Advice From Mark Twain
Stocks stumbled through the summer with the Dow Industrials losing 3% and then regained balance in September before the tragic situation in Syria began to dominate the news. Despite the many uncertainties of any military situation, stocks actually rallied with their best weekly performance in two months. The prospects of armed actions, particularly in the oil-rich Middle East, usually rattle investors and the market’s recent resilience is encouraging.
Beyond events in Syria, the stock market faces four major hurdles, all centered in Washington. Their threats to the economy bear out Mark Twain’s observation, “No man’s life, liberty or property are safe while the legislature is in session.” Unfortunately, Congress returns from recess on Monday, September 9, armed with the power to do economic harm.
The first hurdle is immediate, as they will begin to argue about putting the government on hold as of October 1 because of continuing inability to come up with a budget for the country. The infighting will include renewed quarrels about the blunt spending cuts of the clumsily conceived “sequester,” which has already slowed the economic recovery.
Another self-imposed October 1 deadline will emerge as some Republicans have vowed to shut the government down unless all funding is cut from the Affordable Care Act. The potential harm from inability to resolve these issues is so grave that a short-term extension, perhaps for a couple of months will probably be cobbled together.
Some sort of stopgap delay seems vital, as another crisis will reemerge in October. That’s when the government will run out of room for its routine borrowing unless Congress modifies the “debt ceiling” that it created back in 1917 to finance selling Liberty Bonds. It would be an economic tragedy if these current political disputes even threatened the nation’s first default of its full faith and credit.
A temporary postponement seems likely but that still leaves the current issue of prospective changes in Federal Reserve policy. These uncertainties may crest during the week of September 15, as the Fed will decide whether the time has come to reduce its purchase of mortgage-backed securities and Treasury bonds.
The Fed has reaffirmed criteria that appear to demand more of a clearly sustainable economic recovery than has yet appeared before beginning its “taper”. With the Congress likely to swing from crisis to crisis, it seems doubtful that the Fed would signal a weakening of these economic supports in the face of myriad major uncertainties. The new open-ended Syrian situation also argues for it to continue its policies.
The short-term outlook is for the stock market to swirl around without clear trends regardless of fairly steady support from rising corporate earnings. There will probably be some emotionally driven dips providing bargain prices on sound stocks. One trigger may come from the nervous increase in interest rates as the bond market continues to weaken. The rate on the key 10-year Treasury finally reached 3.00%, its highest level in two years. Although that’s still historically low, reaching this level might prompt some panicked selling in bonds, possibly spilling over into stocks.
Investors should emphasize stocks with sound prospects of continued increasing earnings. Solid picks include Apple (AAPL-$495), Google (GOOG-$879) and General Electric (GE-$23). Among medical stocks, leaders include Amgen (AMGN-$112), Allergan (AGN-$89), Celgene (CELG-$145), Cooper (COO-$133) and Jazz Pharm. (JAZZ-$87). Cigna (CI-$81) and Computer Programs (CPSI-$55) are strong among medical support and Abbott (ABT-$33) in medical equipment.
This is not the season to take speculative risks. Mark Twain also nailed that warning, noting that October was “a peculiarly dangerous month to speculate stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.” Thoughtful investing always beats panicked selling.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/