Nolte Notes for September 4, 2012Paul J. Nolte - Tuesday, September 4th, 2012
It is as if you are moving through another dimension, a journey into a wondrous land whose boundaries are the imagination. You are entering the Fed zone. With many pardons to Rod Serling, investors had to feel that the emphasis on one speech to make/break the financial markets for the rest of the year was a bit over the top. And Ben really didn’t disappoint. After pointing to Congress for failing to do anything fiscally, he then indicated the Fed stood at the ready, ostensibly to make more money available to an economy that really doesn’t need it. Here is an interesting twilight zone moment, with a twist of conspiracy. Bernanke next Fed meeting is in two weeks, at which time he embarks upon another QE program, boosting Obama’s chances at the White House – as Romney indicated that if elected, Ben is out of a job. Only in the twilight zone can this kind of thinking actually gain currency. The economic data over the past month has been better than expected and this week’s data points include the always-important unemployment report. That’s the signpost up ahead, our next stop – the Twilight Zone!
Worries over impending doom in the next two months may be overblown, as the market returns may actually be very good for the rest of the year. Since 1950, there have been 22 years in which the markets were up over 10% through August. In those 22 years, the average September return was 0.66% and a better than 5% gain through yearend. Two outliers were ‘86/’87. September ’86 the markets fell over 8% and in ’87 the markets fell over 33% in the last four months. Dropping the best and worst returns, the remaining 20-year average for September was 0.7% and nearly 6.75% for the last four months. Two of the 20 were also election years (‘76/’80) where returns were 6.9% and 14.9% respectively. The history lesson: September/October are not as scary if the markets are already up more than 10%, with declines generally shallow and ultimately the markets are higher by yearend. Just maybe all the gloom/doom gets postponed until 2013.
The comments from Bernanke at Jackson Hole gave bond investors hope as well that the Fed will be back buying bonds again before the year is out. As a result, the yields fell nearly a quarter point from their highs two weeks ago. The bond model remains in negative territory, as utility stocks have been declining and commodity prices rising, offsetting any good from lower treasury yields. The corporate bond market should also continue to benefit from the Feds’ largesse as investors scurry to find any kind of yield in this near zero yielding world. If the Fed does announce a bond-buying program in September, expect equities to rise and bonds to trade sideways as fears of eminent inflation outweigh the benefits of lower yields.
The summer rally started on Memorial Day and let’s hope it doesn’t end with Labor Day. The leader of the pack for much of the year has been large US stocks, but small, mid and even international stocks are beginning to pick up the pace. International stocks are benefiting from a lower dollar (down 3% from recent peaks) and less worries about a European disaster. While that may yet happen, the can kicking is giving investors confidence that time might heal at least some of the wounds. As investors realize the Fed may provide a “backstop” many of the higher beta (volatile) sectors are beginning to shine. Technology has been the poster child for volatility, with Google and Apple both jumping nearly 10% for the month of August. Technology stocks may actually be the new favorites for the income crowd. Their yields, overall, are not that terrific and many of the companies have ample cash flow and earnings to potentially boost dividends at well over 10% annually. Given the already very inexpensive valuation of many names in this sector, investors may be very well rewarded in the decade ahead with significant income growth and appreciation.
More European meetings this week, unemployment reports and Fed meeting in two weeks will keep investors cautious. However, as outlined above, given the very good year so far for stocks, the normal September/October swoon may be relatively short and shallow this year. Bond investors will want to stay on the corporate side, as returns should best treasuries through yearend.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.
Login or register to post comments