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Window of Opportunity

In broad terms, there have only been two clear points in time this year to buy stocks; late June and late August.  If you did not own stocks at the start of the year, the opportunities to get into the stock market have been limited and purchases at other points in time likely yielded less than optimal results.  This is not an unusual problem for investors navigating a bull market.  The impulse to buy becomes greater and greater.

Year to date, the S&P 500 is up 19.97%, a very good year by historical measures.  For the month of September, stocks rose 2.97%, a strong performance on the heels of a worrisome August.  A poor performance in September would have been a troublesome signal to many Wall Street analysts.  Now we face the risk of a big “give back” in these returns due to macro issues we usually take for granted; the federal budget and the national debt limit.  If the foundation becomes unstable, investors will conclude these issues are not resolvable, and prices will fall.  This will provide another window of opportunity.

Shakespeare is probably rolling in his grave watching the bizarre comedy (farce) taking place in Washington DC.  Our   Congressional leaders have allowed the Federal Government to partially shut down.  Ultimately, this will not play well on Wall Street and will do little to comfort foreign investors in US Treasury Bonds.  Depending on how long the impasse lasts, halting the government saves some federal spending, yet it will also eliminate distribution of all market related data, and will also put a crimp on an otherwise inchworm-like rate of GDP growth.  To the consternation of some, it will also end any efforts to push the Federal Reserve toward tapering its bond purchasing program.

The debt ceiling fight is a high stakes game, if it can be called a game.  To allow US debt to default and likely incur a downgrade from rating agencies is flagrantly irresponsible.  Our politicians have disconnected.   Since 1960, the debt limit has been raised a total of 78 times, 49 under Republican Presidents and 29 under Democratic Presidents.

As we move on into the fourth quarter, I suspect most investors have their hand on the dial and are braced to sell stocks.  I would expect a sell off to induce a lot of fear.  This is a distinct possibility.  At the same time, signals from Wall Street are that a resolution is expected.  Unless Washington drives the economy into a ditch, I think stocks remain the asset class of choice, from both a fundamental and long-term perspective.  Further, the surge in interest rates (beginning in May) has begun to normalize, and even reverse, as I expected.  It looks to me like the fixed income markets are beginning to come back into line (revert to the mean) as they often tend to.  The spike in the yield curve has been a fly in the ointment of an otherwise strong year in the investment markets.

Apple, the sleeping giant, has awoken.  The new iPhone launch appears to have been successful both in the US and abroad: 9mm phones sold versus 6mm in expectations. Additionally, the iOS7 operating system has already seen over 250mm downloads, the fastest in history. The most important metric for Apple is international growth.  Those solely focused on its domestic sales will miss the boat.

The Federal Reserve gave the stock and bond markets a positive surprise by leaving the current quantitative easing program in place.  The tapering of this program has been anticipated by markets, especially the bond market, since early this year.  With no constructive policy relating to jobs, education or anything that might ultimately bolster our economy, the Fed may have felt its hands were tied.

In my opinion, there is no need to reduce our allocation to stocks at this point in time, though I admit the backdrop is unsettling.  I think there will be some volatility and another opportunity to buy, before year end.  The reality is that any turbulence is likely to be short lived and with that in mind I am hesitant to take money off the table.  At the same time, fixed income assets are “cheap” and on a recovery track.

If you would like, please feel free to call me if we have not spoken recently.  Your quarterly statements are available on your Tamarac portal.  We have received a lot of positive feedback.  If you would like some help with your log-in please feel free to reach out to Valerie or Eileen.

Finally, with our Wealth for Women initiative, we are holding an evening seminar at the Radnor Memorial Library Tuesday October 15th on investment and financial planning issues confronting women.  I’m sure this will be an informative evening and I hope you can join us.

Bruce Hotaling, CFA

Managing Partner

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