Author’s note: It is difficult to write a weekly note on investing against the background of the tragic events we witnessed this week. Our hearts are with everyone impacted.
We’re heading into Memorial Day weekend, the unofficial kickoff of summer.
Time to close our computers, flip on our out-of-offices, and head to the beach for some much-needed rest and relaxation.
Or…not? The US economy may be tipping into recession, the Fed is meeting twice before September, earnings season is coming up, and Elon is still fighting with Twitter.
Recently, hotter temperatures and lower volumes have led to the markets gliding higher in the summer months. But this year, is it really the best time to tune out to the sound of the ocean?
High temperatures, low volume
The period between Memorial Day and Labor Day has historically been one of the S&P 500’s weakest stretches of the year, plagued by directionless markets and unexpected selloffs. We could blame it on low volume and random headlines that catch a smaller group of attentive investors off-guard.
Lately, stocks and crypto have bucked the summer trend. The S&P 500 has climbed for six straight summers, while Bitcoin has risen in five out of the last six. In the last two years, the summer months offered a bit of respite after a wild start to the year.
A break from the madness would be nice this year, but don’t count on it just yet. In the past two weeks, the market has flipped from inflation worries to recession worries, after a string of bad retailer earnings and disappointing data. The market’s calendar doesn’t slow down over the next few months, either. There are two Fed meetings, a full earnings season, three jobs reports, and the Fed’s annual Jackson Hole symposium (with lots of speakers!) between now and Labor Day.
Low volumes could make this summer especially difficult to manage, too. Some investors are clearly gripped by asymmetric risk, or the feeling that any reward in this market isn’t worth the risk. That’s why we’ve seen unusually big one-day drops in stocks like Walmart, Snap, and Target, sparked by a few bad headlines.
If volumes dry up like they have in past years, there could be fewer buyers or sellers to process market-moving news. The result? A stock’s direction may depend on just a handful of trades. If the mood is sour enough, the selling could pile up quickly.
The good news
I don’t want to bombard you with bad news just as you’re kicking off Memorial Day Weekend. So here are a few encouraging tidbits to chew on.
First, there are no foregone conclusions in markets. We may be at the edge of recession, or we may be overreacting. The stock market seems to be thinking twice about heading into bear market territory (aka panic mode). The job and housing markets have shown some cracks, and high inventories at retailers have Wall Street on edge. Yet these are also signs of slowing growth, which is exactly what the Fed is going for. While slowing growth can be painful, it isn’t the same thing as a recession (when the economy is actually shrinking). It’s rate hikes in action.
Also, the consumer still seems to be in good shape. I know…bold statement after this latest round of big-box retailer earnings. Inventory management is a chore these days, and it’s started showing in profit margins. But instead of a broader slowdown, is this simply just a rotation in spending back into life experiences — traveling, eating out and gathering with friends? Demand for goods may be backing off, but Americans seem to be prepping for a hot vax summer 2.0.
About six in every 10 Americans plan to travel this summer, with 35% expecting to travel more than last summer, according to US Travel Association data. International destinations have opened up, and air travel has nearly gotten back to pre-COVID highs, according to Transportation Security Administration data. Plus, we’ve been putting off our big vacation plans for two years now. There’s a reason why you and all your friends are planning to get away, regardless of the crazy airfare you’ll probably have to pay.
Still, there are risks to this view. The Conference Board’s monthly consumer survey shows that the percentage of Americans with vacation plans has actually declined this year. And there’s evidence that fewer people are planning to take road trips (versus plane rides) to destinations. Gas prices still seem to be a significant hindrance for spending.
Summer-proofing your portfolio
Stocks and crypto markets could struggle this summer, with lower trading volumes and quick news-based mood shifts. You can tune out when you’re on vacation, but make sure your portfolio is always prepared for storms. Stop-loss and limit orders can help you set buy and sell targets while you’re away. And if you manage your risk well by spreading your money across multiple assets, you may be in for less of a shock when you return to the real world.
Watch services-based stocks like airlines, hotels, and cruise liners, too. They may give us some clues on just how strong spending is this summer. Pay attention to the security lines next time you’re in the airport. They may be the strongest case for why we shouldn’t rule out the consumer just yet.
No matter which investment strategy you ponder, we wish you a safe and pleasant long weekend. This Memorial Day and every day, thank you to all who have served our country.
*Data sourced through Bloomberg. Can be made available upon request.