Lexicon Financial Group Weekly Update — August 14, 2024
“There are those of us who think that the psychology of man, each and together, has more impact on markets, business, services and building and all the fabric of an economy than all the more measurable statistical indices.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Who hasn’t looked at a bunch of dots and instantly seen squares or lines? The human brain is wired to find patterns. It’s an evolutionary advantage. Patterns helped our early ancestors understand when to plant crops or how to ensure success during a hunt. It also kept us safe. That shadow at the edge of the forest that breaks the pattern of the tree line – it could be a predator. Be prepared.
Take a look at the image below. We see four sets of two dots instead of eight separate ones. You probably see the same. That is because our brains create a pattern where one does not exist. Scientists who study this type of thing have discovered that the human brain responds differently to specific shapes, like horizontal or vertical lines, edges, or even angles. These are the building blocks our brain uses – referred to as geometric icons or geons – to recognize more complex objects.
These geons are like Lego bricks for our vision and, despite there only being a small number of geons (around 24!), they can be combined in many ways to create the vast variety of objects we see throughout our lives. (1)
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Video: China's economy struggles. Data points to slowing growth
[As an aside, take a look at our Lexicon Financial Group logo. Is the small cube at the centre emerging from or retreating into the larger cube? With a bit of practice, you should be able to see it both ways.]
According to Jared Blikre, a reporter with Yahoo Finance, investors love patterns, too. His recent article, Stock market bears may have the calendar on their side until the election, touches on an interesting phenomenon in investing – seasonality. Whether charting technical indicators or dissecting an earnings report, identifying themes that repeat offers investors a sense of predictability amid chaotic markets. And the most reliable patterns in finance tend to be based on the calendar year. Seasonality refers to predictable and recurring changes in markets that tend to happen at the same time every year. Blikre contends that although markets have steadied after the most recent abrupt sell-off, stock market bears looking at seasonal patterns will be encouraged by this history, ahead of this year's election.
Ryan Detrick, chief market strategist at Carson Group, and a long-time advocate for understanding the forces of seasonality at work in the markets, cautions against blindly investing in seasonality. However, investors have nearly a century of solid data from the S&P 500 (^GSPC) to analyze market trends. Take, for instance, the fact that consumer spending usually increases during the holiday season while back-to-school shopping (we already started seeing the ads for this in July) boosts retail sales in late August and early September. Summer vacations or holidays can also slow down overall market activity and lower trading volumes. This all creates observable patterns in the market that influence prices of stocks, bonds, commodities, and even cryptocurrencies. This data allows returns from each day of the year to be analyzed to find the average loss or gain, and those results can be combined to create a seasonality map for the year.
The chart above shows that markets tend to go up each year, but, on average, annual gains are interrupted by a big downturn from September into October (just remember what happened in 2023). This data reflects the numerous market crashes that have occurred in September and October, including Black Monday in October 1987 and Black Tuesday in October 1929. However, towards the end of October, things tend to start turning around, on average, and markets often rise into year-end, capped off by the much-vaunted Santa Claus Rally.
The S&P 500's seasonality map shows that, on average, not much happens in August. There have been exceptions though, such as Iraq's invasion of Kuwait in 1990, the Asian Contagion in 1997, and the downgrade of U.S. debt by S&P in 2011. Historically, when August is down, it tends to really be down more than any other month. Seasonality isn't just about monthly patterns, as the four-year U.S. election and presidential cycle provides a unique lens through which to view how the markets are behaving. Each of the four years has its own characteristics and tendencies, and the fourth year of the cycle averages a seven per cent gain in the S&P 500.
All of this said, seasonality has more than a few limitations, not the least of which is a somewhat limited data set. What matters in the current environment is uncertainty about the election, interest rates, inflation, the economy, and more. Consequently, seasonality can give investors clues about how the market got here, and where it could be headed next, but it's less like a crystal ball and much more like a tool, just a tool.
Investors need to always remember that there is nothing new under the investment sun. Whatever markets do, investors have gotten through this before and will do so again over the long term. (2)
Investors are also counselled to remember that past performance is not an actual predictor of future performance.
Looking Back
The Toronto Stock Exchange’s S&P/TSX composite index ended slightly up at the end of last week, with the index rebounding after it fell on Wednesday to a near six-week low. Data from last Friday showed that Canada’s economy shed 2,800 jobs in July but some of the details were encouraging, including increases in full-time jobs and hours worked.
In terms of sectors, the materials sector climbed 1.09 per cent as copper prices moved higher. It was further helped by a 15.35 per cent jump in the shares of IAMGOLD Corp after the company reported quarterly results. The financial sector rose 0.75 per cent while the technology sector rose by almost one per cent. (3)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | -0.1% | 12.0% |
| Nasdaq Composite | -0.2% | 11.6% |
| Dow Jones Industrial Average | -0.6% | 4.8% |
| S&P/TSX Composite Index | 0.2% | 6.3% |
Source: Associated Press and Morningstar Direct 08/09/2024
United States (U.S.) major markets ended marginally lower last week, after recovering from the biggest sell-off in nearly two years. The CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, briefly spiked last Monday to 65.73, its highest level since late March 2020, before falling back to end the week at 20.69. Technical factors and programmed trading strategies appeared to be partly behind the swings.
Some of the recent market volatility can be traced to an increase in Japanese short-term interest rates. This resulted in a partial unwind in the so-called carry trade, in which investors borrow at near-zero interest rates in Japan and then invest the funds in higher-yielding assets in the U.S. and other countries. When Japanese rates went up, so did the cost of borrowing. At the same time, the Yen appreciated against the U.S. dollar and this double whammy meant that these trades were no longer profitable or even under water. To pay off the debt in Japan, large institutional investors had to sell stocks to generate cash to cover their loan.
Volatility may also have been further exacerbated by the summer vacation season, which kept some longer-term investors absent from the market. Continuing worries about the previous week’s downside economic surprises – particularly the surprise increase in the unemployment rate and negative manufacturing signals – also had an impact on investor sentiment.
All this speculation and unwinding of loans meant that Japan’s stock markets started last week with the most severe one-day sell-off in decades, rattling global markets. But, by the end of last week, Japan’s markets had managed to recover and the Nikkei 225 Index and the broader TOPIX Index went down 2.5 per cent and 2.1 per cent, respectively.
In local currency terms, the pan-European STOXX Europe 600 Index moved back from sharp losses earlier last week to end 0.27 per cent higher. Other major stock indexes were mixed, as Germany’s DAX gained 0.35 per cent, and France’s CAC 40 Index added 0.25 per cent. The U.K.’s FTSE 100 Index was little changed. Italy’s FTSE MIB, however, fell 0.74 per cent.
Retail sales volumes in the eurozone unexpectedly declined 0.3 per cent sequentially in June after increasing 0.1 per cent in May. This weakness reflected a drop in the sales of food, drinks, and tobacco. This possibly suggests that consumers are taking longer to recover from the inflationary squeeze, adding to doubts about the strength of demand in the second quarter.Chinese markets fell back last week, as a stronger-than-expected increase in consumer prices failed to offset concerns about deflationary pressures. The Shanghai Composite Index fell 1.48 per cent while the blue chip CSI 300 gave up 1.56 per cent. In Hong Kong, the benchmark Hang Seng Index gained 0.85 per cent.
China’s exports rose a lower-than-expected seven per cent in July due to sluggish demand. The overall trade surplus was USD 84.65 billion, down from USD 99.05 billion in June. This decline in exports has raised concerns about softening global demand, which has been vital for China’s economy this year as it helped compensate for sluggish domestic demand. (4)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Why Your Brain Loves Patterns (and How to Use This in Design), Nemohhh, Medium, April 27, 2024
Stock market bears may have the calendar on their side until the election, Jared Blikre, Yahoo Finance, August 13, 2024
The close: TSX rises, posts weekly gain as markets recover, The Globe and Mail, August 9, 2024.
Global Markets Weekly Update, T. Rowe Price, August 9, 2024
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