We Made It Through September... Now For October!

If there is ever a time of the year that strikes the highest level of anxiety among investors it is the period of September and October. Well we made it through September and now have three quarters of the year behind us and what an explosive time this has been since the market low on March 9. No time to relax though, as we now have October to deal with which is historically the most volatile month of the entire calendar for the stock market. That claim is statistically supported by market technicians who enjoy plotting such financial measures as standard deviation, a complicated method of measuring variation from the norm. Since the Dow Jones Industrial Average was initially created the standard deviation for market percentage changes in October is 40% higher than the average of the other eleven months. That speaks to volatility!

Let's take a moment, however, and consider where we are at September 30. Remember that at the outset of the year the markets were in a continuing downward freefall from the credit crisis that began to engulf the global financial system in 2008. As of the end of February this year the Dow Jones Industrial Average was down -19.5%, the NASDAQ down -12.6%, and the S&P 500 down -18.6%. Just a few days later as indicated above on March 9 the markets "hit" what continues to be perceived as the bottoming of the bear market.

Whether or not a reaction to the various stimulus measures and monetary policy actions, the markets have responded dramatically since then resulting in year to date positive performance through September of 10.7% for the Dow, 34.6% for NASDAQ, and 17.0% for the S&P 500. As for the latter index, an interesting observation has been made. The S&P 500 for the last two calendar quarters has had gains of 15% each quarter. While that seems like a formidable move, the point to be made is that if that index advanced another 39% in the last quarter of this year it would be a breakeven movement for the last decade. To express this another way, an investment in the S&P 500 10 years ago requires a final calendar quarter performance increase this year of 39% to at least walk away with the original principal of the investment with no earnings. Clearly this is a checkmark for the column that says buy and hold strategies do not always work.

Now let's get back to October. While the month is indeed typically associated with negative performance, the norm for that has usually been in the vicinity of 3-5% down. If we were to look at the two biggest losing October months in the past twenty five years, which were 1987 and 2008, they were both preceded by a negative September. That was not the case this year. Additionally, other October downturns have witnessed market selling earlier in that year in the months of May and June with October representing the climax of selling. For 2009 the months of May and June experienced positive performance.

The opposing camps in the marketplace at this time are at odds: the bears contend that the market is significantly overextended and ready for a serious pullback; the bulls believe the characteristics of the rally suggest growing strength in the economy and continued advancement. What do we believe? The safe bet is to say somewhere in the middle. We are not anticipating a significant pullback. We believe the 2008 and early 2009 sell off created a clear oversold condition once the confidence in the global financial system was reassured. However, to say the economy is powering forward is premature and as the expression goes... the jury is still out!

Typically with the writing of our quarterly newsletter we are entering what is called the earnings season for America's corporations. This will be a particularly important quarter to look at for the quality of those earnings reports. The markets performance this year has been a result of the acceptance of profitability levels from many companies, albeit less than the previous year, that met market forecasting expectations. This quarter's earnings need to clearly demonstrate the evidence of sales growth and not to just be relying on cost cutting and productivity measures to deliver shareholder profits. Sales growth is the key to demonstrate that there is strength rebuilding in the economy.

It appears the economy will continue to have the support of the existing Federal Reserve monetary policies such as low interest rates. There seems to be an acknowledgement that uncertainty remains with the housing market and associated mortgage market along with the big question of whether there can be sustainability to the economy without any further stimulus programs.

It seems to be a wonderful time to have a reliable crystal ball but we just have not been able to find one. So while we are quite happy with client performance results to date this year we will remain cautious in our investment posture as we continue to watch the data unfold in anticipation that it provides clearer visibility to future strategy implementation. In the meantime, let's not lose sight of the fact that October brings about significant spending in the economy for Halloween. Let this year be no exception and here is hoping that when it comes to trick or treat there will be a lot more treats for us to enjoy. Have a Happy Halloween!