If there is ever a time of the year that strikes the highest level of anxiety among investors it is the period of September and October. Well we made it through September and now have three quarters of the year behind us and what an explosive time this has been since the market low on March 9. No time to relax though, as we now have October which is historically the most volatile month of the entire calendar for the stock market.
Whether or not a reaction to the various stimulus measures and monetary policy actions, the markets have responded dramatically since March resulting in year to date positive September performance of 10.7% for the Dow, 34.6% for NASDAQ, and 17.0% for the S&P 500. As for the latter index, there is an interesting observation. The S&P 500 for the last two calendar quarters has had gains of 15% each quarter. While that seems like a formidable move, the point is that if the index advances another 39% in the last quarter of this year it will achieve breakeven for the last decade. I will play and bet the odds of that not happening! To put it another way, an investment in the S&P 500 10 years ago requires a final calendar quarter performance increase this year of 39% to at least walk away with your original principal, no earnings. Clearly this is a checkmark for the column that says buy and hold strategies do not always work.
The opposing camps in the marketplace at this time are advocating the following positions: the bears contend that the market is significantly overextended and ready for a serious pullback; the bulls believe the characteristics of the rally suggest growing strength in the economy and continued advancement. What do I believe? The safe bet is to say somewhere in the middle but then readers would say that is taking the easy choice. So here are at least my thoughts. I am not anticipating a significant pullback. I believe the 2008 and early 2009 sell off created a clear oversold condition once the systemic confidence in the global financial system was reassured. However, to say the economy is powering forward is premature and as the expression goes the jury is still out!
This will be a particularly important quarter to look at the quality of corporate earnings reports. They will need to clearly demonstrate the evidence of top line sales growth and not to just be relying on cost cutting and productivity measures to deliver shareholder profits. Sales growth is the key for the economy moving forward.
I still believe that there is uncertainty in the housing and mortgage markets along with the big question of whether there can be sustainability to the economy without any further stimulus programs. It seems to be a wonderful time to have a reliable crystal ball but I just have not been able to find one. So I will remain cautious in my investment approach as we continue to watch the data unfold in anticipation that it provides clearer visibility to future strategy implementation.
