As August Looms, so Do Memories of Nasty Surprises
Caesar had his Ides of March to worry about. For the modern investor, the time to be fearful is August.
It could be a mere coincidence that the stock market had such a bad time last week, with the Nasdaq composite index sinking 6% and the Dow Jones industrials losing 2.7%.
The coincidence would be that the market had closed at record highs the preceding Friday--precisely one year after the summer 1998 market peak, when the Dow topped out at 9,337.97.
What followed the 1998 peak was the worst market decline since 1990, as stocks plummeted in the wake of Russia’s surprise currency devaluation and rising global deflation fears. The Dow sank 1,799 points, or 19.3%, between July 17 and Aug. 31 of last year.
August of 1997 was no picnic for investors, either. The Dow tumbled 7.3% that month as worries about East Asia’s then-nascent economic crisis hit Wall Street.
August of 1992 brought us the start of a European currency crisis--and a 4% Dow drop. August of 1991 saw the coup attempt against Mikhail Gorbachev in the old Soviet Union. In August of 1990, the Dow plunged 10% after Iraq invaded Kuwait. And August of 1987 marked the final peak of the 1980s bull market and the beginning of a bear market that culminated in the horrendous October ’87 crash.
All coincidences? Perhaps. But that’s six out of 12 Augusts since 1987 that many investors would have preferred to have been out of the market.
September and October often haven’t been kind to stocks, either. Indeed, August through October has generally been the U.S. market’s weakest stretch each year, at least since 1950. By contrast, stocks’ best season historically has been November through January.
Is there good reason to suspect that the next three months could be difficult or worse for stocks? Long-term investors may rightly ask, “Who cares?” After all, the smart move all through the 1990s has been to buy into steep market declines, not sell into them.
But if that’s your strategy, you ought to ask yourself this question: Do you have some cash ready to put to work if the market adds to its string of late summer/early fall conniptions?
For many investors who’ve ridden the ‘90s bull market, the constant worry is that their paper capital gains might evaporate and never return--or take years to do so. In other words, the fear is that we’re near a long-term market peak, as in 1987.
Stocks’ valuations aren’t much solace for nervous investors, of course. Many blue-chip stocks have never been more expensive relative to underlying earnings.
Al Goldman, veteran market analyst at brokerage A.G. Edwards in St. Louis, concedes that the market has an “altitude problem,” but he sees that more in the context of how sharply key indexes have run up since early June.
The Standard & Poor’s 500 index, for example, is up 10.4% year to date, and half of that has come just since June 1.
The technology-laden Nasdaq composite, up 22.8% year to date, is up 11.6% since June 1.
That’s too much too soon, Goldman says. So he expects the market to pull back modestly in the near term. But a repeat of last August? Forget about it, Goldman says.
Last year at this time, U.S. corporate earnings growth was weak and Asia was still in depression. So the market was already on wobbly legs when Russia devalued its currency.
This year, corporate earnings are resurging and Asia is showing increasing signs of recovery. The global depression/deflation worries of last fall have dissipated.
Besides, Goldman says, with many Wall Streeters jittery because of the last two Augusts, a deep decline this time would be “too obvious, too easy.” He’s still expecting the Dow, now at 10,910, to hit 12,000 by year’s end.
Bernie Schaeffer, head of Schaeffer’s Investment Research in Cincinnati and someone who has made some excellent market calls in recent years, also thinks worries about the next few months are overstated.
He concedes there is always room for a surprise: another surge in oil prices, a currency devaluation by China, a plunge in the suddenly weak dollar. Still, “from a reward-to-risk standpoint, I see more upside potential than downside,” he said.
Despite the latest uptick in long-term interest rates--the bellwether 30-year Treasury bond yield ended at a 2 1/2-week high of 6.01% on Friday--Schaeffer sees yields staying in this range for a while.
But didn’t Federal Reserve Chairman Alan Greenspan, in testimony to Congress last week, leave the door open for another boost in short-term rates when the central bank meets Aug. 24?
As usual, Greenspan merely spelled out the Fed’s concerns about the economy and potential inflationary pressures.
Yet whatever the Fed does, the Treasury bond market may have a key ally in keeping yields down between now and the end of the year: the year 2000 computer bug.
Schaeffer and other analysts note that there are already signs that fears about Y2K are driving more investors to buy Treasuries as a “safe haven.” That may be most evident in demand for six-month T-bills--which, if bought now, mature after Jan. 1.
Since July 1, the yield on the six-month T-bill has tumbled 0.29 percentage point, from 5.01% to 4.72%. By contrast, the yield on the one-year T-bill has eased just 0.06 percentage point, to 5.02%.
“A lot of people expect a ‘flight to quality’ ” in markets ahead of Jan. 1, notes economist James Glassman at Chase Securities in New York. “I think the T-bill is just beginning to show it.”
But what would any such flight to quality, even by a minority of investors, mean for stocks? Could that be this year’s nasty August-to-October surprise?
Conventional wisdom has been that if someone’s going to sell stock because of Y2K fears, they’ll do so soon, not wait until November or December. That would suggest that the market will indeed face Y2K pressure in the next few months.
But Schaeffer notes that it would be more like the market to confound the conventional wisdom, rising through October--then selling off just before 2000 dawns.
Tom Petruno can be reached at tom.petruno@latimes.com.
