As we welcome August, we are already seeing markets begin their usual seasonal volatility from now and into the fall. As of writing, markets are pulling back form their recent highs. We are seeing profit taking, but also declines on concerns over the U.S. debt levels, on the need to negotiate again the Debt Ceiling so the US can pay their bills and on the downgrading of the U.S. credit on Wednesday by Fitch Ratings. Furthermore, the fears of recession, and a question of a hard or soft landing continue to create volatility. More on those below.
We are in the Green Zone in our longer-term Stoplight Indicator. More importantly, we are seeing a rollover back to yellow in our shorter-term Footsteps / Price Action and expect by the time you read this, if our chart lines do not hold, we will be increasing cash and or defensive positions. Markets may drift a little lower, but we do not expect to see any major breakdown at this point that would have us going into the Red Zones and all defense.
Profit Taking: Markets have had a decent run in the past few months and as we have been sticking close to our charts, rather than just the stoplight, it has had us moving quicker to respond and take part in the moves. The U.S. growth stocks in particular have had a run. Canadian stocks in the month of July finally improved as did the whole breadth of the markets generally. We saw small to mid size companies and financials finally begin to take part in the rise. This was a good sign of overall improvement as stocks generally do not sustain a longer term rise without them. And though we are now seeing some profit taking, it is a good sign of the overall strength underlying all markets.
Seasonal Tendencies: As we go into August and the fall, we consistently see volatility increase. Many institutional investors take the month off, so the remaining speculators and retail traders tend to have itchy fingers. That creates volatility. Come September, all return to office and again volatility increases as traders look for direction in the markets for the remainder of the year. Volatility is increasing from its recent lows, but it is important to note it is not yet reaching a level of concern where we see markets really beginning to falter.
Debt Ceiling and Debt downgrade: Fitch Ratings just downgraded the U.S. government's credit rating: Fitch's highest credit rating is "AAA." And now, the U.S. is one notch below that at "AA+." The amount of debt outstanding is of serious concern as we have discussed here many times. Not just in the U.S. but globally for government, corporate and personal debt. However, many people see the timing of this as this a political statement against the Jan 6 Capitol riots and an overall lack of governance and stability in the U.S.. Others (and we might agree) see these ratings and agencies as somewhat arbitrary, even questionable. For example, pre-2008 the ratings agencies had many of the corporate and real estate bonds rated quite high and stable, only to see those debt instruments default and cause much of that debt crisis.
The Debt Ceiling and the approval of public finances and debt levels in the U.S. must be renewed. However, it continues to be a political football. We understand that debt in the U.S. and globally is high and rising. It must be dealt with. Both sides have difficulty with it. That said, the U.S. is still the single largest military power, the single largest economy, and as such the U.S. literally holds the right to print the world's "reserve currency." It is the safe haven, no matter what the ratings agencies may say. The U.S. also had a similar situation in August 2011, when Standard & Poor's ("S&P") downgraded U.S. debt from its top-notch rating for the first time ever. “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” That is pretty much what Fitch is saying now. And by the way, when this happened, markets ended up 16% higher one year later.
Recession?: We are not officially in one, as yet. The Central Banks are continuing to reduce the stimulus they pushed into the markets since the bottom of 2009 and raising rates, all in an effort to quell inflation. It does seem to be working. Inflation is slowing it’s rise, but still somewhat sticky. The question becomes if they raise rates for too much for too long, do we go into a recession? Most consider it is inevitable, but the question remains a soft landing, short recession, or a deep and long recession? By the very fact that markets have continued to “climb the wall of worry”, with growth stocks rising, and now the rest of the market recently beginning to take part (including financials and small to mid size companies) says that investors for the most part consider the Feds are doing their job. Economic numbers including job numbers and business activity are moderating but continue to be positive. We are far from out of the woods as we head into the higher volatility season. However, the stock market is still telling us the outlook is improving from the bottom of 2021.
Price and Charts Guide us: We watch carefully what is happening in the economy and markets. And we indeed have our opinions, but we are not prognosticators. Nor do we have to stick to a position and buy and hold. We watch for catalysts and accept that we may need to change our views. Most importantly we do not need to wait for someone else to act, money managers or mutual fund managers to make changes. Nor do we rely on the news that sells, nor the pundits to decide what is important. We only need to follow Price to give us the direction. And to use our charts, signals and indicators that are directly in front of us to make the adjustments and trading accordingly.
Bottom Line: We are still in the Green Zone mid to longer term. Although we are going into the season of more volatility, and with that markets may be taking a breather., As our short term signals move into the Yellow Zone, markets are still looking ahead with a positive outlook. Looking forward to the fall, they may trade overall sideways for a while, and we may need to increase cash and defense somewhat simply to take advantage of shorter-term moves. But for now, we expect markets to continue to climb the walls of worry thru the fall and into the end of the year.
Should you have any questions or concerns or if you would like to meet online or in person anytime, we always look forward to doing so.