Are investors losing faith in Europe? The price action might suggest as much. The Stoxx Europe 600 hit six-month lows last week, while Germany’s Dax and France’s CAC 50 fell below their 200-day moving average for the first time in a year. However, some weakness is unsurprising. Europe had become a crowded trade. In May, European equity allocations among fund managers hit their third-highest level on record.
“Europe usually outperforms when everyone hates it and underperforms when everyone loves it,” this column noted at the time, “so today’s high levels of exposure don’t augur well for coming months.”
A lot of good news was priced in – Barclays last week noting the median European stock failed to outperform on results day, despite beating estimates. Secondly, appearances can be deceptive. Yes, European indices have fallen while US markets hover near all-time highs, but this is entirely due to the sinking dollar. Priced in euro, European indices remain "way ahead" of US equities over the last year, notes Macro Tourist blogger Kevin Muir. In fact, the US continues to lose share relative to the rest of the world. Last November, it accounted for 38 per cent of global stock market capitalisation. Last week, it fell below 34 per cent, with Bespoke Investment Group noting the US "lost a full percentage point in August alone". US president Donald Trump "views himself as quite the stock market whisperer", as Muir put it, but Europe's recent weakness doesn't hide the fact US stocks are the ones "stinking compared to the rest of the world".
Is the September effect real?
September is here. The end is nigh. Well, no, but September’s reputation as the worst month for stocks is deserved. The Dow Jones has averaged a monthly loss of more than 1 per cent over the past century, whereas the other 11 months have all been profitable.
It is the only month to have averaged monthly losses over the past 20, 50 and 100 years. In five of the past nine decades, it's been the worst month, never ranking higher than ninth. Research suggests the September effect has been around for more than 200 years in the US and UK. Indeed, it appears to be an international phenomenon; in one study, September declines were reported in 16 out of 18 developed markets. In 12 of those countries, September was the worst month. The good news? September tends to be just fine in bull markets; stocks have gained in nine of the past 14 instances when stocks were above their 200-day moving average. More importantly, no one has ever established why September should prove a ghastly month for stocks. September's lousy performance is, as market historian Mark Hulbert put it, a "crime in search of a motive". Don't be spooked by a statistical fluke.
The trend is your friend
The S&P 500 has risen eight months in a row. It hasn’t fallen as much as 3 per cent since last November’s election, the second-longest run in history. It has gone 50 consecutive weeks without posting a weekly decline of 2 per cent. This can’t continue – or can it? Well, it seems it can. According to LPL Research, this is the sixth time in history stocks have gone 50 consecutive weeks without a weekly 2 per cent drop. Six months later, stocks were higher every time, averaging gains of 9.5 per cent. A year later, the index was also higher on each occasion, averaging rip-roaring gains of almost 20 per cent. Many instinctively assume such runs are unsustainable, evidence of an imminent reversal being at hand, but the data bears out the truth of an old Wall Street adage – the trend is your friend.
Market breadth weakens
While history indicates stocks will do just fine over the next six to 12 months, concerns regarding recent US market breadth are growing. Although the S&P 500 is just shy of all-time highs, less than half of the stocks were last week trading above their 50-day moving average. Some crucial cyclical sectors are also below their 50-day average, Bespoke Investment Group notes, while the strongest sector – utilities – is a defensive one.
Bespoke also notes that at the June market peak, rising 50-day averages were evident in 95 per cent of sectors, confirming that almost every industry grouping was participating in the rally. By last week, however, that number had dropped to 33 per cent – the lowest number since November’s US election.
Quote of the year
“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me,” said Donald Trump in April. August’s decline means the dollar has now fallen for six consecutive months, its longest losing streak in 14 years, bringing the currency to its lowest point since January 2015.
