The Dog Days of Summer

As families prepare for their kids to return to school, financial advisors are preparing for the always entertaining months of August and September.  August used to be the best stock market month for the Dow and S&P 500 up until 1951 because farmers would have just completed their summer harvest and money was flowing into the economy.  Now farming makes up a much smaller component of our nation’s GDP.  From 1951 to present, the month of August has historically been the worst month for the Dow and S&P 500 and the second worst for the NASDAQ.1

We may be in line for another soft August and September.  See the chart below and you’ll see that the S&P 500 has been moving in a sideways pattern since late February of this year.  Every couple of weeks we test our new highs only to retreat back to lower levels of support.  This consolidation is healthy for a stock market as short-term weakness is often required to continue an upward trend.  We still feel comfortable that the intermediate and long-term trends are positive for domestic markets, but we are closely monitoring the markets for larger movements that may adversely affect our clients.

S&P 500 Chart

Give Way to Higher Rates.  The Federal Reserve looks poised to raise rates in September unless something drastic occurs between now and when the meetings occur September 16th - 17th.  As we have heard the past couple of years, the value of bonds move in the opposite direction of interest rates so when rates rise the existing bonds are expected to lose value.  We have continued to review our bond portfolios to ensure they offer a relatively short duration, because the lower the duration of the bond portfolio, the less sensitivity that portfolio will have to rising rates.

Just like a short-term loss in equity markets, we feel that rising rates will ultimately be healthy as yields on U.S. bonds are lower than fair market value and have been held low due to Federal Reserve policy.  Goldman Sachs recently printed an article that suggested the fair market value of 10 year government bond yields is just north of 3%.  As of this writing, the yield on 10 year U.S. Treasury bonds is closer to 2 1/8%.  Higher yields will mean a stronger dollar which leads to the next point:

Value still exists in Europe and other Global Markets. Tony wrote positively about Europe in last month’s commentary and it’s worth noting again that value still exists in Europe and potentially more so than the U.S.  As global interest rates remain low while U.S. rates begin to rise, we will experience a strengthening dollar which will make goods and services produced overseas cheaper for U.S. consumption.  This should, in turn, strengthen the financial outlook of foreign businesses that have been hit hard by the struggles in Europe and China. 

Let’s Go Royals!

Support the Boys in Blue.  This would be a terribly boring update if I had to talk about the stock market the entire time so I wanted to provide a quick preview of some of the fun and quirky special events our FIRST PLACE Kansas City Royals have planned for the month of August:

Royals BobbleheadSaturday, August 8th:  Huskers Night.

Sunday, August 9th:  STAR WARS Day. 

You can purchase a special ticket package for STAR WARS Day and receive a Jedi Alex Gordon Bobblehead (see left).  This may be the most anticipated and highly awkward Royals game in recent memory as fans are encouraged to dress as their favorite character.

Sunday, August 16th:  Cruise to the K. 

This is the 6th Annual Cruise to the K Class Car Show and Exhibit.

Sunday, August 16th:  KU Night. 

I am sure that most of our clients will be looking forward to this exciting night.  Purchase special tickets online and receive a limited edition crimson & blue KC Royals KU Cap.  Sandra Moeller is especially excited about this game.

In closing, thank you for taking the time to read my first commentary for the firm.  This has been a great week for Integrity Advisory as Tony and family are enjoying themselves in Colorado and we say thank you and goodbye to Mike Odenwald who was our summer intern.  Mike was working on some very exciting projects that we will be introducing to you in the coming months that will hopefully help you understand, organize and prioritize your financial risks and objectives.

In the short term, we may see continued weakness in the domestic equity and bond markets.  As stated before, we believe this is healthy for the markets and ultimately required if we want to see intermediate and long-term equity trends moving up.  If you have questions about the market or how you are positioned in your account please do not hesitate to give us a call.

Quotes 

"Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.”

                   Warren Buffett

"Ah, summer, what power you have to make us suffer and like it."

                   Russell Bakerwith

Quotes selected by the IAG staff

"A man should always consider how much he has more than he wants."

                   Joseph Addison

"Remember that children, marriages, and flower gardens reflect the kind of care they get."

                   H. Jackson Brown, Jr.

“Baseball is a lot like life. It’s a day-to-day existence, full of ups and downs. You make the most of your opportunities in baseball as you do in life.”

                   Ernie Harwell

Matt Ahrens

At the time of publication Matt Ahrens held positions in the following relevant positions:  PowerShares US Dollar Index Bullish Fund (Ticker: UUP).  The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on. Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

1 Source:  Stock Trader’s Almanac

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