Friends
As I mentioned yesterday, the market just finished the best September that we have had in nearly 70 years. The third quarter was also a good one for the market averages. With that behind us, where does the market go from here? The coming quarter will be highlighted by a mid-year election that could produce a balance of power in Congress. Has the market already begun to discount gains in the House and Senate by the Republicans? I believe that it has, and an outcome that would leave the Houses status quo would be a disappointment to the market.
Over the next few weeks, we will get results for 3rd quarter corporate earnings which will define the fundamental story for the rest of the year. Because of very low trading volume, we already know that large bank earnings will be weak for the quarter. With the falling dollar, multinationals should be reporting somewhat healthy numbers, and for retailers, the Christmas season discussions will begin. High-end retailers seem to be doing fine, and on the other end of the spectrum, the discount retailers seem to be beneficiaries of the weak economy.
This morning’s economic numbers continue to paint an uninspiring picture as the ISM manufacturing number was the lowest of the year (slightly below expectations) and the Michigan consumer sentiment number was just okay. Next week we will get the September unemployment number, but the most recent economic numbers don’t bode well for employment. Jobs just aren’t created with this little growth. We will most likely hear more about quantitative easing by the Fed and potential stimulus programs from Congress.
What does all this mean for stocks and bonds? First, bonds will take their cue from the Fed. If the Fed accelerates its purchases of securities in the open market, then interest rates will stay down for a while and bond prices will remain firm. The longer term problem will be the specter of inflation and the bond market’s anticipation of such. Believe me, the Fed would like some inflation right now, as it would indicate that money is finally moving, but when the bond vigilantes all head for the door at the same time, a bloodbath in bonds will occur. It is unlikely that this would begin in the coming quarter.
As for stocks, October has been historically filled with frightening events (crashes come to mind), but the total lack of individual participation leads me to conclude that stocks will continue the back and forth churning that we have seen all summer. I am encouraged that we have been able to remain above the 200 day moving average but 1150 on the S&P 500 has provided strong resistance. If we can decisively penetrate that level and remain above it, stocks could target 1250 on the S&P 500 by year-end.
We will be providing clients with a detailed discussion of CHJ’s fourth quarter outlook and our discussion of the individual investor in the next week or so. Suffice it to say, if we get good earnings and political change, the market may be able to work its way higher by year-end.
Have a nice weekend everyone.
