Summer Winds Down, Markets Wind Up

 
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By Miles Clyne

Summer holidays are over. Everyone is getting their heads back into work as we get closer to the last quarter of the year. Thanksgiving and Halloween are around the corner, be wary of some factors that may spook you about your investments going into fall.

Historically mid-August to mid-October have been the weakest and more volatile times of the year for investing. We won’t hear much about corporate profits during this time frame as next reporting period is in about six weeks. But there is no shortage of political and other economic events that could impact markets both positively or negatively.

This is a big week: US Manufacturing PMI was positive, Construction spending was weak, and non-farm payrolls are due out on Friday. We will also get Canada’s employment numbers on Friday. This talking head expects decent employment numbers in both the US and Canada.  In Canada, interest rates remained steady and trade deficit was reasonable. So far so good.

Globally, we have yet to hear on NAFTA or it’s incarnation and US and China trade issues. Argentina, Turkey and South Africa remain very unsettled. Throw in US midterm elections and we have a reasonable basket of uncertainty which adds to market risks during these next six weeks, regardless of the positive economic conditions for us at home in Canada.

Other short-term factor in the market; summer driving season winds down and we see gasoline prices falling, which is to be expected. We are also heading into hurricane season, which may impact oil and natural gas prices.  Once again, the weather gods will spite or give respite to energy.  We’ll know in 8 or 10 weeks.

History tells us at this time of year to keep our seat belts buckled up. The reality of this being another year of uncertainty appears to be all but certain. The Canadian and US equity markets continue to diverge at the time of this writing, with the TSX Composite -1.04% in August, bringing the index to virtually breakeven on a year-to-date basis (+0.33%).  The S&P 500, on the other hand, celebrated its longest bull run in history with a return of +3.03% in August, and is now +8.52% on a year-to-date basis.  As strong as the US market has been this year, the gains are narrowly focused, with the returns being driven significantly by the FAANG stocks, 2 of which (Apple and Amazon) have now reached the trillion $ market cap threshold.
 
The Canadian bond market returned to the positive, with the FTSE Canada Bond Universe Index +0.75% in August, bringing it slightly above breakeven (+0.63%) on a year-to-date basis. Unless you were overconcentrated in the US your investments likely haven’t produced a whole lot of returns. The volatility across multiple asset classes and sectors have added to the challenges of finding something that has worked.

The key to having long term investment success is sticking to strategies that have delivered more consistently, in spite of the chaos that tempts us from intelligent processes at various times. A reasonable solution to gain peace of mind is to see how these strategies performed in periods where the markets have actually suffered material losses.  If you are OK with how they performed, likely you can stop questioning the strategy when your emotions are telling you one thing, but the evidence tells you something else.