October 2014

Last Friday 10/10/14, I wrote about “Rising above the noise” that has been increasing volatility and pushing equity markets down.

Well that “noise” just got louder. The noise today (10/15/14) was a second Dallas healthcare worker confirmed to have contracted the Ebola virus and economic reports out of Europe, specifically Germany, pointing toward declining economic growth. This noise caused a massive flight out of risk assets (equities) and into safe-haven assets (mostly US Treasuries) during the early part of the day.

However, not all the “noise” was bad. At 2pm Eastern time on 10/15/14 the Federal Reserve released its Beige Book, a summary of economic activity and conditions across the 12 Federal Reserve Districts in the US. Essentially, the Fed found that economic growth was continuing at a modest to moderate pace across the US. Here is a link to a CNBC report that summarizes it well: http://www.cnbc.com/id/102090888 This report was received positively by the market as between 2pm EST and the market close at 4pm EST the S&P 500 rebounded from a low of 1820.66 to close at 1862.49 (source: Yahoo Finance)

So far the “noise” has drowned out the start of 3^rd quarter 2014 corporate earnings season. While we have only had a handful of earnings reports, so far most have been better than forecast with companies such as Alcoa, Johnson & Johnson, Intel, American Express and Netflix all beating estimated earnings per share. See this CNBC report on earnings surprises: http://www.cnbc.com/id/18080780

I remain convinced we are experiencing a normal correction in an otherwise healthy market. I believe that corporate earnings will continue to be better than expected and that fact will stop the fall in equity prices. I am looking for the equity market to rebound back to the 2,000 area on the S&P 500 by the end of the year. However, I remain vigilant in monitoring economic and financial conditions for any signs that would necessitate a change in approach.

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

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Mark Twain once said, “OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

While Mr. Twain was correct that October has been the month for some memorable single day stock market declines (see 10/24/1929 Great Depression and 10/19/1987 Black Monday), historically the entire month of October has been a positive month and generally the start of a seasonally good period for the equity markets.

The equity markets ended September 2014 on a down note, and are opening October 2014 on the downside as well. I think we could finally be getting the correction I have been expecting. From the S&P 500 all-time closing high of 2,011.36 set on 9/18/14, a 10% decline would take it to 1,810. I’m not sure it will fall that far. Right now I feel it will hold at the 1,900 level and if it doesn’t hold there, then I am looking at 1,850.

There are several reasons I think the downside will be limited:

The US economy, while not robust, continues its slow but steady growth.
The Federal Reserve remains firmly committed to supporting the economic recovery.
Portfolio managers have been underperforming so far this year – they will be looking to improve their results before year-end so they can earn their bonuses.
The favorable season for stocks as depicted above.
There is still a tremendous amount of cash on the sidelines and in this low interest rate environment cash earns no return.

Finally, major equity market corrections have historically occurred when interest rates are rising and the yield curve is inverted (an inverted yield curve is when short-term interest rates are higher than long-term interest rates). Interest rates have fallen so far this year from 2.99% (marketwatch.com) on January 2, 2014 to 2.39% (marketwatch.com) on October 1, 2014 on the US 10year Treasury, and short-term rates @ 0.10% (13 week US T-Bill) on October 2, 2014 (marketwatch.com) are well below the 10 year rate.

In summary, I expect October to be a volatile month in the financial markets but that the outlook going out to year-end 2014 is positive.

October Calendar of Events (comments and additions for future months always welcome)

October is Breast Cancer Awareness Month. I donated to a fundraiser my daughter Ryan is running at her gym “Barbells for Boobs”. What are you doing to support this cause?

October 4^th Yom Kippur

October 13^th Columbus Day

October 16^th My granddaughter Naomi’s 7^th Birthday

October 24^th United Nations Day

October 31^st Halloween

I hope you find this report useful. Please feel free to pass it along to anyone you feel could benefit from the information.

Sources: International Strategy and Investments, Fidelity Investments.

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Information provided should not be construed as legal or tax advice. You should discuss any tax or legal matter with the appropriate professional.

Month: October 2014

The Noise just got louder

October 2014 Monthly Outlook – Mark Twain