Generally by this time in July, big money investors have fled the city, found a cooler place or a beach, whichever their pleasure, and put trading on hold until after Labor Day. This year feels a little different. For one thing, millions of new Millennial speculators are still hard at it. Even if they do not individually have large portfolios, their sheer numbers make a sizable force in the markets.
We have been expecting and discussing a drop in index prices for some time now, so it should be no surprise that each of the primary measures finally had a fairly bad day on Monday following a drop last Friday as well. Remember that markets are like a pressure cooker (if you are old enough to know what that is). If some pressure is not constantly being released, the whole thing will explode.
In practical terms, think of it mathematically as an upward trending line of prices. When the slope of the price line approaches too steep of an angle, the stock price is likely to fall down in the same drastic way. A few weeks ago, I described the trajectory of the shorted stocks like GameStop (GME) and AMC Theaters (AMC).
GME rose by over 2,300 percent in January. Then it dropped by 90 plus percent of that gain during February. Too many times, late comers will buy in near the top and then sell out after the inevitable sell off. By the way, from February’s low of $38.50, GME has risen to over $174 a share at the time of this writing.
Even though it has been a smoother ride than GameStop, the S&P 500 has risen from its March, 2020 low of 2,280 to a recent high of 4,393 last week, or a gain or more than 92%. This is undoubtedly why some look in the rearview mirror and say, Why would one invest in anything but this index of 500 stocks dominated by the weight of a dozen or two?
The best answer is long term safety and the ability to sleep well. In the Bible, Proverbs 13 (English Standard Version) expresses it this way: Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. Although company sales and profits are increasing again in spite of the difficulty of getting enough workers or parts like semiconductor chips, there will be hiccups and even worse future developments for worry than whether we still have a virus infecting people. However in the longer term, things have a way of working out.
Most boomers even seem to have forgotten that we had three bad market years in a row between the Dot Com bubble’s climax in early 2000 and the beginning of the War on Al Qaida in early 2003. This is not a call to sell all of your investments and sit on cash. It is more of a caution not to get caught up in the frenzy of quick gains and the feeling that trees will now grow up through the sky.
The third quarter of most years provide a down draft of some percentage that will give you an opportunity to reallocate your investments to take advantage of market trends and changes in momentum. Between now and about October 15th, things could get even more exciting. Be watchful and please do not expect or try to get rich quickly.