Xanax in the Financial Markets?

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Xanax is a prescription drug that helps with anxiety and depression. It can help calm someone who is anxious or worried. I suspect the US financial markets have been taking big doses of this drug since the Brexit vote in England back in June. Per a news story in Barron’s, the S&P 500 has gone 40 straight trading sessions and counting without so much as a move of 1% up or down. That is a very long time for the markets to be so calm. By comparison, in the first 35 trading sessions of this year (January and into early February), the market had moved 1% up or down 30 times, per Ned Davis Research. It would be more exciting to write about my summer vacation than the stock market in July and August. (FYI, we went to Hilton Head, SC, again and had a great time.)

How long can this calm last? Is this the proverbial “calm before the storm?” Certainly that is what we are trying to decipher as we look at all the portfolios for which we are responsible and attempt to position them to prosper in an economy with very little yield (on the bond side) and very little growth (on the stock side). Some of you might be thinking: I know interest rates are really low, but how can you complain about low growth when the media is reporting record highs in the stock markets almost daily? Please remember, almost all journalists, even business reporters, went to journalism school and do not have MBAs in finance. They want flashy headlines and stories. “New Highs” fit that storyline and, technically, they are correct. However, it is not the full story. Yes, we are at new highs. From the early market selloff in 2016, the broad stock markets are up 15%. However, from the last all-time market high back in mid-2015, we are up only 2%. So, if you are wondering why all this talk of new highs has not translated into a substantial increase in your account value, it is because we have not had a substantial increase in stock values. The stock markets have had a slow, extended climb. This climb was paired with occasional brief periods of panic early in the year and around the Brexit vote. The market must have forgotten to take its anxiety pills on those days.

I doubt this calm will survive the last four months of 2016. Most important to the short-term direction of the financial markets, we have considerable debate about when the next interest rate increase will come from the Federal Reserve. Until August’s employment numbers came in just a tad soft, some felt the next hike in rates might be in September. Now, many Fed watchers think they will wait until December to pull the trigger on another increase. This would be one year after their first increase and it also would be after the presidential election so they cannot be blamed for having any impact on the outcome of the race. At this point, I think a September increase would qualify as a decent surprise and could certainly shake the stock markets’ tranquility. The event with long-term consequences that faces the financial markets is the presidential election in early November. At this point the two main candidates have very different economic policies. The winner will have to get those passed through the House and Senate to change anything and that may take a long time. The true impact of any new president or election cycle normally plays out over years. It is unwise to make big portfolio adjustments, regardless of whom you favor or hate in this election. We will have plenty of time to make long-term adjustments after the race is decided.

We at Bill Few Associates are working to analyze some short-term adjustments that we might make to our bond offerings. We are weighing the risks of Fed tightening with the possibility of an economic slowdown. Certain bond categories react differently to increasing interest rates and we want to be sure we have the right mix. We will communicate those changes when they are finalized.

As this calm and blissful summer comes to an end, we are carefully monitoring the financial markets and preparing for a return to some normal levels of volatility in the last third of 2016. Financial markets are typically much more volatile than what we have experienced recently. It may not be a comforting thought, but let’s get ready for stock markets to slam open and shut like kids open and close the refrigerator door. That type of frequent, abrupt movement is more typical of active, healthy stock markets. As always, please contact your financial advisor with any questions, concerns or changes in your financial world. Thanks, Mike.

Mike Kauffelt
Chief Investment Officer
Bill Few Associates, Inc.

 

Contact Michael K. Kauffelt, II, CFA

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