Streetwise

Lauren Rudd

Sunday, October 6, 2013

Not In My 40 Year Career

Neither Wall Street nor Congress has ever been mistaken for a rose garden. Yes, greed and one-upmanship are part and parcel of both worlds. Nonetheless, the indefatigable avarice, instability and volatility of late in both arenas extend beyond anything I can recall during my career of 40 plus years.

Chris Matthews wrote in his recent book, Tip and the Gipper, that President Reagan went to the Capitol to deliver a State of the Union address. His designated "holding room" was the House Speaker Tip O’Neal's ceremonial office just off the House floor. Matthews was a senior aide to the House Speaker, and thought a little kidding was in order.

"Mr. President, welcome to the room where we plot against you," Matthews said.

"Oh, no, not after 6," Reagan replied. "Tip says that here in Washington we're all friends after 6:00 PM." It appears that someone forgot to tell this to the current Congress.

Nonetheless, Wall Street shrugged off the first day of the shutdown as manufacturing activity expanded at its fastest pace in almost 2-1/2 years. As I write this, the second day was not so optimistic even though the Street is still holding out hope that a deal will be reached to return the government to work and peacefully raise the debt ceiling.

The debt ceiling is a far graver issue than the shutdown as it could lead to an unprecedented default by the United States on paying some aspect of its debt; an outcome Wall Street believes is unthinkable and the seriousness of which the major players on the Street have done their best to convey to both the Administration and Congress.

The immediate impact of the shutdown has been a drop-off in economic data at a time when investors are trying to gauge when the Federal Reserve will scale back its bond purchases, affectionately known as tapering. The Bureau of Labor Statistics, which publishes the closely watched non-farm payrolls report, has said it would not issue anything until government operations resumed. Other government agencies will follow suit.

Meanwhile, here is a word of warning; in my opinion if the debt ceiling is not raised and the Federal government actually defaults on interest and/or principle payments of Treasury securities or any other payment, even temporarily, there will be a sharp rise in interest rates, which in turn will decimate bond portfolios, send market indexes lower and choke off economic growth. Global confidence in Treasury securities will plummet; ensuing cash outflows will result in a credit crisis similar to 2008.

Meanwhile, October is upon us once again, the time of the year when trees display their fall colors and pumpkins debut as pumpkin pie. It is also the most dreaded month in the annals of investing, the month of black Mondays.

Does October really deserve its rotten reputation? There is some justification when you consider the debacle of October 1929. More recent are the declines on October 19, 1987 that sent the Dow Jones Industrial Average down 23 percent. Moreover, we cannot forget the relatively minor “October massacres” in years such as 1978, 1979, 1989, 1997 and 2008.

Wall Street is a forward-looking or leading indicator. However, if Wall Street is anything it is fickle and sentiment on the Street can reverse in the blink of an eye. With the S&P 500 index up 19 percent so far this year it is no doubt tempting to spend the rest of the year on the sidelines. That is a bad idea.

Since 2009 the S&P 500 index has gained an average of 9 percent during the last 3 months of the year. Over the last 30 years, stocks have moved higher during the fourth quarter 24 out of 30 times, gaining on average 7 percent.

Looking at those times when share prices have moved higher during the third quarter, 32 times in all, share prices moved higher during the fourth quarter 80 percent of the time.

Your goal in the upcoming quarter should be not to become unduly swayed by market negativism. Investing can be deadly if you dance along with the crowd. Remember that investing in individual companies is not the same as investing in “The Market.” Filene’s bargain basement anyone?