Streetwise for Sunday, September 24, 2017
Readers: Please note that due to Hurricane Irma and a resulting loss of power, this is a repeat of a favorite column from a year ago. Things should be back to normal next week.
The financial markets are buffeted by events in much the same way that a sailboat finds itself at the mercy of the wind. Moreover, the waves of volatility often reach dramatic proportions. Such is the nature of the beast. So, it is not surprising that the oscillation between anticipation and disappointment over the current economic outlook, both domestically and globally, is roiling the investment waters.
Adding to the concern is the rising clamor that we could be facing an even more severe correction. Why…some say because we have not had a major correction for several years therefore one must be coming. From there it is only a small leap of faith to the idea that we will face a scenario like that of 2008.
The probability is extremely low but what if we did? Wall Street will still offer ongoing potential for accumulating wealth. Consider the gains realized by Warren Buffett as he took advantage of the 2008 financial crisis by tossing lifelines to a handful of blue-chip companies during the financial crisis. His reward…a 40 percent the pretax profit.
While Buffett is certainly a prescient investor, he has said repeatedly, that in terms of simple profitability, an average investor could have done just as well by buying in during the panic period.”
And if a potential slide downward on Wall Street is not worrisome enough, many investors find their fears compounded by the fact that October is almost upon us, the most dreaded month in the annals of investing; the month of black Mondays.
Does October really deserve its rotten reputation? There is some justification when you consider the debacle of October 1929. More recent are the declines on October 19, 1987 that sent the Dow Jones Industrial Average down 23 percent. Moreover, we cannot forget the relatively minor “October massacres” in years such as 1978, 1979, 1989, 1997 and 2008.
However, if Wall Street is anything it is fickle and sentiment on the Street can reverse without warning. With the global news anything but good, some will find it tempting to spend the rest of the year on the sidelines. Before doing so consider that a recent Reuters poll shows the S&P 500 ending 2015 roughly 11 percent above current levels.
Since 2009 the S&P 500 index has gained an average of seven percent during the last three months of the year. Over the last 30 years, stocks have moved higher during the fourth quarter 26 times out of a possible 33, gaining on average seven percent.
Moreover, there is a pronounced seasonal pattern to performance estimates in each quarter and particularly the fourth quarter. Specifically, the number of upward revisions tends to rise sharply, beginning with about the second week of each quarter before giving way to downward revisions as the moment of truth approaches.
Why do companies, and subsequently analysts, raise estimates early on, only to backpedal later? The answer is it is in no one’s interest for companies or analysts to miss estimates. Therefore, when sensing trouble companies often report that information expeditiously. Moreover, if a company can beat a downward revised number, its share price usually recovers quickly.
Meanwhile, the release of an unexpected earnings report has given rise to the “cockroach” theory. While you may have fondly compared a stock to a cockroach, with the cockroach achieving greater accolades, for a company to acquire the title, it simply must announce an earnings surprise. The label of cockroach is derived from the idea that you seldom see only one.
Historical data indicates that there is a 35 to 40 percent probability of the trend continuing, positive and negative. Therefore, cockroach theorists recommend buying or selling immediately following the first unexpected report on the theory that the next report will follow in the footsteps of the first.
L’Shanah Tovah everyone! May this New Year grant all your wishes for love in family and in self.
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.RuddReport.com.