As every football fan knows, most games are either won or lost in the final moments of play. So true is this harsh reality that teams practice their so-called "2-minute drills" more than any other set of plays or style of offense. In short, it's all about the 4th quarter and everybody knows it.
Coincidentally, the same holds true on Wall Street, where professional money managers and investors of all sizes are getting set to embark on their own 2-minute drills in hopes of securing a last second win. And just like the action on the gridiron, where things like the weather, remaining timeouts and player health all affect strategy, there are several unique investment variables that are sure to impact this year's financial finale as well.
"November 6th is obviously on everyone's radar," says Charlie Smith, chief investment officer at Fort Pitt Capital in the attached clip. "For sanity's sake of people who manage money and the managements of businesses around the world, we need to know how the fiscal cliff issue is going to come out," he says, naming politics and elections as the key determinant of the coming quarter; at least the first 7 weeks of it.
From his viewpoint, an Obama victory would likely lead to some sort of lame duck deal on raising taxes on super high earners ($750,000+ per year) paired with some negotiated wiggle room on mandatory defense cuts set to kick in in 2013.
Should Mitt Romney win and the Senate swing to Republican control, Smith says "all that goes off the table." He thinks a drastic change in sentiment would get capital off the sidelines where it has "been on strike for the past couple years."
Another key consideration is the fact that the benchmark stock indexes are up 10-15% year to date, while the average fund will go into the last 13 weeks of 2012 with only 3% gains. This performance disparity, while widely discussed, has yet to be reconciled.
"There's a big incentive for money managers to try and catch up," Smith says, "and if the 4th quarter gets out of the gates strong, I think we could see a wave of purchasing by managers looking to buy volatility, to buy beta so to speak, to try to drive performance." In short, it could lead to what he calls a "decent melt up."
On the flip side, if the early part of the October is marked by pronounced weakness (of 10% or more), that would suddenly push cash-hording laggards with a bearish bent to the fore.
Interestingly, with Alcoa (AA) set to report results and kick-off 3rd quarter earnings season on October 9th, Smith is conspicuously not that concerned about what he calls the tepid profit picture, saying "it's not going to be the focus." By his count, 3rd quarter earnings should grow by about 1%, and that as a result, not a lot of expectation is built in.
Fed-watching will also garner less attention going forward since the U.S. central bank decided to punt late in the 3rd quarter via its open-ended QE3. And Europe, if I had to guess, will resemble an instant replay, in as much as it probably won't implode or explode in the next 90 days, any more than it did in the prior 90 days.
What's your game plan for the 4th quarter? Will you be running out the clock (sitting on gains) or trying to force a turnover and put some points on the score board?
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