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@theMarket: Play it Again, Sam
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It was a week of tension. Markets rose and fell on every word uttered by party leaders, who jockeyed for position and the national spotlight around the Fiscal Cliff. It was Washington at its worst. Get used to it because this deal is going to go down to the wire.
Remember last year's Greek debt negotiations? It was a game of he said, she said that dragged on for months. We are playing the same song once again only on this side of the pond. I guess the best that can be said for this American version is that if nothing happens before Jan. 1 we all think we know the outcome.
But unlike Greece, where the country either received a bail-out or went bankrupt, this U.S. event would not be as dramatic, at least at first. If for some reason the politicians miss the deadline, it would take several days and even weeks before we feel the tax bite. As for the spending cuts, those draconian measures will be enacted piecemeal and over several years. Why is this important?
Well, the stock markets are acting like January first is a do or die event. It's not. Politicians can continue to agree to disagree; delay a compromise and either extend the deadline or let the country fall off the cliff (really a ditch) temporarily. They would still have time to come up with a solution sometime in 2013 without much impact to the economy.
But that kind of scenario would sell fewer newspapers and reduce the ratings on business shows. Brokers would have less to talk about and retirees, rather than being pinned to their televisions, could actually go out and do something productive like exercise or read a good book.
If you are in that stressed-out category, remember this. How much did all that angst over Greece help you? In the end, Greece did get a bail-out, their market is up 25 percent since then and the U.S. market is up substantially as well. So relax, will you?
Warren Buffet may not be right about everything but one reason I believe he is so successful and still in the business is because he takes a long-term view. Sure, time has become compressed. Fortunes have been made and lost in years rather than decades and it has become fashionable to “trade” the markets. I am as guilty as the next person, but only to a point.
In the past, we've had to refuse clients because we didn't see eye to eye when it came to investment style. They insisted we sell every down move in the market before it occurred and jump back in "at the right time," which for them, was before the markets moved back up.
"If I could do that," I explained. "I wouldn’t need to work. I could simply sit home, trade my own account and make a couple billion dollars a year."
Here's my take. The anxiety over this Fiscal Cliff is overblown. Focus instead on the increasingly positive economic data in the United States. In addition, I expect the Fed may announce further stimulus moves in the coming month. The stock market, which is trading around 13 times earnings, is fairly valued given a modest growth scenario. We may be underestimating that growth and prospects for a better 2013 than most people expect. Buy the dips.
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: Stay the Course
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Unfortunately, stock markets need these periodic pullbacks. As I have written before, expect three to four such pullbacks per year of between 3-6 percent in the equity markets. It is the cost of doing business. Without them, financial markets would be just too dangerous for the average investor. And I have never met a person or firm that can trade those declines consistently and successfully, so don't try.
Now is the time, however, for a little hand holding. About now my phone begins to ring regularly with client calls. They always begin this way:
"Have you changed your mind about the markets?"
"No," I reply, waiting for the next question.
"So how much lower do you thing stocks can go?"
The real question behind that one is "How much more pain do you expect me to endure?" Clients are expressing what is called loss aversion, which is part of the Prospect Theory. This theory was coined by two Israeli psychologists Daniel Kahneman and Amos Tversky back in the '90s. They contend that people value gains and losses differently. Losses, they say, have more emotional impact than an equivalent amount of gains.
In my experience, they are absolutely right. Rarely, if ever, do I receive calls when the markets are roaring. On occasion I may receive a call from someone who is worried about how high the markets have climbed, but once again I believe the concern is more about the avoidance of loss (pain) than any giddiness based on how much the investor has made.
Now, pain has a profound effect on us humans. It can make us take irrational actions. If I think back to times in my life when I was in severe pain, all I wanted was for the pain to stop and I would do just about anything to feel better. And this statement is coming from a guy who has an extremely high tolerance for pain.
In the investment world, this aversion to losses has caused many a good man and woman to dump their holdings at the absolute worst time. Over and over again, I have seen this wholesale selling capitulation sometimes on the very same day that markets have hit their bottom.
Of course, we all know that we should never make any decisions based on emotions but we do it anyway. That's why we are who we are. I'm just asking readers and clients alike to try and be honest with their decision to buy, sell or hold. In my investment experience, the correct decision is to do the exact opposite that my emotions are telling me to do. If I can't do that, than most likely I should do nothing.
Bringing this home to today's markets, I would advise you to simply sit on your hands and do nothing. We are pulling back because third quarter earnings were a disappointment. But remember, those are earnings that have already occurred. They are not indicative of future earnings.
The elections are less than two weeks away and after that we confront the much-heralded "Fiscal Cliff." Since the markets dislike uncertainty, I would expect further volatility and declines until then. Rather than work yourself into a frenzy, just ignore the daily gyrations and keep your eye on the bigger picture. I expect the economy to strengthen, not weaken, from here and as such there are better times ahead.
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: Profit-taking: An Opportunity
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Now normally, history doesn't repeat itself but it does rhyme, more often than not. The first Federal Reserve Bank quantitative easing (QE 1) was announced on Nov. 25, 2008, and was formally launched on Dec. 16 of that year. QE II kicked off on Nov. 3, 2010, and QE III was announced last Thursday. After both the QE I and II announcements the markets rallied and then spent several days consolidating those gains. That seems to be the pattern we are experiencing now.
Investors who purchased equities during that consolidation phase were greatly rewarded. The stock market after QE1 gained 29.8 percent during the next 12 months. After QE II, the markets gained another 13.2 percent in just six months. The lion's share of those gains came within the first three months after the announcements. This time around, stocks rallied in anticipation of a third easing so some of those gains could already be in the market.
Nevertheless, a fairly safe prediction would be that over the next 6-8 weeks we should see a substantial rally. That should take us just into the November elections or slightly after. That is where things could get a bit dicey, in my opinion.
The stock market, using the S&P 500 Index as a benchmark, is already up almost 16 percent since I advised readers to get back in the market. If the stock averages were to rally into the November elections, we may be looking at a gain of greater than 20 percent for the year. On Wall Street, there are three kinds of investors: bulls, bears and pigs. I try to avoid "pigging out" when it comes to profits so, by November, it just might be time to cut and run.
In the aftermath of the general elections, there are a multitude of economic issues that the lame-duck Congress will either face or flunk. Chief among them is the often mentioned "Fiscal Cliff." Will the makeup of the House and Senate be such that we can avert across-the-board tax increases and deep spending cuts by Jan. 1, 2013? Will politicians agree to raise the debt ceiling once again? If so, what will that do to the U.S. credit rating?
Those are only some of the gnarly issues Congress and the president–elect will face. Depending on who wins, the first quarter of 2013 might also be a bit stormy. Given that I have no idea of how all of this is going to play out, November might be a great month to take profits this year. There is a risk that things may go absolutely wonderful. Congress and the president could make up. A raft of great legislation could pass before the end of the year and this year's Christmas rally could be stupendous. In which case, I would have left some money on the table by getting out too soon.
So be it. No one ever went broke by taking profits. This year has been a good one so far. Although it is only late September, it is time to begin thinking about an exit strategy. Hang in there for now because I do think there are further gains to be had in the markets. But plan for the 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: Game Changer
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This is a game changer, in my opinion, so hold on to your hats because the markets are definitely going higher. The only question is how high?
I won't bore you by regurgitating all the moves the Fed has made, but I will give you the bottom line. Interest rates on the short end will stay low through 2015. The Fed is going to target the mortgage market (read housing sector) by buying up all the mortgage-backed securities they can find. That should both drop lending rates further and also spur the banks to start lending money to Americans who have not been able to obtain mortgages or refinancing.
These latest moves by the Federal Reserve Bank are actions I have been advocating since writing my column "What the Markets Missed" on Sept. 22, 2011. It actually goes further by putting everyone — the markets, the politicians, the corporations and small businesses — on notice. Fed support will be on-going. Why is that important?
Because up until Friday, the Fed's wait-and-see attitude toward additional stimulus created a great deal of uncertainty within the markets and the business world. It also created what I call a "start and stop economy." In such a business climate, both Fortune 500 corporations and small businesses cannot plan, cannot hire, and will not invest.
The Fed is not only removing any uncertainty that this might have been their last QE move, but goes a lot further by putting everyone on notice that they are committed to stimulate for as long as it takes — even after the economy starts to grow again.
Remember readers that no matter how much support the Fed is willing to contribute they can't solve the unemployment problem alone. Once again, Chairman Ben Bernanke reiterated that without fiscal policy, the unemployment situation is not going to improve very much.
So bear with me as I fantasize about the near future. In my opinion, Ben Bernanke just handed the presidency to his boss, Barack Obama. In exchange, so this story goes, the newly re-elected President Obama will forego partisan politics, work with the opposition in both the House and Senate and implement a full employment policy through fiscal stimulus.
But what specific policies are the Republicans and Democrats going to implement in order to reduce unemployment? Both sides keep jawboning about "getting America back to work" but exactly how are they going to accomplish that? How, for example, is cutting spending and raising taxes either directly (taxing the rich) or indirectly (cutting services to the middle class and poor) going to increase job growth? Readers/voters should demand those answers now — before voting for one politician or the other.
But back to the markets, with "risk on" once again, dividend and income funds should take a back seat to more aggressive areas. That doesn't mean dividend stocks won't still go up. They will, but just not as fast. Other more defensive areas such as utilities, consumer and durable goods, healthcare and such will also see less price appreciation than some other sectors. For those who still hold long-dated U.S. Treasury Bonds, get out of them right now. The Fed is no longer supporting that market and as the economy strengthens the prices of these bonds are going to plummet.
Some areas in the stock market that have lagged the overall markets could do quite well between now and November elections. The materials sector seems ripe for a rebound as do the financials and industrial sectors. Emerging markets, which are also top heavy in commodities, could catch up fairly quickly.
I am not sure how high the markets will go before succumbing to a bout of profit taking but, given the background of central bank stimulus, I remain a buyer of pullbacks, which has been my advice since early June. It was a great summer and it could be an even better fall.
Bill Schmick is registered as an investment advisor 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: Are Markets Predicting Obama Winner in November?
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Readers may recall that I have been using the historical performance date of the stock market during election years since 1900 to predict the market's direction in 2012, courtesy of Ned Davis Research. So far, that data had accurately predicted the markets ups and downs all year.
The data shows that the Dow Jones Industrial Average gains an average of 8.6 percent each election year when the incumbent has won. It gains less when the challenger wins. The Dow is up 8.8 percent year-to-date. In only three cases over the past 112 years has the incumbent party candidate gone on to lose after being up that much by the end of August. As such, I would say there is high probability (89.7 percent) that a Democrat will sit in the White House come November.
Of course, you may reject the stock market as an accurate predictor of the future. You may also choose not to base outcomes on probabilities; that is your prerogative. But as a stock market investor you may want to hope that the election-year indicator is correct. Here's why.
In last week's column, I stated that "Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets," but that kind of thinking flies in the face of reality. Kudos to a reader from Lenox Dale who supplied me with a wealth of statistics which show that stocks have historically fared much, much better under Democratic administrations. The S&P 500 Index has rallied an average 12.1 percent per year since 1901 when Democrats occupy the White House versus just 5.1 percent for the GOP.
The overall economy has done better as well with GDP increasing 4.2 percent annually since 1949 when a Democratic president occupied the Oval Office compared to 2.6 percent under Republicans. Our greatest stock market run occurred under Bill Clinton's watch (1993-2000), followed by the period 1981-1992 under the presidencies of Reagan and Bush.
But enough history, this week we made a little history of our own with all three stock market averages hitting new highs for the year. As expected, European Central Bank President Mario Draghi outlined the latest European rescue plan. The ECB intends to buy member nations' government bonds in exchange for further promises to accept outside oversight of their fiscal policies.
Then, on Friday the unemployment data came in weaker than expected. That immediately had gold flying in anticipation that it is all but certain that the Fed will ease next week at their Sept. 13 FOMC meeting. And my wish came true. I said I would like to see the S&P 500 Index break out of its weeks-long trading range and it did. It appears more upside awaits us.
Bill Schmick is registered as an investment advisor 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.
