June 2016 Monthly Outlook – “Patience Grasshopper”

I have been practicing one of the rarest commodities in investing  – patience.  I am reminded of the 1970’s TV show Kung Fu starring David Carradine as Caine  – and his sensei Master Po, who frequently told Caine “patience Grasshopper”

The reason I am being patient is that the financial markets have been stuck in a range between 2,000 and 2,100 (basis S&P 500) for almost 2 years.  The S&P 500 first hit the 2,000 level on 8/26/14. Since then it has been as high as 2,135 (5/20/15) and as low as 1,847 (2/11/16) and finished May 2016 at 2,088.  (source: Yahoo Finance)  Despite the declines we saw in October 2014, August & October 2015 and January & February this year, this trading range is rather narrow by historical standards.

June_2016_Monthly_Outlook_1

There have been several other time periods where the financial markets basically went sideways for an extended period of time.  Three periods that stick out are:

  1. During the S&P Secular Bull (dates are approx) 1950-1967, approx 25 months of sideways trend from  Sept 1951 –23.48 to Oct 1953 – 23.97
  2. During the &P Secular Bull (dates are approx) 1950-1967, approx 39 months of sideways trend from Jan 1959 – 55.62 to June 1962 – 55.63
  3. During the S&P Secular Bull (dates are approx) 1979-1999, approx 38 months of sideways  trend from Sept 1987 – 318.70 to Nov 1990 – 315.29

If you are thinking things are much worse now than back then, consider this.  In the 1951-1953 timeframe: 1) the U.S. government seized the steel mills to advert a union strike; 2) Eisenhower was elected and ordered wage controls; and 3) Russia exploded an “H” bomb. The 1959-1962 timeframe was not much better: 1) a U.S. U-2 spy plane was shot down over Russia; 2) Castro seized all of the U.S. oil refineries in Cuba; 3) East Germany built “The Wall;” 4) the U.S. military arrived in Vietnam; and 5) the 1962 President Kennedy steel crisis lopped ~28% off of the stock market in just a few weeks. As for the 1987-1990 time slice: 1) the 1987 crash; 2) 2) Drexel Burnham is charged with insider trading; 3) the Chinese crackdown at Tiananmen Square; 4) hundreds of banks and thrifts become insolvent; 5) Iraq invades Kuwait. So do you really think our problems are all that worse now?!  (source: Raymond James & Associates)

However, you aren’t alone if you have a pessimistic view of the market.  Below is a chart showing investor sentiment as measured by the American Association of Individual Investors (AAII).  As you will see, it is at a low level not seen since January 2009.  Also note that investor sentiment generally is inversely correlated with the market – when sentiment is low the market generally goes up and when sentiment is high the market generally declines. This is why Warren Buffet says “be fearful when people are greedy and be greedy when people are fearful”.

June_2016_Monthly_Outlook_2

I remain cautiously optimistic about the condition of the financial markets and the US economy.  I am not concerned about a potential 0.25% increase in US interest rates, which the Federal Reserve has indicated could come in June or July.  This has been well telegraphed and short-term interest rates would still be below 1%.  Long term interest rates (basis US 10yr Treasury) should continue to stay low due to strong demand from foreign investors looking for safe haven interest (Japan and European government bonds have a negative interest rate). I remain concerned about the global economy, especially China and Europe depending the decision by Great Britain on staying in the Eurozone (vote 6/23/16).

June Calendar of Events   (comments and additions for future months are always welcome)

  • June is National Safety month.  Schools are closing for summer and folks will be outside more so please be mindful on the roads. Perhaps take a first aid or CPR course.

June 14th         Flag Day                  

June 19th         Father’s Day – wishing all father’s, grandfathers, & great grandfathers a wonderful day.

June 20th         Summer begins – let’s see what Mother Nature has in store for us                   

I hope you find this report useful.  Please share it with anyone who you feel would benefit from the information.

 

 

Sources:  Raymond James & Associates, Bespoke Investment Group, Yahoo Finance.

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