We generally stand by a simple rule at StreetAuthority: Find great companies and tune out the market noise. The nation's top companies deliver shareholder value on a consistent basis, which puts them among the best candidates we know for the buy-and-hold investor.
But it still pays to heed the rhythms of the stock market. There are moments when clear potential headwinds are in place, which can slightly alter your shorter-term moves. At a minimum, such times should lead you to rethink any moves to add even greater exposure to stocks.
This coming month may prove to be one of those times.
September presents a series of challenges and depending on your timeframes and investing strategies, discretion may prove to be the better part of valor for stock pickers.
At first blush, an upcoming set of meetings by the Federal Reserve's Open Market Committee (FOMC) is this month's only major event. The meetings, scheduled for the third week of September, may yield a major change in Fed policy. That's when the Fed may seek to begin winding down its massive economic stimulus program, known as quantitative easing (QE).
Since many market strategists attribute much of the impressive 40% gain in the S&P 500 over the past two years to the QE program, there is a good chance that the market could suffer a hangover once the Fed takes the punch bowl away.
Yet it's a series of other events that surround the all-important Fed meeting that could also roil the markets. For example, on Friday, Sept. 6, the Bureau of Labor Statistics will release the monthly employment report. You can be sure the members of the FOMC will give this report a very close read as they decide the Fed's next move.
Simply put, if the U.S. economy created more than 150,000 jobs in August (which appears quite feasible, considering 160,000 jobs were created in June and 227,000 jobs were created in July), then most Wall Street strategists will likely conclude that the Fed will be set to start "tapering" its current massive stimulus program at that next Fed meeting.
Looking ahead to the middle of the month, just days ahead of the Fed's decision, we'll also get a look at:
- The Empire State Manufacturing Survey (Sept. 16)
- Monthly figures on industrial production (Sept. 16)
- Redbook retail sales (Sept. 17)
And when the FOMC's members meet on Tuesday and Wednesday of that week, they'll process all of that data and make their big announcement. Though the U.S. economy is not yet the picture of health, these three economic reports are likely to show just enough vigor to prompt the Fed to shift gears.
Yet that doesn't spell the end of the action. On the very next day, Sept. 19, German voters will go to the polls to elect a new Parliament. And if these voters no longer feel inclined to continue backstopping weaker European economies in Greece and elsewhere, a fresh euro crisis might ensue.
Chancellor Angela Merkel will be fending off a bid from former ally Peer Steinbruck, and investors will be reading the tea leaves to determine if Germany will soon look to change course, and remove its implicit financial backing of the broken economies in southern Europe.
Even as the market digests the news from the Fed and German voters, a few more boulders will land in the road. The day after German elections, Sept. 20, the options markets are set to digest "quadruple witching."
Quadruple witching is a once-a-quarter event that coincides with the closure of a wide range of many options contracts while many new ones are opened. These actions can lead stock market trading volume to spike by 50%, and if the events of the previous days have been roiling the market, then investors should brace for a large market swing.
As if that weren't enough to worry about, the final days of September may also prove to be a nail-biting time for investors. By then, we'll be inching ever closer to the next potential fiscal crisis: Government economists expect that we'll hit the $16.7 trillion debt ceiling sometime in mid-October.
To be sure, a last-minute agreement has narrowly averted a debt-ceiling crisis a few times in the past, but if the two major parties aren't yet talking about the issue by late September, then the markets will grow extremely anxious.
The fact that both parties must first agree to a budget for the government fiscal year, which begins Oct. 1, is just one more headache to worry about.
The Silver LiningAgainst this seemingly worrisome backdrop, an entirely different picture is emerging for long-term investors. The primary reason the Fed is seriously considering a move to wind down the QE program is that there is less concern that the U.S. economy remains in need of help.
In fact, the U.S. economy may be on the cusp of a long-awaited sustained upturn. Consumers have greatly improved their financial standing, carrying the lowest levels of debt since 2006, which can be seen in the steady pace of improving car sales.
A brighter sheen in the housing market -- reflected in both rising home prices and rising sales --has led some economists to predict that the housing market is on a path to a long-awaited expansion in 2014 and 2015. A steady rise in home construction can generate millions of jobs, both directly and indirectly, helping to push the U.S. unemployment rate back down to healthy levels.
On the corporate side of the ledger, many businesses remain flush with cash, and a perkier economy could lead them to unleash a torrent of pent-up capital spending. According to analysts at J.P. Morgan, it would take a $150 billion increase to bring capital expenditures back in line with historical norms. That would be quite an economic booster shot.
Capital investment in new factories, equipment, software, logistics and other areas sets the stage for higher levels of productivity. And higher productivity leads to economic growth without a commensurate rise in inflation.
Action to Take --> So what should you glean from all of these near-term market challenges and long-term bullish economic opportunities? The best course may be to watch and wait in coming weeks. If the market stumbles badly in the face of the looming economic actions playing out here and in Europe, then investors may get the chance to buy great companies at even lower prices.
P.S. -- I'm not a market technician, but I've seen enough charts in my day to know when a pattern is shaping up to be ... interesting. I encourage you to check out my colleague Amber Hestla's presentation to learn more about what the dreaded "triple top" could mean for your portfolio in the coming weeks.
- David Sterman
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