Summer Letter {Part III}

Today we continue with the 3rd installment of our summer letter to our clients originally dated July 25, 2014:

Foreign affairs have often derailed markets and the list of foreign crises or wars that have begun in the summer months is too long to mention.  Markets have a lot on their plate, as there are numerous flashpoints right now.  To name a few: Ukraine {which was a mess even before Malaysian Airlines flight 17 was recently shot down}, Iraq, the current Palestinian-Israeli conflict and the humanitarian immigration crisis on our southern border are all events that could gnaw at markets the longer they go on.  Any event that leads to a large spike in the price of oil would also be of concern to the markets.   Finally we are entering one of the weakest periods for stocks during the calendar year.  I have mentioned many times how the summer season through the early fall has historically been a period of equity underperformance.  Couple that with the upcoming congressional elections this November and you enter into a period of uncertainty, something that markets hate.  Probability suggests the potential for markets to become more volatile as we close into election date or at least until markets derive a reasonable expectation of the coming results. 

These are the primary things that I’m watching.  Of course it’s likely that the event that may give markets a pause isn’t even registering yet on investors radar.  Nobody for example thought at the beginning of the summer in 1990 that Iraq would invade Kuwait.  Or it is possible that stocks have taken all of this into account, discounted the outcomes and nothing will come of any of it.  We’ll have to see.  That’s why we have our indicators.

I would stress that while there may be concerns for markets in the short run, nothing written here takes away from our longer-term view that the risk reward profile for equities remains positive.  It is also possible that the market has already discounted all of these issues and these will not matter as long as earnings continue to grow.  There is much talk today of a bubble in stocks, much as their has been in the past two years, a period where stocks are up something like 60%.  Yet when you take a look at what most people mean when discussing current market prices, in reality they are really talking about market volatility. That CNBC talking head discussing a 10-20% decline in the markets is in essence talking about a pullback in the statistical range for how stocks trade in many years.  They’re not for the most part talking about a significant change of trend that usually leads to a bear market in stocks.  

*Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.