There is an old saying that we have written about before that says, “Sell in May and go away”. This seasonal bias suggests being more conservative in the summer months and get back in for Trick or Treats in October. The data is generally supportive of this, but there are times that the data is wrong and this past May was one of them. Broad indexes were generally better in the face of a litany of noise that continues out there.
Where are we now and what are we looking at?
Right now, the markets appear to be on a decent footing – not great, but decent. With the markets continuing their recent strength, our tactical indicators kept us mostly involved. This has left us with “risk on, but watchful” as we move through June. We recognize that investors are struggling with where we are in this unconventional cycle, reconciling near-term data that suggests no fear of an imminent recession while recognizing that we are long in the tooth for this bull run. While we have held the view for some time that markets were late-cycle, expensive and overbought, the combination of the market pullback and strong recent earnings has left valuations considerably more reasonable but not cheap. While we still believe we are late-cycle, we are probably not “end of cycle”, and this market may yet have another leg higher over the balance of the year. However, let’s not forget the noise.
Here are some things we continue to monitor:
- Italian “debt” is a problem. While it was quickly dismissed by the markets, the potential impact to the global financial system magnitudes larger than Greece.
- The elected officials in both Spain and Italy are not particularly “EU” friendly with both recent appointments primarily anti-establishment officials.
- Deutsche Bank is a major issue of concern.
- The Fed is raising interest rates and reducing their balance sheet.
- Short-term interest rates are rising rapidly.
- The yield curve continues to flatten and risks inverting.
- Credit growth continues to slow suggesting weaker consumption and leads recessions
- The ECB has started tapering its QE program.
- Global growth, especially in Europe, is showing signs of stalling.
- Domestic growth has weakened.
- While EPS growth has been strong, year-over-year comparisons will become challenging.
- Rising interest rates are beginning to challenge the equity valuation story.
Okay, let’s take a breath. This story is not too different than other periods of time – there is always something to worry about. Our comfort comes from the fact that we continue to monitor many factors and stick to the rules and let the data tell the story.
Housing and Inflation
Did the Big Mac get more expensive or did it just become smaller? I can say for sure and for certain it is no longer BIG! Some time ago we blogged about the price of lumber and what impact it may have on house prices and/or affordability. The data tells part of the story of more expensive homes. The chart below shows the generic lumber price over the past 5 years. This basically is the cost of a lot of 2x4s – the ones used in building homes.
Source: VIP Wealth Solutions & Bloomberg
Is this inflationary? Likely somewhat. An on the ground conversation the other day with an electrician basically suggested that he has never charged more for his services and never paid less for labour and supplies. Now maybe he was just chewing the fat, but perhaps there is some truth in his statements. If there is a thread of truth in it combined with other data, it would suggest there is some inflation on the horizon or here already.
Summer is just around the corner!
We sourced this information from Web MD, so we assume there is some merit to the advice:
8 Tips to Avoid Summer Bummers
- Make Yourself Unattractive – To insects, that is. Scented soaps, perfumes, and hair sprays can attract mosquitoes and other biting bugs.
- Use the 20-Minute Rule – Drink water at least every 20 minutes. To prevent heat stress and heat stroke, adults and children should stay hydrated when outside on hot and humid days.
- Play It Safe – At the playground, take a good look at the equipment. It should be in good shape. Rotted or worn out woods and plastic can have sharp edges and points that could scrape or cause eye injuries.
- Stay Street Legal – Before you head out on a family bike ride, you might want to check on your local laws, says Lee Uehara, the education manager of City Bike Coach in New York. “For example, in some towns, it’s illegal to ride with passengers under 1 year of age.” And of course, make sure everyone straps on a helmet.
- Scan for Bad Plants – Learn to recognize poison ivy and poison oak, and steer clear. You should also know about other poisonous plants like nightshade, says Carolyn Dean, MD, ND, author of Kids' Health: A Doctor's Guide for Parents.
- Big Adventure? Brag About It – Tell someone where you’re going and when you expect to be back. Someone needs to know where you plan to be, just in case.
- Be a Hero, the Right Way – If you see someone struggling in a pool or lake, you’ll naturally want to help them. But it’s dangerous for you to jump in. “It’s more likely that the panicked victim will pull the would-be rescuer under the water with them than it is for the rescuer to save the victim,” Clifton says. Instead, throw a Coast Guard approved flotation device for the person in the water or use a pole to reach them.
- Go Broad – Use a “broad-spectrum” sunscreen. “That means it will screen out both UVB and UVA rays,” Fagan says. You need it even if it’s not a blazing hot sunny day.
Thank you for reading and enjoy a safe and healthy summer.
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