Streetwise for Sunday, October 14, 2018

October is upon us once again, that time of the year when trees display their fall colors and pumpkins debut as pumpkin pie. It is also the most dreaded month in the annals of investing, the month of black Mondays.

Does October really deserve its rotten reputation, recent events aside? There is some justification for the bad rap when you consider the debacle of October 1929.

More recent, but still only history book material for most on Wall Street today is the decline on October 19, 1987 that sent the Dow down 23 percent and resulted in the initiation of this column. Moreover, we cannot forget the relatively minor “October massacres” in years such as 1978, 1979, 1989, 1997 and 2008.

People hear October and they remember those spectacular crashes. But when you look back in history, October is not that bad. During the last 20 years, October has been the strongest month of the year for the S&P 500 index, gaining on average about 2.1 percent each year. It is August and September that are typically the weakest months of the year.

And while many are unaware of it, any October prior to November midterm elections is also historically strong for stocks. Since 1982, October in midterm years has only been down once. In fact, the fourth quarter of a midterm year typically has the S&P 500 index rising on average 7.8 percent, according to data since 1950.

Both the economy and corporate financial fundamentals, such as earnings are likely to remain strong through the fourth quarter. And it is still a broad-based rally. Technology has pulled back, but its main entrants remain fundamentally strong. Meanwhile, look for health care and industrials take up any slack.

Keep in mind that on Wall Street the baton is often passed from group to group and then back again. Trying to follow the current “in groups,” is like herding cats, an unsuccessful endeavor at best. That is why a buy and hold strategy is the secret sauce of so many successful investors.

At the same time there is an excessive amount of noise within the financial news media. The endless stream of so-called expert opinion can only serve to cloud your investment judgement.

Throughout the week you are constantly being bombarded with investment bait. Join us for a “free” consultation, lunch, dinner or an invite to hear an imported expert that has the answers to today’s investment climate. What utter nonsense.

It gets even more “entertaining” when a news outlet waffles in trying to explain why stocks are up or down, rather than admitting that they really do not know. But in doing so would not make for an interesting news hour.

Therefore, the media and many of those on the Street continually create a degree of fear to keep you reading, watching and listening.

What is important are factors such as productivity, job growth, inflation and interest rates. These are the true drivers of the economy and subsequently the financial markets. Add in corporate financial data and that is where your long-term focus should be.

A good example of information not to be taken at face value is the growing chorus of opinions that bank stocks will do well, given the rising interest rate environment. Why, because the spread between what banks pay for money versus the rate they earn on loans is crucial to a bank’s strength.

For bemouths such as JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley maybe not. Rather than just banks, they are closer to the Black Hole of Calcutta, a maze of interconnected and concentrated interest-rate risk with trillions of dollars of derivatives sitting on their balance sheets.

Wait, you say, these banks know how to hedge their interest-rate and derivative risk. Both the Great Depression and quantitative analysis might say otherwise.

Financial news is sort of like being caught in quicksand. The more you watch, the more likely you are to react and lose money. Remember, you only actually lose money when you sell at a loss. And you are more likely to sell in a panic when a news outlet is flashing turmoil across your screen.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.