession or significant slowdown in the economy, so we believe we need to continue to expect modest economic GROWTH for the foreseeable future. That is a pattern that has been very reliable for many years.
Any opinions are those of Dave Crouch and are not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Past performance does not guarantee future results. This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.