A “Summer of Fear” for Stocks?

Last week, guest columnist, David Wismer, editor of Proactive Advisor Magazine, took us back in time to the “Summer of Love” that kicked off 50 years ago. It was a time of drugs, music, and a freedom from authority and responsibility that still echoes through the years, influencing us even today. In a very real sense, it was a revolution that succeeded in many ways.

David’s brilliant recollection of the time carried me back to that summer as well, and my wife’s 50-year high school reunion flooded us both with memories of 1967. However, some of those memories were not as sanguine as David’s. They include flashes of the Detroit riot, which commenced at 3:30 a.m. on July 23, just weeks after my future spouse’s graduation parties had subsided.

It all began with the words “I think we have problems on 12th street.” The uprising technically ended Thursday, July 27. It took the actions of 17,000 Detroit and state police; the Michigan National Guard; and, on President Johnson’s order, federal troops (the 82nd and 101st airborne units) just home from Vietnam to finally quell the outbreak.

On Monday evening, President Johnson went on national TV. “The fact of the matter is, law and order have broken down in Detroit, Michigan,” said Johnson. Jimmy Breslin, a national columnist at the time, covered the story and wrote, “The city is an asylum.”

At the end, the human toll was horrendous: 43 were dead (33 African-Americans), 1,189 were injured, and 7,231 were arrested. Business and residential home losses were in the hundreds of millions of dollars. 2,509 businesses were looted, including 611 food markets, 537 dry cleaners, and 285 liquor stores. Most stores never reopened, 700 buildings were totally destroyed, and the city has still not fully recovered.

This revolution, if it was such, clearly did not succeed, and almost killed a great American city.

Our family had moved in 1958 from Detroit to what was then the small, rural town of Farmington, Michigan, which later became a part of the suburban sprawl that was the long-term legacy of the Detroit riot of 1967. As I drove the 70 miles home from Michigan State University that Sunday afternoon, a seemingly endless parade of state police vehicles ran parallel to me. I did not know why they were there since there was a news freeze on the story.

When I arrived home, the news of the rioting had at last broke, and my dad was in panic mode. The looting occurring in neighborhoods that he and my mom had grown up in was frightening for a business owner to watch. And he had two businesses in Detroit. They provided all of the income supporting his family of six. With his three sons, he wanted to head down and defend his property. This from a man who, although a WWII veteran, had never owned a gun!

For five frightening days, there was an unending barrage of TV videos displaying fires (so widespread that the smoke plumes were visible from Farmington, 18 miles away) and what looked like bombed ruins spread over an ever-increasing area. Thousands of people assembled, egged on by their more outspoken neighbors. There was unimpeded looting by men, women, and children. Sniper shots that killed at random were reported. And, unbelievably, tanks and troops patrolled the streets of the city where my entire family had all been born. Through it all, our family continually had to reassure dad and counsel him to let the authorities do their job.

As frightening as it was for those of us outside the city, the fear must have been unbearable for those within the east and west sides of Detroit, where the violence was occurring. As resident Katie Thompson said in later interviews with the Detroit Historical Society, “It was like the whole world was on fire.” “Twelfth Street [now Rosa Park Boulevard] was burning. Guns were going off, and the electricity was popping. I couldn’t sleep. I just laid there and cried.”

It was truly a “Summer of Fear.” While Detroit was the site of the largest riot, it was not the only city in America ablaze that summer of 1967. It had begun with Newark, New Jersey, earlier in July. By the end of the year, riots had occurred in 150 other urban communities in the United States.

The fear we felt for those five days in July was repeated throughout the country that summer at the same time that couples were dancing on the corner of Haight and Ashbury during the “Summer of Love.”

Fear is often represented as something that is unreasonable. We think of our childhood and the imagined fears that would disappear simply by having our parents hold and reassure us. Yet, sometimes fear is justified. The hurricane does come ashore, the tornado does flatten the home, the earthquake does bring down the buildings, and the unexpected auto accident does devastate the family.

And, yes, the stock market does crash. Hard to believe with stocks rallying for over eight years, right?

In fact, I can categorically state that it will crash, if history is our guide. And, unfortunately, history has also taught us that bonds can crash—as can gold, housing, the U.S. dollar, and really any asset class in the financial marketplace. Even banks can close. And governmental entities—like countries, states, territories, and cities…like Detroit—can, if only in effect, go bankrupt. There is no investment that has not at some time elicited fear and caused real loss.

But, as we found in Detroit, the risk can be managed. Police can be better trained, and hiring can include more diversity. (A largely white police force under white leadership that enforced laws in a city with more than 30% black residents has for decades now been made up of a majority of African-Americans managed by black leaders in what is now city largely populated by them.)

Sometimes these risk-management efforts have been effective, and sometimes not. While New Detroit, Inc., was formed in the wake of the riots to spark community development, it has only recently been able to bear fruit.

And while the city had been blessed before the riot with the most federal money of any city (except the much larger cities of Chicago and New York) from Presidents Kennedy’s and Johnson’s housing efforts and the War on Poverty, those federal funds did not stave off the riot. It was later determined that the hot summer nights combined with years of bad relations between police and the community fostered the riot. And an initial laissez-faire response in which the community stood by and let the situation get out of control literally fanned the flames.

Similarly, in investing, a passive buy-and-hold approach does not always work. And while we can spend millions in search of risk-management tools, they are not foolproof.

But we all need to invest; we need to invest to reach our goals in life, to sustain ourselves in a long and fulfilling retirement, to stay ahead of the never-ending ravages of inflation, and to be prepared for emergencies. Not all of the business owners in Detroit could rely on the “Soul Brother” message hastily scrawled across the fronts of so many Detroit businesses in the early hours of the riot. For some, there was insurance. For those without insurance, there was only loss.

Active management—or, as we refer to it, “dynamic risk-managed investing”—was developed to help people be able to invest in the assets they need for their future. It is employed to mitigate losses to a level that most can accept in order to invest and reap the benefits of our society and its future.

As Detroit’s Walter Reuther, the dynamic leader of the United Automobile Workers, said in the aftermath of the riot:

“What are we trying to do with this thing we call the American Dream? We are trying to build a society in which we can harmonize the diversity—the many splendored diversity—of the human family, of all kinds of people, and to weld them into a sense of unity and solidarity.

“This has never been done before. There are no blueprints that we can lift out of the history books, because no other people have ever had the challenge, or the opportunity. There is little we can do about yesterday. But there is much that we can do about tomorrow.”

Market update

There has been very little fear in the financial markets this summer. The so-called fear index, the VIX, continues at near-historic-low levels. While this can often suggest an impending downturn, we have learned during the last few years that the VIX can stay low for a very long time before there is an actual, tradeable decline.

VIX Weekly Volatility Index 07/26/17

Virtually all of the major asset classes finished the week higher. Led by gold’s 2%-plus rally, and the across-the-board gains of bonds, U.S. stocks, reaching new all-time highs, outperformed the broader foreign equity indexes of both developed countries and emerging-markets issues. Even the U.S. dollar had gains, but only against the British pound—it still trailed the yen and euro badly (time for that summer vacation abroad!).

None of the most reliable statistical indicators of an upcoming recession are flashing.

Earnings reports so far have been strong. Most have beaten analyst projections. It’s the same on the revenue side, with strong performance across the board. Rarely have revenues outperformed earnings over the last few years, yet this quarter they are. This is significant since revenues are less susceptible to short-term control by companies than earnings.

Market breadth measures also moved to new high levels, but that means the dreaded “overbought” word is now in vogue for both the stock market and breadth indexes. Still, like with the VIX, stocks can stay in danger territory for a long period when the market is rallying.

While this has been closer to a “summer of love” than “a summer of fear,” as we learned here in Detroit, it is not enough to wishfully think that things will stay quiet just because they have been. Instead, it is better to be prepared and use the risk-management options that are available…even when you believe it can’t happen here.

P.S. For more on the Detroit 1967 riot, go to the Detroit Free Press section on the outbreak, which I relied on heavily for facts cited in this article. Also, for the arts’ contribution to the discourse, listen to John Hooker’s “The Motor City Is Burning,” and Gordon Lightfoot’s “Black Day in July.” Also check out the Detroit Historical Society’s site of oral histories and two new movies: “12th and Clairmount” and, premiering this week, “Detroit.”

Weekly Edge: “Risk-On” Continues as Markets Break to New Highs

Investors’ risk-on attitude pushed markets to new highs last week, and our benchmark ETFs continue to indicate more bullishness. This is due to an overall increase in momentum scores. The only sector that experienced a decrease in momentum was Industrials. Technology is still the highest-ranked sector that had an increase in momentum score over the past week, from 27 to 29. With a rise in oil prices over the past week, Energy’s negative momentum decreased from -14 to -9.

Sectors: The leading Sector Benchmark ETFs exhibited minor shifts last week. Technology continues to be at the top of the leaderboard, with Health Care right behind. Industrials and Discretionary flipped places, as did Utilities and Real Estate. The spread between the highest and lowest sectors decreased from 48 to 41 this past week. Telecom continues to improve, from -21 to -12, but is still at the bottom of the sector list. These are the only two sectors that exhibited negative momentum last week, since Consumer Staples changed from -3 to 2.

Technology and Materials, cyclical sectors, are still near the top, while Consumer Staples and Telecommunications, more defensive sectors, are near the bottom. Energy, in what looks like a retracement, is within a longer-term downtrend, reducing its negative momentum score as previously mentioned.

Factors: Momentum, Growth, and High Beta continue to be the top factors among our Factor Benchmark ETFs. The current factor rankings confirm the “risk-on” nature of the markets at the moment. Low performance of more defensive factors, such as Low Volatility, Dividend Growth, and Yield, strengthens these observations. The overall increase of momentum scores for all factors except Momentum (-1 change) and Yield (0 change) might suggest investors are cautious with their “risk-on” bets. Three factors have momentum scores greater than 20 (compared to two the previous week), and the sum of the top-three ranking scores is 76 (compared to 70 the previous week). The cautiously risk-on observation mentioned previously is evident from the rise in the sum of the bottom-three momentum scores, from 15 to 22.

Global: There were slight shifts in rank and overall momentum levels among the Global Benchmark ETFs, with most exposures’ momentum rising from last week. The top-ranked regions still include China, Emerging Markets, and Latin America. The rankings suggest investors are putting capital to work overseas in regions now believed to be economically and politically stable and growing. China continues to be at the top of the ranks with an increasing momentum score, from 46 to 48. USA, UK, and Japan continue to be ranked last. The rankings don’t necessarily mean that the leading regions will have the most prosperous economies going forward, but they do indicate that momentum has increased in those economies. The current Global rankings also suggest a risk-on appetite when looking at investment exposures on a global level.

Two Week EdgeChart 07/26/17

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