Investors would be forgiven for thinking summer-month returns should be seen equally to the rest of the year. It’s also understandable that many, with sharp sell-offs across risk assets like equities and a potential shift in central bank policy (which has been among the most accommodating to equities in recent memory) are frightened into wanting to sell.
But this is wrong. Or at least it should be, soon. It's important to remember that the market is smart, informed and self-aware; second, third and fourth guessing itself. So let’s consider where the market might go next, not what it's worrying about now. Crucially, what the market predicts today about the near future is largely already in prices; it’s old news.
The velocity at which it comes to light can be an indicator of things to take advantage of. Think fear and fast selling, like during the summer. And think about what Warren Buffett might say about all this, as he habitually looks past the flashing red screens and ugly returns of the quarter: if the market is worried, doesn't that make way for upside?
Bloomberg recently posted the above with the Investors Intelligence Bull / Bear Ratio, a measure of professional investor sentiment. It's at its lowest levels for three decades. Bloomberg also notes that since 1963 the Standard & Poor's 500 Index advances on average 11% in the year following data collected similar to this. That compares with an annualised return of 8.3% for the same period.
This is also one of the 'least-believed' economic recoveries for the G7 in living memory. Short positions – bets that stocks will fall – are at their highest (as a percentage of float) since early 2009, according to data compiled by U.S. exchanges. Happily, early 2009 immediately preceded this seven-year rally for risk assets. Again, consider the upside when people aren't convinced.
So what does the summer have to do with this? A lot. If the last 30 years are anything to go by, the summer normally means higher volatility and lower returns. The market usually performs worse over the summer – but, of course, future returns aren't pegged to historic ones. We just know that a thin market over the summer can struggle to price things properly. The 6% intraday move in the Dow Jones Industrial Average last month is testament to that.
Where does all this leave the market? Well, in the long term, possibly in better shape than before the summer. A worried market set against a backdrop of low interest rates and low inflation provides opportunities. So it could be a case of ‘their loss, your gain’ when it comes to taking a risk this autumn.