August is usually a quiet time for the markets, but days when the Dow Industrials move hundreds of points are increasingly common, almost routine now. There was a time when individual investors would be spooked by such trading and conclude that the market is nothing more than a casino.
On a few occasions over the years I’ve argued that if Wall Street is a casino it’s the only one in which the odds favor the players, provided the players are longer-term investors. We have seen how that plays out again and again. We are seeing it now.
Large-cap dividend paying stocks, which I’ve championed as great buy-and-hold investments, lost less than the market when stocks were retreating. And now that the S&P 500 has recovered half of its bear market losses the dividend payers aren’t far from their highs. iShares Large-Cap Value ETF (IVE) and ProShares S&P 500 Dividend Aristocrats (NOBL) are only down 4.2% for the year. For all the pain of this bear market these have been comfortable holds.
As for the near term, investors will need to deal with the anticipated increases in interest rates, which appear even more likely after the July employment report showed a larger than expected gain, mostly in areas other than retailing where jobs are being cut.
Rates will be rising into the fall if not next year. The bond crowd is on board with that and to a lesser extent so are stock investors as the rally illustrates. I’d previously written that anticipation and later appearance of improving CPI numbers would trigger a market rally. We saw the anticipation rally in July and are seeing higher prices in August after the recent CPI report. CPI rose 8.5%t year-over-year, down from 9.1% a month ago. Hardly reason to cheer, but it’s a step in the right direction. That’s all investors needed to see. They’ll applaud again as the rate falls in the months ahead, though it will still be too high.
The summer rally has not run its course. Hedge funds and others who have missed the rally will play catch up and buy. They can’t be left behind. The acronym FOMO covers it. That’s Fear Of Missing Out. But FOMO will get the market just so far. Earnings growth will need to accelerate. They will. If Wall Street is a casino then my bet is on Corporate America.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.