If there is anything hotter than this weather in the U.S., I'd like to know. The sweltering heat here on the West Coast, with temperatures easily passing triple digits, have made us all lethargic as we move slowly and yearn to sit it out. It's kind of what we are seeing in markets, right? Volatility has been crushed, volume is absent and participation is lacking, along with interest.
What's surprising is where the indices are sitting. They're at nearly three month highs as the most hated rally in the history of mankind continues. Who has really been excited about buying this market? Other than a few sharp rallies after statements from European Central Bank President Mario Draghi and the Federal Reserve, as well as earnings, the price action has been only OK. Yet from the beginning of June the S&P 500 has gained more than 13% and the Nasdaq is higher by 12%, as is the Russell 2000. Meanwhile, volume is lower by some 30% and the CBOE Volatility Index (VIX) has fallen about 45%. What gives?
There never seems to be any rhyme or reason for market rallies or declines, though it is the best barometer of future activity we have. If you think six to eight months ahead, you might understand that the markets are rallying today because the economy may be set to gather some steam in early 2013. How about a change in Washington? No, the market has a poor record of forecasting that outcome -- but it has a stellar record of predicting the economy. Perhaps we should just listen to the message being sent.
Speaking of heat, the Midwest is stuck in an awful drought that has nearly killed a bountiful crop of corn, soybeans and wheat. Prices for these commodities have skyrocketed lately as farmers have pulled out a discouraging amount of corn from the ground. It's been nearly six years since the estimated crop has been this bad.
Any corn that makes it through, of course, will be getting some great prices. Meanwhile, those left out in the "cold" will end up getting some assistance and then replanting the next season. As for beneficiaries, certainly these include the seed and fertilizer companies I have been talking about all year. Potash (POT), Mosaic (MOS), Agrium (AGU) and CF Industries (CF) are all positioned well with lean inventories, strong demand and good pricing.
There are other beneficiaries as well. Deere (DE), for example, is one of the best equipment suppliers. Dupont (DD) is another unlikely player that has done well -- one that has performed well for Action Alerts Plus portfolio co-manager Stephanie Link. Dupont has a great yield and operations, and Ms. Link continues to favor it over the longer term.
So as the temperatures stay elevated and we look to find some relief from the fiery sun, we also continue looking for some activity to return to the markets. As the election draws near and the uncertainty of the outcome is considered, the action may just be around the corner, with something on tap for everyone. It's time to stay cool and avoid melting down.