The anticipation of September proved to be a lot worse than the actual event. The Federal Reserve didn't reverse course, Syria wasn't the tinderbox it promised to be, and the budget fight was punted into October. Many of the investors who fled to cash in August missed out on a good month of returns for both stocks and bonds. As we begin October, the political mess will continue to dominate the headlines. Don't focus only on daily news cycle or you'll miss all of the good things that are going on.
In the U.S, American household wealth hit a new record at $74.8trln, largely as a result of improved stock and housing markets. Industrial Production is picking up. In the UK, the Purchasing Managers Index (PMI) hit levels not seen since 1994. Even Greece is expecting a "primary" budget surplus this year (a primary surplus doesn't include interest payments on government debt). Opposite our western shores, Japan is staging a surprisingly robust recovery while China appears to be reaccelerating. Inflation, a theoretically worrisome bugaboo, remains subdued giving central banking authorities cart blanche to maintain aggressive monetary policies.
Consider this. Microsoft - in September the company boosted its quarterly dividend by 22%, authorized a $40bln share buyback plan, and bought Nokia's Smartphone business for $7bln. And Apple - in September Apple released its latest iPhone to record setting demand and likely set a new record for share buybacks in a single quarter. Not so bad.
Unfortunately the political risks are becoming acute. The budget debate is a sideshow to the more serious debt ceiling issue. If the government doesn't pass a budget for a few days some purchases will simply be pushed to the next week. However, if the government does not raise the debt ceiling, more serious constraints begin. No one can know with any certainty how these events will unfold.
Political theater is frustrating for investors. One might understandably be inclined to sell everything and sit on the sidelines while this plays out. And if this doesn't play out as poorly as is widely anticipated, you will be getting back in at higher prices. No one can predict what is going to happen and letting politicians dictate investment decisions is a poor strategy for success. If these storms clouds pass like so many others, you won't miss any rally. If the market corrects lower, I expect it will be temporary and thus a good opportunity to build equity positions.
Brennan R. Redmond, CFA Vice President Brighton Securities
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities.)