It has been said that one should “never fight the Fed”. As recent history proves, that statement is very sound wisdom. Trading on the side of the Fed has been greatly rewarding for those who put their fears on hold and committed capital on the long side of the equity and residential real estate markets. Since the pandemic panic lows of February/March 2020 residential real estate is up a whopping 24% in a little over one year as people took advantage of historic drops in interest rates. And the S&P 500 is up a historic 102% as a result of the flood of cash pumped into the system by the Federal Reserve, forcing asset managers and individual investors out on the risk curve.
The Federal Reserve Bank of Kansas City hosts its annual meeting of central bankers this Thursday, July 29 through the weekend with Treasury Secretary Janet Yellen scheduled to speak on Friday. In the past, the annual event has been a forum for the Federal Reserve to announce major monetary initiatives. In anticipation of this year’s meeting, some have speculated that Jay Powell the Federal Reserve Chairman may use the opportunity to discuss a way forward to gradually limit the Fed’s assistance to the capital markets. As such, it might add some volatility to what otherwise might be a sleepy summer Friday.
Putting the Fed’s influence aside for a moment, this brings us to today’s intended subject, Seasonality. In many aspects of life, it makes sense to go with the flow, and that is true in trading and investing as well. Yes, if one is a very long-term investor one can achieve superior returns by buying out of favor sectors or stocks and sitting and waiting for their inherent value to be recognized by the market. But for the active trader or manager that can be too long a time frame. So, being conscious of seasonal tendencies can bring rich returns if one is looking to have the wind at one’s back. In that regard, according to the indispensable Stock Trader’s Almanac the month of August from 1988 to 2019 has proven to be the worst month of the year for the Dow and S&P, with the first 9 trading days historically weak (Mid-August has tended to be stronger than the beginning and end of the month). So based on this history, the markets do NOT have the wind at their back and prudent traders and investors might find it more beneficial to hit the beach than to trade (at least from the long side).
In consideration of the above two factors, we have the confluence of potentially potent news coming out of the Fed’s Jackson Hole meeting and the historic pattern of equity weakness in August. One could cancel the influence of the other, but should their influence line up together in a bearish fashion this August could turn out to be a potential route. In as much as equity markets are at all-time highs, stock valuations extended, with evidence of speculative excess from SPAC utilization to NFT’s, it might just pay to snug up stops on long positions and then hit the beach.
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