Streetwise
Lauren Rudd
Sunday, July 6,
2008
It's Summer Time Once Again
"Forecasts are difficult to make...particularly about the
future." Samuel Goldwyn.
It is summertime once again and although the calendar says
that summer officially started a few days ago, for many of us the season kicks
off with the celebration of Independence Day. Depending on your preferences,
July 4 can mean the official start of the beach and barbecue season, while
others view it as a time for a well earned vacation.
Regardless of how you welcome the summer season, each year at
this time everyone is asking the same question...will the stock market will
treat us to a summer rally? Summer rally...heck if the markets would just escape
the jaws of the bear chances are most investors would be waving flags and
jumping up and down. Of course that would be a summer rally.
So what is the likelihood of a summer rally? Statistically,
71 years of data show July as being the best month for stock prices in terms of
percentage gain. Furthermore, the Dow has rallied during 57 of the past 63
summers. Of course, if you subscribe to the theory that the stock market
represents a series of independent events, then a rally has exactly the same
statistical probability as no rally. Nonetheless, many long-time observers of
the stock market are willing to concede that there are certain seasonal
tendencies.
The other side of the coin is that Wall Street is considered
to be a forward looking indicator for the economy. In that case you could
rightfully argue that the road ahead may have a few potholes. For example, a
continuing rise in oil prices could easily upset the apple cart.
Meanwhile, many on Wall Street are hoping that the market’s
recent decline reflects the third low in what stock market technicians call a
"triple bottom," a pattern of three lows, to be followed by a rally. The S&P 500
index fell below the 1,280 this year in January, March, and now again in June.
However, the pessimists are saying that the market's recent
turmoil represents the start of a bear market, which is often calculated to be a
drop of 20 percent from the last peak. All three major equity indexes are near,
or at that point.
On the energy front, it was understood a year ago that the
price of oil was rising. Yet, most prognosticators did not expect crude would
surpass $140 per barrel, this column excepted. At the same time, the National
Association of Realtors has been preaching that better times are right around
the corner. And when banks said the worst of the credit crunch was behind them
in January, and then again in April, many were willing to believe them. Oh, for
shame.
Warren Buffett and George Soros have been vocal about how bad
the current downturn will be. Now, Eli Broad, one of the richest men in America,
has added his voice, stating that is the worst economic period of his lifetime.
He does not think the housing market will recover for years and sees a sharp
rise in unemployment. Ever wonder how billionaires became billionaires?
The Dow ended last quarter with an overall loss of 912
points, or 7.4 percent. It was the third straight quarterly decline and the
worst second quarter since 2002.
Moreover, if earnings matter there is trouble ahead. The
current thought is that second quarter earnings of the S&P 500 companies will
fall 11 percent, led by a 60 percent drop in financial-sector earnings.
That aside, it is our old nemesis the inflation genie that
will determine our fate going forward. More specifically, the aggressiveness of
the Fed’s stance on inflation will be a key factor in market performance over
the next 12 months.
Still the market’s overall performance is not the key
determinant of how your portfolio performs. While it may be easier to select
stocks in a rising market, there are always profitable investment opportunities
available. Nest week we will take up the subject once again.
