Don’t Read Much Into Late-Summer Wiggles

We know the stock market is an inanimate, non-corporeal object, but sometimes we could swear it has a sense of humor. Case in point: Just when the fine folks at Bloomberg pointed out that the S&P 500 had gone all month—as of Friday—without notching consecutive up days and examined the handful of prior instances, the S&P 500 notched its second consecutive rise on Monday.^[i] And its third on Tuesday. How nice of the market to deliver such a timely reminder: Searching for meaning in wiggles, waggles and wobbles is fruitless.

Not that we don’t sort of get the temptation. Entering August, the S&P 500 was on a five-month win streak and inching close to its January 2022 high, nearing a full round trip from last year’s bear market. But as the party paused, investors increasingly craved hints about the market’s longer-term direction. For many, technical indicators and funky patterns seemed like a good place to start, and the S&P 500’s lack of consecutive wins was, supposedly, a sign the market lacked “conviction” and was “tired.” To us, it was an epic case of reading into past returns. As we pointed out in our What We’re Reading space Monday, there was no significance in the fact that the last time the S&P 500 went a full month without back-to-back rises was May 2010. Far from being fragile, that month was quite early in history’s longest bull market. Of the six other post-War months without consecutive up days (per FactSet), December 1968 was early in a bear market, and April 1970 was the bottom of the same bear market. February 1982 was late in a bear market, April 1994 was smack in the middle of the 1990s bull market, and February 2001 and April 2002 were both in the bear market that accompanied the dot-com crash. No consistency, no conclusion to draw.

And now there is no there there at all, given the streak is over. What was the point? Stocks are volatile, always, and that volatility cuts both ways. Short-term pullbacks and corrections (typically sharp, sentiment-fueled drops of -10% to -20%) can strike any time, for any or no reason. They can also end at any time, for any or no reason, giving way to fast rises. Up and down, up and down, zig and zag. What matters isn’t each blip and spike, but what sort of longer-term trend those even out to. In a bear market, they even out to a maddening grind lower. In a bull market, they even out to a relieving grind higher.

One article making the rounds Tuesday lamented that the vast majority of Wall Street’s favorite trades, from meme stocks to the weakening dollar to easing long-term Treasury yields, left speculators with egg on their face this month.^[ii] Some analysts extrapolated this to mean stocks must have already notched their high for the year. Yet when negativity strikes, it is normal for countertrends of all types to erupt—all assets are vulnerable to short-term sentiment swings, and those swings can affect different things in different ways. If the drops and countertrends cause analysts to get more pessimistic and stop preaching buy the dip, so much the better. That, typically, amounts to a sentiment reset that extends the wall of worry.

This seems to be happening now. Folks seem preoccupied with the approach of September—famously the S&P 500’s worst month—and worry a bad August foretells an especially lousy one. There seems to be a general sense that negativity will beget more negativity. The fact that stocks can and usually do turn on a dime seems long forgotten.

In our view, short-term moves are impossible to predict. Neither we nor anyone else knows how long this late-summer rough patch will last. But we do think it is clear nothing fundamentally changed. Bullish political gridlock still reigns, keeping legislative risk low. Economic expectations still aren’t great, with analysts projecting weak growth in the US, trouble in Europe and property market fallout knocking growth in China. A global economy that merely plods along would qualify as a positive surprise, and indicators still broadly point to that happening. The world isn’t perfect, and the global economy has some soft pockets, but stocks don’t need perfection—just a reality that goes a bit better than expected.

So we suggest not getting hung up on volatility. Rather, if you are investing for long-term growth, remember earning market-like returns requires sometimes taking the bad with the good and enduring short-term negativity in order to reap long-term returns. It isn’t always fun, but it is a well-trod road to wealth for a reason.