David Fabian: The first days of October bring with them a combination of chilly temperatures, a frozen federal government, and a cooling commodity complex. On the flip side, we are seeing a renewed surge in the fixed-income sector combined with resilient momentum in stocks that is restoring confidence in the markets. As we turn the calendar to the 4th quarter, I think that it is prudent to key in on four trends that will play a pivotal role through the balance of the year. By analyzing these factors, we set the stage for making prudent and balanced portfolio decisions that will allow you to safely reach your investment goals.
1. Political Turmoil – We have seen how the media likes to play up the importance of every potential conflict in the political arena. CNBC is relentlessly counting down to the next crisis – whether it is the budget impasse shutting down the federal government or the debt ceiling debate forcing the hand of our policy makers. Everyone loves a little drama in their lives.
However, you have to remember that we have seen this movie before, and we already know the ending. According to Jeff Saut, since the 1970’s we have experienced 17 government shutdowns and none of them have had a marked impact on the stock market. I wasn’t surprised in the least that the SPDR S&P 500 ETF (NYSEARCA:SPY) closed higher on the first day of the federal shutdown, because the free markets continue to operate in earnest.
The next big event on the horizon will be the debt ceiling debate which will generate headlines of “treasury default” and “spending crisis”. But once again, the stakes are too high for Congress not to act as they do almost every year. I would forecast that this issue will be resolved with much banter about fiscal conservatism, but little dissent in the majority needed to pass the resolution. It’s business as usual in Washington D.C. this fall.
2. Strength in Stocks – There is no questioning the resilience of the stock market this year with the major averages sitting on double digit returns and nary a blip on the chart to represent any meaningful correction. I have been mostly cautious in 2013 as valuations have been stretched to the upside and have made strategic allocation shifts as conditions dictate.
While the month of October is generally considered to be more volatile, I would not count out stocks remaining strong through the balance of the year. We are soon going to be entering the growth season where the effects of the holidays generally lift the markets higher. As long as we see SPY hold above its long-term 200-day moving average, I would use any pull backs to add new money.
I prefer stalwart dividend paying or low volatility names such as the First Trust NASDAQ Technology Dividend Index (NASDAQ:TDIV) or the iShares MSCI U.S. Minimum Volatility ETF (NYSEARCA:USMV). Both of these ETFs offer a unique approach to identifying quality companies within their respective index constraints.
3. Commodity Conundrum – It’s pretty clear that commodities are having a rough year so far in 2013. The SPDR Gold Shares ETF (NYSEARCA:GLD) continues to show the kind of volatility and lack of direction that make it hard to regain faith in the precious metals. Just when you think the coast is clear, it heads for another ride lower. Right now I am avoiding adding new money to precious metals until we see a more substantive uptrend emerge. However, aggressive traders can use the prior lows as respectable stop loss points for short-term money.