Our recent International Investing seminar with ENR Asset Managers in Montreal focused on how various cycles impact stock markets and investing value. This is a time of great opportunity because three of the numerous cycles that pressure stock price up or down are working together at this time. The 17 year cycle, the economic cycle (2) and seasonality are all putting negative pressure on shares. When all three forces work together, as they are now, market reactions can be strong.
Dow chart showing Black Friday results of seasonality in 1987.
Regarding seasonality, a statistical analysis was done some years ago by Michael Keppler. This study shows that most appreciation in most major equity markets, is achieved from the beginning of November through the end of May.
Michael wrote: “Gary, We have done extensive research on seasonality and I am proud to announce that a shortened version of a major study which I have coauthored with our Director of Research, Dr. Xing Hong Xue, will be published in the Winter Issue of the Journal of Investing. Our research shows that basically in all major equity markets, nearly all returns are achieved from the beginning of November through the end of May. All the best to you and Merri. Michael”
Keppler showed that over 30 Years Dow the Dow grew 8.16% overall.
There was 8.36% Growth in the months November through April.
There was 0.37 growth in the months May to October.
$100 invested in the Dow grew to $848 overall over the 3o years.
$100 invested in the Dow grew to $1,067 if it were invested only in the months of November through April.
$100 invested in the Dow dropped to $79 if it were invested only in the months of May to October.
Historically the best five months for the best equity appreciation are about to begin… but first there could be one more downwards jerk. There is no on-off switch I know of but we should be thinking more about risk aversion right now.
October is the end of the negative seasonality cycle and is often a month of great volatility.
For example, on Black Friday, Oct. 19, 1987, the Dow Jones Industrial Average plunged 508 points, or 22.6 percent in value – its second-biggest percentage drop in history.
This is why I use professional managers to help me keep my head when markets are spinning down.
Eric Roseman, head of ENR Asset Mangers, one of the managers I use sent me a note about current market opportunities.
Here is an excerpt: Market events over the past several weeks have resulted in the return of volatility following a three-year period of relative calm. We’re communicating with you today to assure you that we are using this intermittent correction (not a bear market) as an opportunity to accumulate high quality companies in our existing portfolio and new positions following significant declines since September.
We also believe that a weaker EURO serves as a catalyst to boost European multinational earnings in 2015 and we are positioned for this outcome. Our top holdings remain Roche Holdings, Nestle, Pepsico, Nordea Bank and Apple. Each of these companies – like all of our holdings – are market leaders in their respective industries and harbor tremendous free cash-flow and strong management.
Despite pervading gloom and doom, negative headlines in the press and bearish sentiment, we’ve been in the market since October 13th buying existing positions or purchasing new holdings at 52-week lows accompanied by dividends of 50% or more compared to the MSCI World Index. Our job is to purchase high quality at a discount, accompanied by yield. We’ve done this amid sharply lower prices.
To be sure, the global macroeconomic landscape has deteriorated since this summer. Commodities, bond yields and the dollar all show signs of concerted danger implying rapidly slowing global GDP. For these reasons, we continue to hold largely defensive companies and only purchase stocks paying a dividend once they hit a new low. But we must also remind investors that volatility is part of the investing regimen and without it, future returns are likely to be dull in a near-zero interest rate environment.
Amid the market mayhem unfolding, however, we do find solace in the following bullish indicators as we shortly conclude October:
* Seasonal strength for stocks commences in November and runs through April. October is infamous for bad markets and this month proves to be no exception;
* Oil prices (WTI) have plunged from $104 a barrel in June to $81 a barrel now. This should help boost consumption, adding $1.1 trillion to global GDP, according to Citigroup, as lower prices act as an effective tax cut on the consumer;
* The Fed might not be eager to start hiking rates next year as global markets decline and the euro-zone flirts with another recession. The markets have not discounted a new round of QE, which is not impossible, if financial markets continue to plunge;
* Interest rates will remain low worldwide, supportive of most risk assets;
· If Germany continues to slow, the ECB will be forced to act more aggressively and launch an all-out war against deflation;
* Inflation is nowhere to be seen as evidenced by plunging TIP prices and sharply lower Treasury bond yields;
* Stocks in most regions are not in a ‘bubble’ as measured by previous peaks in 2007, 1999 and 1989. Market multiples for high quality stocks are especially attractive overseas with European companies exceptionally well positioned amid EUR weakness.
A complete detailed Third Quarter report along with our views in October will be emailed to you shortly.
Multi Currency Investors can read ENR’s entire letter and see ENR’s October Market Update at their password protected site. Click here.
That’s three cycles that might come together in a negative way to create the storm before the calm. Problems create opportunity and many important underlying factors for a long term bull market are accumulating. Current corrections and volatility offer great opportunity to find wealth offered at a good value.
(1) 17 Year Cycles
(2) Economic Cycle