“When I look at the domestic economy, I don’t see a catalyst,” said Barclays strategist Barry Knapp, head of equity portfolio strategy. He said he continues to be positioned defensively, and he and others see potential bumps ahead. “September is the worst performing month for the market for the last 25 years,” he said.
LPL Financial chief investment strategist Jeff Kleintop notes that while September is the worst month, August is one of the most volatile and volatility could pick up before it’s over. “As we get closer to the election, around Labor Day, there’s going to be more and more focus on the fiscal cliff, more and more focus on the election,” he said. The fiscal cliff, as it's known, is the dual expiration of tax cuts Dec. 31 and the automatic, dramatic hits to federal spending and programs starting Jan. 1 if Congress does not act.
“It wouldn’t surprise me to see stocks move back to the bottom of this channel we’ve been in,” said Kleintop. Kleintop expects the market to end the year at about current levels.
On the Other Hand...
Just as they spell out the concerns, strategists still see compelling reasons to stay in the market.
Keon said there are investors who believe the prospect of Fed stimulus is creating a “sugar high,” helping to keep stocks aloft. “The other position is the market is signaling gloom and doom is overdone, and when you stand back, you’re going to get very good value,” he said.
“The election and the fiscal cliffs are all things to be nervous about but the market still moves higher despite them. You get a 2 percent dividend yield from the S&P or you can get 1.6 or 1.7 percent from the 10-year Treasury bond. That’s one of the best ratios we’ve seen in a decade, plus with stocks you get some long term protection against inflation,” he said.
Kleintop said one measure he follows, the Citigroup G-10 economic surprise index, is starting to show a turn. The indicator, including a separate one for the U.S., has been turning higher. It is based on the difference between economists’ forecasts and actual economic data. Economists, for now, have become so gloomy in some cases that their view is worse than the actual data.
One example was the better-than-expected July jobs report, which showed 163,000 nonfarm payrolls compared to economists’ 100,000 consensus forecast. Plus, there’s been improvement in weekly jobless claims for the last two weeks, though it is too soon to declare a stabilization in the data.
“It tells me expectations have gotten so low. What I find is the market tends to track that,” he said. “...We’re seeing the expectations index rise. This starting to turn supports what stocks have done in the last few weeks. There’s still kind of a big gap. Stocks are still kind of ahead of where the economic data is relative to expectations. The economic data has to play catch up, if these gains are going to be sustained.”
Keon also pointed to an improvement in data, but he specifically pointed to the improvement in housing, which has been a major drag on the economy for years. Plus the consumer has been successfully deleveraging. “It’s still too early to break out the champagne, but it looks to me like maybe the fourth quarter might be a little bit better than expectations.”
“The market always climbs a wall of worry, and this is a perfect example of it,” he said.
What to Watch in the Week Ahead:
Earnings: GroupOn, Sysco, Iam Gold
Earnings: Home Depot, TJX, Michael Kors, JDS Uniphase, Flowers Food
0730 am NFIB survey
0830 am Retail sales
0830 am PPI
1000 am Business inventories
Earnings: Deere, Target, Cisco, Applied Materials
0700 am Mortgage applications
0830 am CPI
0830 am Empire state survey
0900 am Treasury international capital flows
0915 am Industrial production
1000 am NAHB survey
0800 pm Minneapolis Fed President Narayana Kocherlakota on Federal Reserve and role of its board
Earnings: Wal-Mart, Dollar Tree, Aeropostale, Gap
0830 am Initial claims
0830 am Housing starts
1000 am Philadelphia Fed survey
0800 pm Minneapolis Fed’s Kocherlakota on Federal Reserve and role of its directors
Earnings: Ann, J.M. Smucker
0955 am Consumer sentiment
1000 am Leading indicators
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