In the last several years, we’ve observed that the summer months tend to go nowhere relative to the rest of the year. Then, near the end of summer, a break-out occurs. This change is often to the down-side and tends to happen quickly. Knowing this historical tendency has played into our reasoning to take a “balanced” approach to investing during the summer months. While that has kept us on the low-growth side of the market, if a fast reversal does occur, we’ll be on the right side of the “safe-or-sorry” equation. And that is our ultimate goal.
Now that Q2 earnings season is winding down, it is interesting to note that we continue to have a divergence between the stock market and corporate earnings: the market has been slowly climbing, while corporate earnings have been slowly shrinking. The result is a rise in the Price/Earnings Ratio of the market. Right now, the Cyclically Adjusted Price-to-Earnings (CAPE) ratio is just below 27 (http://www.multpl.com/shiller-pe/).
What this suggests is: if the stock market keeps climbing and corporate earnings keep declining, the CAPE could rise above 30 in the near future. If this happens, the expected return for the ensuing 10 years (based on historical data) has been near 0%. Not a good sign for traditional buy-and-hold investors. This is why we believe you have to be more active in this type of economic environment.
So what happens next?
In the short-term, we’re still watching the VIX (Volatility Index) for signs of “fear” coming back into the market. For now, the VIX reads on the quiet end of the spectrum. As always, we’re watching this closely as FED chair Janet Yellen speaks this week. If no major market volatility occurs, then we’ll expect more of the same leading up to the November election. That is when we believe things could get really interesting. …stay tuned!
We hope this commentary has been helpful. If you have concerns, please reach out to us so that we can review your personal situation. We are honored to be your advisers, and appreciate the opportunity to answer your questions.