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In the Market - September 2009
Sep 15, 2009
Opposite Year
School children play a game where everything they say is the opposite of reality, and only those that know the game understand what is going on. On the surface that seems precisely what we have been witnessing in the markets this year. Over the last century almost 100% of the stock market gains have come between the fall and spring, with returns over the summer not just less than the risk free rate, but near zero. The adage “Sell in May and go away” has been particularly prescient over the last 25 years as only 6 summers have outperformed the winter months. This year however, after a terrible fall and winter, the summer rally has proven quite robust, completely counter to the prevailing trends.
In the spring the bond market sold off in sync with the recovering stock market and a potentially recovering economy in anticipation of higher rates. Today however, bonds yields are back down to the levels of May and the two year note is back to the lows of the beginning of the year. This is the opposite of what we would have expected if the economy is truly recovering and following the stock market’s lead. While inflation may be at bay for the near term, the historically low rate environment is unlikely to remain in effect if the stock market continues its recovery.
Even some of the sectors hardest hit by the financial crisis, such as financials, transportation and consumer discretionary, have proven to be some of the strongest performers over the last six months - despite financial instability and some near bankruptcies.
Much of the opposite behavior can be attributed to extreme market dislocations, and many markets are just reverting to equilibrium after significant shocks. Much of this opposite looking year could be characterized as payback and that may be the most significant trend moving forward.