‘TIS THE SEASON-ALITY

The bears are prowling around the edges of the stock market ready to pounce on the slightest sign of weakness.  But they may have to wait a bit longer for a pullback or correction. 

The Big Picture 

Contrary to conventional wisdom, September was not the cruelest month and there was no October stock market crash.  The Dow Jones Industrial Average and the S&P 500 index started November at or near record highs.  The NASDAQ is at its highest level since September, 2000.  Not only has the S&P 500 climbed 165% from its March 2009 lows, it has scored 33 new highs so far this year, seven of those record highs notched in October alone. 

It’s understandable that those who have doubted this rally all the way up would be calling for a pullback of five to ten percent if not a correction of ten to twenty percent.  But seasonal patterns aren’t in favor of sellers.  According to Standard & Poor’s, November and December are generally good months for stocks.   The Stock Trader’s Almanac goes even further, calling November through April historically the “sweet spot” for stocks. 

Investors are jumping back into stocks, continuing to rotate out of low-yielding bonds and money market funds.  Lipper Analytics and Trim Tabs Research report the largest dollar inflows into mutual and exchange-traded funds since 2000.  That action prompts talk of bubbles and an impending stock market crash that may not materialize, for several reasons.

 1.  The Federal Reserve.  Five years into its extraordinary stimulus effort, the Fed has yet to rein in its support.  While rumors abound, the anecdotal evidence and Fed policy statements belie those rumors.  As long as economic growth remains tepid, the Fed has promised to be supportive, if nothing else but to counter the deleterious effects of fiscal austerity.  The recent government shutdown is expected to shave at least 0.5% from fourth-quarter growth, on the heels of a third-quarter slowdown.  Sequestration cuts continue to suppress economic activity with another round of cuts expected in early 2014, coinciding with budget and debt ceiling deadlines.  

2.  Corporate profits are at an all-time high, companies are carrying less debt and labor costs have been slashed as productivity has risen.  Companies can make the same amount of money or even more with fewer and fewer workers.  There is no reason for companies to hire, hence the stubbornly high unemployment rate and dismal rate of new jobs created. 

3.  Technology trumps Washington dysfunction.  Businesses (and investors) hate uncertainty.  We know that Washington is broken and will remain so for the foreseeable future (2014 at the earliest) but technology can help companies adjust quickly to change, insulating revenues and profits. 

I, Investor 

Because the equity market has been able to absorb the body blows from sluggish economic growth and Congressional gamesmanship, the economic cycle is losing its influence.  Instead of being a rally in a bear market, this advance from March 2009 could be the first leg of a longer-term secular rally that lasts for years.  Watch for key levels of support to hold:  Dow 14,500; S&P 1560; NASDAQ 3,300.  Ignore economic data scheduled for release as it will be distorted by the recent government shutdown.  Anticipate portfolio window dressing as money mangers sell losers and replace them with winners to make their performance look better.  Look for opportunities to get into the spirit of the season.  

Speak Your Mind

*