The end of September will bring some clarity to markets. While US stock markets in particular are still very much in a bullish trend, seasonal tendencies (September in particular) and the market’s reaction to the decision by the Fed on their QE3 tapering program may cause volatility through October. There are two potential outcomes:
- If the Fed doesn’t taper aggressively, the market may only be shaky until the September 18th meeting — and then go up strongly in October and on.
- If they announce aggressive tapering, then markets will likely go down through October in a “taper-tantrum”. Thereafter, seasonal’s suggest being fully invested.
My bet is that Bernanke & company will be “gentle” about the tapering. The Fed is well aware of the wealth effect (aggressive tapering could push stocks down, pushing consumer confidence down). They don’t want to kibosh the economic progress they’ve worked so hard to see. Not to mention that employment data and other economic indicators are not quite yet where they want to see them. Things are progressing, but not as quickly as some might suggest.
Looking into October, this month can sometimes be a shaky month from a seasonal perspective, but that’s a coin-toss. In fact, about 2/3rds of the time, October is actually bullish (0.8% average return since 1950 according to Brooke Thackray). More important to the markets will be this month’s tapering decision. So I’m cautious to the end of September, then bullish if the tapering isn’t too aggressive. But I’ll have to play it as the announcement comes out. Either way though, I feel that the market will eventually accept whatever the outcome, and become bullish again after the fall.
For this week’s macro view, I’ll bring up my ongoing “QE Chart”. Will the market be able to stand on its own going forward? My bet is yes, but I also believe that there will be some pains along the way as the market disconnects from its current QE addiction.
Read my newest Moneyletter article just posted on the ValueTrend website – here’s the link: here.
Keith, how do you see Gold / Gold Mining Stocks reacting to either of your potential outcomes?
Andy–rising interest rates are bearish for gold–so an aggressive tapering would be bearish. But if its a mild taper, as I expect (but really–who knows?) then gold may continue its rally for the seasonal period into late October. The gold stocks usually peak earlier, but there is enough correlation to say that there will be some following of the stocks to the commodity. I have a 5% position in bullion, and its an uncomfortable wait until the 18th. But thats investing for you!