For September, will the market be as mild as the weather?

  • You wouldn't know it today (9/6/2012), but September doesn't have the best reputation when it comes to stocks. According to Bank of America Merrill Lynch, since 1926 stocks of any large company fell 0.80% during September, but rose 0.9% on average during any other given month. Separately, researchers at the University of Kansas noted that if an individual started investing in 1802 and kept their money in stocks only during September, they would have lost more than half their money by 2006. However, doing the same during any other month and they would have gained 79% over the same period.           
  • Due to the summer drought of 2012 the United Nations is urging action in the face of surging food costs, which the World Bank stated rose 10% in July. In the U.S., many ranchers cannot afford higher feed costs and have thinned their herds to the lowest levels in 60 years. This means higher meat prices in the coming months, and it should be noted that poultry and pig farmers have been impacted as well. Basically, higher food costs (meat, fruit, vegetables and grains) will be on the menu for the foreseeable future.      
  • U.S. factory activity contracted for the third straight month in August. It wasn't any better overseas where the Euro-zone economy shrank for the second time in three quarters according to a revised estimate. Also, both Fed Ex Corp. and UPS stated that they're seeing declines in shipping due to a sharp reduction in global manufacturing activity, especially from Asia. 
  • As a result of the Eurozone's economic troubles, European Central Bank President Mario Draghi came to the rescue today and global stock markets responded quite positively. He stated that ECB would begin a new bond-buying program to lower struggling euro zone countries' borrowing costs, which would serve as a "fully effective backstop." Draghi said the new bond-buying program is  conditional upon countries submitting to outside fiscal oversight. He believes the program will "safeguard the monetary policy transmission in all countries in the euro zone area" and backs up his pledge to do whatever it takes to preserve the euro. 

It will be interesting to see if this move is just another band-aid attempt or a true game changer for the Eurozone economies and markets. 

  • The Congressional Budget Office has repeatedly warned of another recession, if no action is taken and current tax rates expire resulting in automatic tax and spending triggers taking effect on January 1st of next year. Local economist, Chris Kuehl, wrote an interesting piece on this issue in the August 14, 2012 KC Star Business Weekly. The following is a link if you would like to read further: 

http://www.kansascity.com/2012/08/13/3760892/if-another-recession-occurs-blame.html 

  • Ben Bernanke recently stated the Federal Reserve is ready to act with more stimulus, if the U.S. economy and weak labor market require more help. Lower interest could provide another shot in the arm for stocks and bonds. However, Mr. Bernanke may not need to act anytime soon though. A national employment report calculated by payroll processor Automatic Data Processing Inc. and consultancy Macroeconomic Advisers released today showed that private-sector jobs in the U.S. increased by 201,000 last month, which exceeded economists' expectations. 

            Along these lines, Pimco's co-chief investment officer, Bill Gross, in his latest investment      outlook, suggested that the Federal Reserve's current zero percent interest rates are      harming the economy rather than helping it. Mr. Gross stated that lenders' profit margins on    loans are so low that it doesn't compensate them for the risks involved. Thus, banks are less    willing to lend. He noted that lowering interest rates traditionally spurred economic growth,   but it's not working currently because regulatory changes and caution among households           had "thrown a monkey wrench into these models." He reiterated his view that market returns            were likely to be disappointing for the rest of the year and that investors should remain   cautious. 

  • Dividend stocks have done well 2012, but are showing signs of euphoria. In the August 27, 2012 Barron's Investment Magazine, Vadim Zlotnikov, chief market strategist at AllianceBertstein, share his thoughts on this. He studied the pricing and valuation of various industry sectors compared over the past 30 years and found that currently dividend-paying stocks are trading at a premium compared to the general market. "The risk of owning these [dividend-paying] stocks is that they are 20% to 25% overvalued," and any increase in inflation or bond yields could cause them to tumble. 

In this low-yield environment investors have bid up the price of high dividend-paying stocks, and they are not reasonably priced compared to the general stock market. This is not a dot.com bubble Part 2 by any means, but it is noteworthy since these stocks are considered almost "bullet-proof" by some market pundits. I'm not condemning this sector, but just noting that when everyone piles into one sector, then it can get overvalued and humble those shareholders who've focused solely on that investment sector or criteria. 

  • Year-to-date, U.S. stocks have been quite resilient in the face of all the above and additional economic issues. 

The stock market appears to be showing great apathy regarding the above concerns, and I do not have a crystal ball or a dedicated phone line to Jim Cramer at Mad Money. As such, apathy can be a precursor to market declines. Even though the declines may be temporary (i.e., only for several months), in the near term, I would rather keep a few chips on the side. This allows us to take advantage of better prices when  the market declines, versus just diving in because the "investment" water feels fine today.    

I understand full well that I may be completely wrong in my logic and investment approach, especially when the market rallies like today. However, I recently spoke with a representative from a very well respected, value-oriented mutual fund group. He stated that currently their analysts and managers are not finding many bargains in stocks, and the downside risk outweighs the upside potential. As such, they have taken a wait and see approach for better prices (i.e., waiting for a potential market decline) before committing more cash. Believe me, one conversation does not dictate investment decisions, but it does help validate if my thoughts and gut instinct are rationale or not. 

Summer is over and it's back to reality

School is back in session, which means homework and soccer practice times three. Along these lines, I am looking for cooler weather, hopefully my kids score some goals, parent teacher meetings (because it is very helpful to get a teacher's insight on my child), PTO events, Boy Scout campouts, etc. Also, a break from the heat and additional rain showers will be a great entry into fall.

 

Quotes 

"What is in the well of your heart will show up in the bucket of your speech."

                        Author Unknown 

"Start by doing what's necessary; then do what's possible; and suddenly you are doing the impossible."

                        St. Francis of Assisi 

"People are like stained-glass windows. They sparkle when the sun is out, but when the darkness sets in, their true beauty is revealed only if there is light from within."

                        Elisabeth Kubler-Ross 

 

Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Sign up to receive our Commentary

First Name:
Last Name:
Email:
Security Code:
 
Back to top