@theMarket: A Cause to Pause

Markets usually need something to move them. Good news or bad, the markets want an excuse to go up or down. Now that the government, the debt ceiling, the budget and the Fed are temporarily out of the picture, investors are finally focusing on something meaningful — earnings.

Actually, that is a good thing. It may indicate that the financial sector is at last returning to its historical roots after years of government bail-outs, monetary control and political drama. There was a time, some of you may remember, when earnings could make or break the markets. I don't think we are there yet, but company earnings this week have given the market cause to pause.

The sampling of company data thus far in this earnings season has been lackluster at best. Companies in the financial, health care, retail and several other sectors have disappointed. The Christmas season, for example, was evidently a disappointment for many traditional, non-internet retailers. Consumer shopping behavior is clearly changing as more and more people shop the web and shun the malls.

To tell you the truth, I am one of those who have abandoned the store for the ease, convenience and competitive prices offered through my computer. Just about all of my holiday shopping was done that way, including the gift certificate I purchased for my wife at a local clothing store.

In the financial sector, banks and brokers are struggling with the new curbs on proprietary trading as well as regulations that require them to amass more capital to offset the risks they are taking in their businesses. Bond trading, which had been a big profit center for financial institutions, also did poorly thanks to rising interest rates.

Granted, it is still early days in the earnings season. I am sure that there will be some absolute gems in upside earnings surprises. The trick is to identify those companies that shine and avoid those that won't. Wow! Could we really be at that point in the recovery where the fundamentals of individual companies have once again become important to their stock price?

As readers are aware, I believe the economy is accelerating and employment rising. All is well in the world right now.  Markets over the last few years have climbed a wall of worry but it appears that those worries have faded. We have yet to replace them with new ones or maybe the new worry is that there isn’t anything to worry about it?

So what are the negatives?

We are in the second year of a four-year presidential cycle. If one looks back through the post-World War II period, we find that these "second years" have been the absolute worst performance years in the stock market. To make matters worse, stock market returns have been even lower than normal when the president has been a Democrat.

Valuation also bears watching. Markets are not yet expensive, but could become so if enough companies fail to live up to expectations. What is now simply a pause in the market's advance could become a rout, if too many companies disappoint. But what continues to bother me the most is the sentiment indicators. There are just too many bulls out there for my taste. As a contrarian, I like the markets most when no one else does. However, none of the potential negatives tempt me to bail on stocks. Stay the course.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Statistically Speaking

Wall Street is awash with statistics on any given day. Some are useful while others simply add to the level of noise, but on occasion we do get some hints of where the markets are going by looking at past data.

Take the month of January for example, historically it has been a good month for stocks.

It is a time when new money supposedly floods into the stock market, pushing the averages up. That gets investors excited. They begin to anticipate a big up year. Some say that if the Dow Jones Industrial Average is higher after the first five days in January, then the month will be positive. Others argue that if the month finishes on an up note so will the year.

The S&P 500 Index has been up 13 of the last 20 Januarys, so statistically the odds are in our favor but not by that much. What may add weight to those probabilities is the market's performance in 2013. The S&P 500 Index was up 30 percent last year (not counting dividends).

Whenever that has occurred in the past (75 percent of the time since 1928), the next year's January gained on average 2.4 percent. There have been four years since 1995 that the S&P 500 closed with over 20 percent gains and all four years saw average gains of 2.5 percent.

As for the market's predicted performance in 2014, there is more good news ahead thanks to the gains of last year. Since 1950, there have been 17 instances when the S&P 500 was up more than 20 percent in a year. The same index finished positive the following year 14 times (82 percent probability). There have been four years since 1995 that the S&P 500 closed with over 20 percent gains and in all four years the average gain was 2.5 percent.

There is little to worry about on the domestic or on the global front right now.

Washington politicians are playing nice for now. This year's elections will short circuit any tendencies by the tea party to create another crisis in the first quarter. The economic numbers in the U.S., Europe and Japan are encouraging. Those are the three markets that investors should be focused on. Europe is lagging our own recovery by a year or two. Japan represents enormous upside in the years ahead and we here at home have entered a secular bull market.

So far the jury is out on January. Thursday was a down day and Friday we recouped some of those losses. I am betting that next week sees some further upside. However, somewhere out there a pullback is lurking. I expected it to happen in December but at its worst, the market was down less than 2 percent.

Interest rates continue to rise with the 10-year U.S. Treasury now over 3 percent. I believe rates are heading much higher. Part of the reason that the stock market continues to gain is that bond holders are finally getting religion. They are selling bonds and buying back into equities.

It is too hard to call the movements of the market in the short term but history seems to indicate that we should expect to see a few more days, if not weeks, of gains before this rally comes to a close. In any case, my advice remains the same for readers — stay invested.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: From One Fed to Another

What a week it was! The U.S. central bank marked the end of its quantitative easing, while promising to keep interest rates low. On the other side of the world, the Japanese central bank did the opposite. Its Fed increased the amount of stimulus it will add to the economy from $600 billion to more than $730 billion per year.

Oh, and by the way, the U.S. stock market loved the news. The S&P 500 Index climbed to within a hair's-breadth of its historical high while the Dow actually made a new intra-day record. It is good news if you are a global investor, which I am. More stimuli, wherever it may be, actually enhances global growth and that's good for us. Despite those who criticize the Federal Reserve's quantitative easing efforts since 2009, these actions have not only carried this economy back from the brink but set it up for further growth in the future while sending our stock markets to record highs.

That has not happened elsewhere because central banks worldwide have failed to emulate the Fed's actions. Europe, as I have often said, is struggling because their central bank cannot develop consensus among its EU members to do what it takes to put Europe back on firm footing. Japan, on the other hand, is a horse of a different color.

They have taken the U.S. Fed's playbook and ran with it. Their first QE project, announced almost two years ago, began the herculean effort of pulling that island nation from a 20-year economic funk of no growth and deflation. That was a good start, but similar to our own QE I, it's not enough to do the job. Yesterday, their central bank announced further stimulus, call it QE II, which vaulted the Nikkei stock market over 5 percent on the news.

If you have been reading my columns over the years, you know that I first recommended Japan as a long-term buy back when the Fukushima Crisis had devastated the country ("Japan: The Sun Is Beginning to Rise" June 2, 2011). At that time, the Nikkei was at 9,955. The Nikkei now stands at 16,413. Investors who followed my advice have made about 65 percent on their investment. So what's next?

Japan's stock market should continue to climb. My mid-term target for the TOPIX, which is the Tokyo Stock Exchange's price index, is1,750 which is a 26 percent gain from its present level. That's not too shabby, but don't neglect the U.S. market either. After sounding the "all clear" in my last column, U.S. markets have continued to climb. I expect those gains to continue through the end of the year and into next year. Why?

The economy is growing. I believe that growth will surprise you on the upside as events unfold. Although we still need to do more work on the labor side, especially in seeing more full-time jobs and pay increase, consumer spending is starting to come around. The fact that energy prices have dropped precipitously will help out on the spending end as well as in the months to come.

If I am right, after mid-term elections, we may finally see those do-nothings in Congress actually get to work on a new economic stimulus plan. Call me a cock-eyed optimist, but I am actually hoping for compromise legislation out of both parties. All-in-all, the picture I see unfolding in the months ahead is quite positive. Have a Happy Halloween.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Tea Leaves and Crystal Balls

Given that the New Year is just around the corner, brace yourself for a barrage of Wall Street predictions. Investors love to read them, despite the fact that the vast majority of forecasts will be proven wrong. Last year, I was lucky and spot on with my bullish forecast, but 2014 could be different.

 First, the good news, the economy and employment will continue to grow. Despite the naysayers, the quantitative easing by the Federal Reserve Bank over the past several years was, in my opinion, a success. In 2013, we began to see the fruits of their labors. I believe the strength of the stock market this year was fueled by the gathering strength of the economy and not by what the Fed would or would not do.

Unemployment will continue to fall and will drop to below 6.5 percent by the end of 2014. The strength of the economy will mean an increase in hiring by the nation’s businesses and corporations. Wages will begin to climb for workers and profits will expand among employers.

As a result, the stock market will continue to make gains, although not at the pace of 2013. Declines this year were short and shallow. Every time the markets dipped, buyers took that opportunity to add to their holdings. The S&P 500 Index made it through the year without once experiencing a 10 percent decline. The dazzling strength of the stock market disappointed those who were waiting for a serious pullback before entering the market.

It won't happen like that in 2014.

I suspect that somewhere at the end of the first quarter or into the second quarter, we will see a substantial stock market decline of the 15-20 percent variety. Now, folks, this will not be the end of the world nor should you treat it as such. It will simply be a much-needed correction within a bull market.

The second year in an election cycle has always been a bad one for stocks, and there is a lot riding on elections in 2014. At the same time, if markets continue to advance, valuations will become stretched and the chances of a big sell-off will grow higher and higher.

Interest rates will also continue to climb in 2014. This year was the turning point for bond investors. The thirty year bull market in bonds is over and the next several years will see declining values in bond portfolios and higher and higher interest rates. It may well be that as the Fed begins to taper in earnest next year; interest rates could climb high enough to spook the stock market, causing the sharp selloff.

The good news is that I expect all the potential losses that stock investors would incur under my 2014 scenario could well be made up by the end of next year. It may well be that the market's 2014 gains could be around the historical norm, about 7 percent, when all is said and done.  

As most of my readers and clients know, I will not sit idly by in the face of such a selloff, if it should occur. Unlike this year, where my strategy was to buy and hold, next year will require a certain amount of adeptness in first selling and then buying back equities for some of you. For those longer-term players who are willing to do nothing, you can expect, at worst, some paper losses that will be made up by year-end.

Remember too, that we are in a secular bull market. As such, next year's decline, if it occurs, would be merely a speed bump in the grand scheme of things. I fully expect the stock market to continue to make gains beyond 2014, possibly as high as another 60-80 percent. So the best New Year's resolution you could make in 2014 is to stay with stocks for the foreseeable future.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Fed Saves the Santa Rally

This week the Federal Reserve Bank announced it would begin to taper in January by $10 billion a month.  Most investors expected the markets to drop on the news but the opposite occurred. Why?

One reason is that investors abhor uncertainty. The Fed's announcement this week that they plan in January to reduce their $85 billion a month bond purchases by $10 billion removed a major psychological barrier to the market's advance. Investors now have a game plan on how and when the Fed will reduce their monetary stimulus and can adjust accordingly.

I commend the Fed and outgoing Chairman Ben Bernanke. They handled what could have been a dicey situation adroitly. Bernanke, in his press conference after the FOMC meeting, managed to simultaneously reassure investors that interest rates would remain low, while focusing their attention on the growing strength of the economy. Since then the markets haven't looked back.

So does this week's event change my short-term attitude toward the stock market? I was expecting a decline in the averages. My first stop was the 50-day moving average. We hit that mark and bounced. Many of the indicators I watch are still pointing toward caution but others have turned positive again. I won’t fight the tape and will instead give the market the benefit of the doubt here.

Clearly, the Fed delivered the rally that Santa Claus couldn't. I would expect the market to remain volatile but still maintain its upward trajectory into the New Year and possibly beyond. Given that I had recommended that investors stay long the market, despite any short-term declines, no harm was done. We can all enjoy the next few weeks of upside, but I do apologize for any undue stress I may have caused readers by predicting an imminent decline.

Wall Street winds down beginning next week through the beginning of January. It is a time when low volume allows smaller trades to have a larger impact on prices and we should expect increased volatility.  Maybe we run up, maybe we come down, or maybe we just chop around, but without the big players the market behaves far less predictably. Once again, I advise clients to ignore any short-term moves.

I will mention that we are only weeks away from another stock market phenomenon called the "January effect." At year end (actually starting on the last day of December) through the fifth trading day of January small-cap stocks have tended to rise substantially. The effect is explained by the tendency of investors to first sell these stocks to create tax losses or raise cash for the holidays. This selling drives down prices far below their fundamental worth. Bargain hunters then move in and buy quickly driving up the prices and creating the January effect.

Unless you are an adept trader, I would not recommend you play this game; but for those who may hold some of these small cap stocks, it is good to be aware of these trends.

 It's been a good year for all of us, and well deserved. I want to take this opportunity to thank you for your support and wish all of my readers and clients a very happy holiday season.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.