The dog days of summer are upon us. We all have different ways of marking our seasonal calendars: my own “dog days” typically kick in after the July 4th holiday and the Wimbledon tennis finals, knowing that the next combination of a long weekend and Grand Slam tennis tournament will come in early September with Labor Day, the US Open and the new energy that anticipates autumn. Between now and then it’s all about the heat and humidity that define summers along the languid byways of the Chesapeake Watershed Region.
Investment markets seem to be feeling the heat as well – heading upwards for several days and then listlessly falling back like a Metro passenger dealing with a broken escalator in the midday sun. Even the renowned 3:30 Club has been somewhat muted of late – while we have had our fair share of 1%-plus days, we’ve seen fewer of those extreme lurches at the end of the trading day when the computer algorithms kick in with their hairtrigger buys and sells. Maybe the algorithms, too, are kicking back at Bethany Beach or casting their flies in the Savage River…
The major variable heading into the next couple weeks is the onset of corporate earnings season, kicking off as usual with Alcoa’s announcement after today’s market close. Investors will be interested to get more data points to help them sort out all the conflicting signals in the economy. Earnings surprises on the upside will add more weight to the default hypothesis that we are not headed towards the precipice of an imminent double-dip recession, and the consensus sentiment seems to anticipate this being the case. Of course, “surprises” in the earnings world are a double-edged sword, and early signs of stress by redoubtable market heavyweights like GE or Intel could set a negative tone for the season.
Over the course of this year to date we have characterized the global economic recovery as a series of “fits and starts”. Earlier in the second quarter there seemed to be more starts than fits and the US appeared to be gaining traction in shoring up global growth. The intensifying problems in second-tier European nations back in May raised the specter of more “fits” given the implications of solvency problems in the Eurozone for the US as well as the global growth engines of China, Brazil and India. Observers of macroeconomic policy are stuck between the rock of unsustainable deficits and the hard place of unbudging unemployment, underemployment and falling incomes. And thus the listlessness and indecision that bedevil the markets as moist droplets of hot air shimmer above the Potomac River.
Robust earnings could indeed stir the market out of its torpor and provide some direction, but we think there is an equally plausible case to make that the fits and starts may continue to contain any bull or bear tendencies from breaking out too decisively in either direction. Maybe it’s just the effect the dog days have on us, but we see the opportunity for sluggishness to continue being the market’s defining characteristic.