by Chad Meyer

As humidity takes hold and Fourth of July memories fade, there’s just no denying it: the dog days of summer have officially arrived. And while it’s no surprise for market activity to “cool off” around this time of year, one cannot help but suspect there’s more than the usual pre-Labor Day lull currently at work in the financial world. In this space roughly twelve months ago, I described the second quarter of 2017 as “frothy times,” characterized by the feeling that almost any stock was a winner. Looking back over the last three months, it’s clear that froth has given way to a more cautious mood, due in no small part to a collective acknowledgement of uncertainty as the new normal. The view from the beach, it would seem, now includes whitecaps.

From April through June, the Dow Jones Industrial Average and S&P 500 ticked up by roughly 0.5% and 3%, respectively, while the NASDAQ clocked in at a formidable 6.2%. While healthy in and of itself, the drama that punctuated this growth—particularly in the wake of the president’s late May tariff policies—confirmed the “volatility vortex” cited by prominent onlookers at the year’s outset. Perhaps more vexingly, and as the numbers suggest, first-tier gains appear to be clustering into fewer and fewer assets, with a disproportionate emphasis on the technology sector’s “FAANG” stocks (Facebook, Amazon, Apple, Netflix, Google).

In other words, folks are more finicky about when and where they’ll get in the water. As the Wall Street Journal recently noted, this makes for a higher risk profile within the traditionally “defensive” S&P 500, with herds of investors piling into a select few stocks upon which the broader market’s fate increasingly rests. What might happen, the common worry goes, when Facebook finally turns in a dud quarter?

In times like these, the benefits of a time-tested, “all weather” investment strategy are thrown into sharpest relief. With many participants continuing to simultaneously crowd into and fret over the same few shares, our team is able to focus on relatively non-correlated opportunities that the herd has ignored. Indeed, in these languid summer weeks, when shifts in seasonal business overlap with a general slowdown in market participation, the disciplined value investor may be rewarded merely by digging where others are not.  Conversely, through adherence to bottoms-up fundamental analysis, we’re uniquely positioned to avoid the market’s ticking time-bombs, from the high-flyers overdue for a tumble and the broad indices they may drag down, to the (in our view) significant number of firms milking Trump’s tax cuts to effect inorganic growth.

Of course, there’s no guarantee that the FAANG gang won’t continue to pull most of the market’s weight, rendering those who bothered to look elsewhere foolish in hindsight. But from a historical perspective—on this score, the “dot-com” collapse that put an emphatic end to the 90’s bull market comes to mind—we are instructed by the principle that while hot sectors come and go, the cornerstone principles of sound investment remain fixed. So whether the whitecaps subside or turn to gale waves in the back half of 2018, you can be rest assured that we’ll continue to diligently navigate the market in pursuit of your interests, applying the same free-thinking, steady-handed approach that has kept our clients in good stead since 1995.