September is historically the worst month for stocks but this year, the calendar is a mine field for markets. From the Federal Reserve’s mid-month meeting to German elections, Japanese tax changes and U.S. budget debates, there’s a long list of potential catalysts for volatility. Add to that the potential for military action in Syria and the rising tensions in places like Egypt and we could be in for a bumpy ride in September.
If military action is ultimately undertaken against Syria, it may not be a negative for the equity markets. “ In the month after the 1998 bombing of Iraq, the S&P rallied from 1140 to 1260 or 120 points. In the month after the 2011 bombing of Libya, the S&P rallied from 1280 to 1330. So after a Syria bombing, the S&P might rally +50 to +120 points.” (source: ISI)
Past performance is no assurance of future results.
Offsetting these uncertainties, economic activity, both in the US and globally, seems to be gaining some strength. On August 29, 2013 the US Commerce Department revised 2nd quarter 2013 US GDP (gross domestic product) higher to 2.5% (up from an initial reading of 1.7%). In the same report they revised 2nd quarter 2013 PCE deflator (personal consumption expenditures) to 0.08% (source: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) The PCE deflator is the Federal Reserve’s preferred measure of inflation and at 0.08% (1.4% year over year) it is well below the Fed’s annual inflation target of 2.0%. On September 3, 2013 the Institute for Supply Management’s Manufacturing Index increased to 55.7%, indicating increasing growth in US manufacturing (source: http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942)
Over the Labor Day weekend data out of Europe and Asia was positive. “China’s Mfg PMI rose from 47.7 in July to 50.1 in August, the first rise in six months. The Non-Mfg PMI slipped from 54.1 in July to 53.9 in August, but still revealed growth” (source: ISI) . PMI (purchasing manager index) in Japan and the UK rose above 50% – the level that indicates growth. Stronger sentiment readings were seen in German consumer confidence, French and Italian business confidence, and Eurozone economic outlook (source: http://online.wsj.com/article/SB10001424127887324577304579054403351488642.html). So I would say that the global economy is stuck in low gear but is developing a lot of power for a push forward.
On the investment front, these improving economic indicators are likely to put some upward pressure on interest rates (which puts downward pressure on fixed income/bond prices). On the equity side, this week’s edition (9/2/2013) of Barron’s cover story was titled “Fall Market Forecast Looks Sunny”. In the article, 10 well-know investors/strategists forecast a range for S&P 500 company earnings for 2014 of between $110 – $122. Using the mid-point of $116 that would generate a forward P/E (price /earnings) ratio of 14 based on the 8/30/13 closing price for the S&P 500. If you recall from last month’s Monthly Outlook the long-term historical P/E ratio is 16 so it appears that the current price level of the S&P is reasonable and has some upside potential. However, I plan to keep some powder dry (cash on sideline) until we see how some of the upcoming events play out.
So will this be a September to remember? Time will surely tell.
Sources: International Strategy & Investment, Barrons.com
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