We’re coming up on the “summer doldrum” phenomenon whereby the stock market offers a long history of a downdraft at some point over the summer months. A quick look at a graph of the S&P 500’s last 10 years illustrates that the market experienced a correction every year, starting in 2009, at some point between July and the end of September. It hasn’t happened this year yet, but you just wait.
The last time I wrote about the doldrums was in July of 2010. Greece had imploded and the BP oil spill was upon us.
When unexpected events weigh on stocks during the summer doldrums, the effects can be magnified while trading volumes are low.
If I had to pick the so-called “black swan event,” meaning something unpredictable that happens out of the blue, I would bet that it will probably arise out of the political acrimony that has hobbled our government since the election. Our president and his Republican Congress have yet to face an actual crisis, so we don’t know how they will react to a real problem coming out of left field. What we’ve seen in the first six months, however, is not very confidence-inspiring.
My personal anxiety was alleviated, just slightly, by Jeff Sommer’s article in the New York Times describing the “Partisan Conflict Index” maintained by the Federal Reserve. It is an index that actually measures the extent to which political factions are at each others’ throats — with records going back to 1891. Suffice it to say, the index is at an all-time high right now as measured by the frequency of “newspaper articles reporting lawmakers’ disagreement about policy.”
But the stock market doesn’t seem to care. The more outrageous the behavior in Washington, the more stock prices manage to climb. The only explanation I can offer for this dichotomy is the long-established fact that business does better when there is no change. The stalemate in the nation’s capital offers a clearer glimpse into the future than one promising all kinds of changes — regardless of how giddy business owners might be at the thought of changes like lower taxes. In short, the stock market likes gridlock.
What could change the dynamic, of course, would be an unforeseen crisis and its impact on a dysfunctional government. If this happened during the summer when the market already tends to be unusually delicate, the result would be a greater loss.
The Times article goes on to throw in everything but the kitchen sink as it points out the impact of investor sentiment, whereby negative sentiment offset by strong earnings usually causes stocks to rise. Also, low interest rates offset partisan conflict.
In the end, there’s nothing to really learn about the future of stock values as a result of monitoring the partisan index. By itself, the index depicts the level of government dysfunction and this, in turn, leads to gridlock, which we know is good for the stock market. However, there are too many other components in the matrix of influences that determine future stock prices. This explains the counterintuitive upward move of stocks in the face of what could be a government shutdown.
In the end, lumping these influences together is what I would term as financial entertainment. What’s real, of course, is the reality of the unpredictable situation in Washington and the effect that it can eventually have on asset values.
Combined with the summer doldrums, which may hit sooner or later, this might be a time to take a few chips off the table from some winning investments and add that money to a few relative laggards to date that would nonetheless show more promise in a downturn. Large-cap value funds investing in companies that pay dividends come to mind.
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