While the global and economic headlines scream volatility, the market has actually been fairly calm. The S&P 500 is still trading well within its bull market rally channel. In other words, the recent drop has been very normal, and what one would expect, without the troubling headlines.
At this point I would be cautious committing new investment dollars until the situation in Syria plays out. For those of us in the market, an exit plan should be a planning priority.
While the market and global effects of U S action (or non-action) in Syria are unpredictable, we can focus on events at home.
Once again in October the U S government will reach our limit on the amount of debt the country can have. The President naturally wants to lift this ceiling, but needs congressional approval to do so. Of course Congress will use this as a bargaining chip and negotiate spending cuts in return for an increased ceiling. Pundits will cry that such budget cuts will throw the country back into the throes of recession. Democrats will talk of starving babies. And Republicans will predict financial Armageddon without the cuts. The markets will be “volatile”.
As an investor, we need to focus on the longer term and what really matters to our portfolios – and that is growth of corporate earnings. How will the wrangling impact businesses? To put this into perspective let’s look at the numbers.
Based on the sequester spending cuts of 2011, when you put the budget into numbers a normal person can understand, the cuts don’t look so “draconian”. Seriously, we really won’t miss the money. Of course politicians will cut the most visible services and programs to make their point, but in reality the cuts are fairly meaningless. I think many of us have cut far more than the equivalent of $1155 from a $114,600 budget during the financial crisis.
Bottom line? The consequences of the headlines are never as bad, or as good as the talking heads would have you believe. Of course anything can happen. And sometimes it does. But if you are constantly expecting the worse, you will get nowhere. A better strategy is to expect the best, but be prepared for the worse. So far there is no sign that the current bull market is over, only that it has taken a natural and expected pause.
The key we will be watching is earnings announcements for the third and fourth quarters of this year. Third quarter announcement should start in mid-October. Until then, expect the market to hold its gains, but be prepared if we get unexpected bad news.