The stock markets enjoyed its own brand of fireworks this week. Stocks edged higher, with the Dow almost touching another all-time high of 17,000. You just can’t keep a good market down.
Traditionally, it is a good week anyway for stocks. Given the holiday, the markets were only open three and a half days, but that was enough to push the averages close to their upper-most levels. As the June quarter ended, the S&P 500 Index was up 4.7%, which is its sixth straight quarterly gain. NASDAQ ended with a 3.9% pop and the Dow finished the quarter up 2.4%.
When investors return from the long weekend, they will be facing earnings season once again. A lot rides on how well companies did during the second quarter. There will be no weather-related excuses this time and management’s future guidance on profits and sales will be just as crucial as earnings. Since the middle to the end of July is usually the weakest time of the month, earnings better be good or traders may be tempted to do a little profit-taking.
Earlier in the year, I had mentioned that every mid-term election year since the Fifties has seen the market pullback in the spring and summer. This year, so far, has been the exception to that trend. However, in two of those mid-term election years (1990 and again in 1998) the markets did not begin to decline until July 16th and 17th. Both of those corrections were almost 20%.
That does not mean that we can expect a serious sell-off this month. Given the track record of this market, I am not about to predict such an event. Yet, markets go up until they don’t, so don’t get too complacent along with the rest of the crowd. Complacency is rife among investors today. That is usually the time canny investors are most alert for sudden changes.
One only needs to look at the geopolitical map to see how truly sanguine American investors have become. Two months ago, this week’s actions by the newly-elected Ukrainian government to launch an all-out offensive against Russian-backed separatists would have at least given world markets a pause. Few even mentioned this development.
The Iraqi situation continues to smolder. In the last three weeks, the Sunni uprising has occupied almost half the country and has spread to the borders of Syria and Jordan. With the government in disarray, the U.S. and its allies are hoping that a change in government might create the solidarity necessary to confront the uprising. Yet, the opening session of Iraq’s new parliament ended in walk-outs and complete disarray. The price of oil barely registered the event.
One client remarked to me that “we are in a “goldilocks” market. “ It was the term many investors and market pundits used to describe the market’s ascent in 2007-2008. The economy was neither too hot, nor too cold and investors at the time took that to mean they could buy stocks with impunity. For months the averages registered record highs after record highs. Euphoria, greed and complacency vied for first place among the traders on Wall Street. Sadly, it all came tumbling down over the next year and a half. Hopefully, investors have learned from their mistakes.