As an experienced investor, I have to admit I suffer from a bit of seasonal superstition. While I know that over the long term, there is very little data to validate some of these seasonal pre-dispositions sometimes bias does not bend to logic, and when it comes to seasonal pre-disposition, no month is as scary as October.
Why? Because in my experience October tends to be volatile. Does this mean I believe there’s no money to be made in stocks in October? Not at all, volatility can go both ways and the month of October has had its days in the sun, but at the same time a review of the S&P 500 Index (of course no one can invest directly in an index) going back to 1933 shows three of the largest one day declines in this time period happened in October and six out of ten of the worst stock market months were also posted by October's of yore. Long story short, October frightens me.
At the same time however, October is just about over, and it's been a pretty good this year with major stock market indexes posting positive returns and reaching new all time highs this month.
So with October behind us I’m feeling confident, and there’s a couple reasons why.
First, there’s corporate earnings. Stock prices are ultimately driven by corporate sales and profits, and in this quarter and last quarter companies in general posted some pretty positive results in both areas. Now the counterargument to this is that the level of stock prices compared to profits is kind of high by historical standards which could mean stocks in general may be getting overvalued. But this may not be the case just yet, and the second reason is why.
Interest rates. I’ve said for years, I believe the next stage of the current bull market could not begin until after interest rates started to go up. I know the conventional wisdom is higher interest rates are bad for stock prices, but we are not in a conventional time. With rates at super low levels for so long as an investor I was worried stocks may be on a “sugar high” driven by artificially low interest rates. Now that rates across the board have started to rise, I find myself gaining confidence in the rally and coming to the conclusion that even though rates are higher, within this cycle they may not actually get to the level of what I consider “high."
To me this means even within the context of high relatively high stock valuations, stocks may have room to run.
The third reason. Washington DC. Yes I said it. Now granted, the place is a mess and it seems like every day new news makes it seem more vile, but the tax plan being negotiated thus far looks very well thought out. I plan on doing more columns on this topic soon, but right now both the construct of the plan, and the level of opposing rhetoric (tax cuts for the rich, deficits) are both fairly positive. This combined with the changing culture of regulatory climate reform and reducing the government burden on American business has me feeling encouraged.
Now the question becomes, what to do with this growing confidence? When it comes to investing, like any other emotion, confidence needs to be managed, and that my friends is the hard part.
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