Brooke Thackray's Market Letter December 2013
Market Update
by Brooke Thackray, AlphaMountain Investments,
To taper or not to taper: that is the question that will be bantered about once again. In the spring of last year I was stating that investors were moving too fast in their expectations of the Fed tapering its $85 billion bond and mortgage back securities purchases. The more realistic scenario was that the market would oscillate back and forth, as expectations increased and decreased for tapering depending on the "jaw-boning" efforts of the Fed governors.
Only after tiresome "jaw-boning" and de-sensitizing investors to the negative outcomes of tapering would the Fed start to taper. Well, eventually, I like many others fell for the Bernanke bluff and expected tapering in the near term (the Fed was sending out clear signals of their intentions to taper), only to have tapering pulled from the agenda in September. In the end, the Fed probably pulled the tapering initiative because a more dovish chairperson was coming on board and tightening and then loosening would not make sense.
So where do we stand now? Back to where we were before. The FOMC has promised to keep buying bonds until the "outlook for the labor market has improved substantially." The market consensus right now is for tapering to start in March. Very recently, "the share of economists predicting the Federal Reserve will reduce bond buying in December doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year" (Bloomberg, Dec 7, 2013). Investors are not so sure, and neither am I.
A more likely scenario is for the market to swing back and forth, expecting increased or decreased tapering depending on what the Fed governors are saying and the strength of the economic reports. In the last week alone, the market went down on stronger than expected November ISM manufacturing numbers that came in at 57.3, which was the fastest pace of growth over the last two years. Later in the week the market continued to correct as the ADP report for private sector job growth was best in a year with 215,000 jobs added, beating expectations of 165,000. On Friday the non-farm payroll numbers came in at 203,000 new jobs, better than the expected 180,000.
On this news the market increased as the expectation was that a stronger than expected recovery was going to increase earnings growth. Yes, there were some negative economic reports during the week, but the fact that investors responded both negatively and positively to strong economic reports, shows the confusion that currently exists. Investors should expect the situation to be as clear as mud. The one thing that we can say is that once the Fed starts to give very clear direction, it will probably stick with it. If it does another "September reversal", it will start to lose its credibility.
It looks like the S&P 500 is going to finish the year with a solid performance. Investors are wondering if the run can continue. In looking back over the yearly performance since 1950 for the S&P 500, there is no evidence that a strong year is necessarily followed by a weak year. In fact, to have acted on this premise would have hurt investment profits. Investors should not shy away from investing in the markets just because of a strong year.
Recently, I have had quite a few questions about the performance of the S&P 500, mainly if the S&P 500 is strong in the months of September and October, is it negative over the next six months. From 1950 to 2012, there has been thirteen times where the S&P 500 has produced cumulative gains of 5% or greater in the months of September and October and in only two cases (1965 and 2007) has the S&P 500 produced a loss over the next six months. In other words, strong performance in the transition months of September and October does not have a negative impact on the following six months.
On the last page of this newsletter, I have included a table of the S&P 500 performance by month since 1950. Please feel free to highlight different variations of positive S&P 500 performance in autumn and the returns over the following months. Any way you look at it, you will find that strong results in autumn, do not necessitate a weak following period.
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