by READ MEADOWS
“I really can’t stay—Baby it’s cold outside / I’ve got to go away – Baby it’s cold outside…” – Frank Loesser
Frank Loesser’s 1944 Christmas song speaks to many investors’ sentiment of feeling like you’ve been “left out in the cold,” and wanting to “go away” from the stock market by moving your money to cash. This has been a recurring theme with our clients since the 2008 financial crisis, and I can’t say I completely fault them. Add this to the uncertainties from the recent election and looming fiscal cliff, and “room for concern” is an understatement. As an investment manager I am not tasked with solving these problems (thankfully), but helping our clients navigate the environment they create. Fortunately, it is not all bad news. Here are some insights into what is happening.
TAILWINDS FOR THE MARKET
1 Seasonally Strong Returns – According to the Stock Trader’s Almanac, the stock market tends to perform far better in the six month period from November to April versus May to October. Since 1950, $10,000 invested in the Dow Jones Industrial Average during the weak six months would only be worth $8,976. The same money invested in the Dow Jones Industrial Average during the best six months would be worth $674,073! (That was not a typo, but don’t be confused: it does not mean positive returns are impossible in the bad six months and negative returns impossible in the good six months.) This month is no exception says Jeff Saut, Raymond James Chief Investment Strategist, “December has been the best performing month of the year over the past 100 years with positive returns 73% of the time.” Chief Market Technician Art Huprich says that according to the book titled, The Little Book of Stock Market Cycles, (authored by the same gentleman who wrote The Stock Trader’s Almanac,) “December is the number-two month on the Dow Jones Industrials and number one on the S&P 500 since 1950…The Dow and the S&P 500 start the month off slower and do not become undeniably bullish until the third trading day. But, on the fourth trading day becomes more guarded and remains so through the first half of the month as tax-selling wraps up. It is not until the middle of the week after December ‘Triple- Witching Week’ that stocks begin to rise consistently on the majority of days.”
2 Market Backstop – With Obama’s reelection, Ben Bernanke is likely to remain the Fed chairman. This means his policies of exceptionally low interest rates via “Quantitative Easing” or “QE” as you probably have heard it called, will likely continue. Whether the policy’s merit is good, bad, or indifferent the stock market’s trend has an upward bias in the months following more “QE.” (The third round was enacted in September.)
HEADWINDS FOR THE MARKET
1 The Fiscal Cliff – Lots of ink has been spilled on this subject, so I will only mention the high points. First off, “It’s not really a ‘cliff’—the economy won’t grind to a halt on January 1. Washington has several weeks in 2013 to work out a deal without a major impact on the economy,” says Scott Brown, PhD, Chief Economist for Raymond James. More than likely, a deal will be struck. Politicians can’t help but think about re-election, and they don’t want to be the ones blamed for a recession if the fiscal cliff’s full effects are not curtailed. The question is really when, not if the deal will be hammered out. Sooner would obviously be better because it would reduce “uncertainty,” and remember, the stock market hates uncertainty. When a compromise is reached, look for GDP growth to be around 2% in 2013—mostly in the second half of the year.
2 Europe – The much maligned debt crises across the EU countries will continue to add uncertainty to the global markets.
So as an investor, what do you do from here? Don’t be surprised to see volatility creep up in the coming months. This usually leads to investor’s blood pressure moving up in tandem, but remain calm and use wide price swings to your advantage (buy good stocks cheaply and exit bad stocks on rallies.) Gold has entered a seasonally strong period from the beginning of November to the end of February, just be careful how you own it. Lastly, Raymond James’ Chief Investment Strategist, Jeff Saut, made a statement in a press release prior to the election about the market sectors that tend to perform well under Republican or Democratic White Houses. Since we have the latter, “A Democratic Presidential win should favor the following: Consumer Discretionary, Infrastructure, Clean Energy, Internet, Communications, and Muni Bonds.”
The holidays are in full swing. We are surrounded by the craziness of shopping, cooking, stock market volatility, and scrambling in Washington. Despite all of this, enjoy the time you are able to spend with your family and never forget, “For unto us a child is born, to us a son is given; and the government shall be upon his shoulder, and His name shall be called Wonderful Counselor, Mighty God, Everlasting Father, Prince of Peace” (Isaiah 9:6). Merry Christmas!
Read Meadows is a Financial Advisor with Raymond James Financial Services located in Jackson. He and his wife Elizabeth live in Madison. To contact him, call 601-321-2090 or email Read.Meadows@RaymondJames.com.Inclusion of these indexes is for illustrative purposes only. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Read Meadows and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. You should discuss any tax or legal matters with the appropriate professional. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Income from municipal bonds is not subject to federal income taxation; however, it may be subject to state and local taxes and, for certain investors, to the alternative minimum tax. Income from taxable municipal bonds is subject to federal income taxation, and it may be subject to state and local taxes.