Like stepping on a pop top and blowing out a flip-flop, the stock market’s so-called “summer doldrums” are an all-too-common nuisance factor for those who need instant gratification and who hate to be inconvenienced. The fact is, since 1926 the stock market’s average gains from May to October have been half of what the remaining six months have generated. Downdrafts, when they have happened, tend to have occurred more often during the summer.
In simple arithmetic, this means that a market gaining roughly 10 percent per year will enjoy about 3 percent from May to October and 7 percent from November through April. So here we are with Apple having just reported revenue gains of 33 percent over the past year’s quarter and a 45 percent gain in earnings, and what does the stock do? It steps on a pop top and drops 11 percent.
Another darling of the market, Keurig Green Mountain Coffee, has dropped 62 percent since the beginning of the year.
As for Green Mountain, I would like to think that their report of reduced revenue has something to do with the comment from the inventor of those ubiquitous plastic single-cup throwaway coffee modules piling up on our landfills, oceans and beaches. He was recently quoted as saying he wishes he had never invented them. Amen.
But getting back to the doldrums, the total stock market had been flat for the year as of July 8, but it has gained about 2 percent over the past several weeks. We are now participating in the third longest bull market of the past 80 years, so someone lying on a beach and thinking about their 401(k) and IRA rollover accounts can be excused for considering the possibility that what went up may be coming down. And indeed, the markets did drop midweek.
The forces operating to cause a downdraft are varied, but some that come to mind based on media reports include the increase in short selling, stock investors searching for better results than interest on bonds, and turbulence in China, to mention just a few that are of no consequence to the buy-and-hold long-term investor.
Setting bubbles aside, major stock market declines tend to take place when there is no more cash on the sidelines to fuel additional demand for stocks. We are certainly not in that situation today, as world cash reserves are at an all-time high. This condition, regardless of what the Federal Reserve decides, is the engine that will prompt low rates to persist which, in turn, will support corporate profits and a growing economy.
A simple technique for avoiding the need to second-guess the future is to simply assume, for the moment, your stocks are worth about 15 percent less than what the statements show them to be today. That last 15 percent is just a gift of circumstance anyway. Adjust your mindset to be comfortable with what would have been a more normal outcome rather than confusing brain with a bull market. If you feel like trying to time the market, it’s a convenient month to go lie on the beach until the feeling goes away.
Steve Butler can be reached at 925-956-0505, ext. 228, or sbutler@pensiondynamics.com.
