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Will It Be a September To Remember?


As we approach Labor Day and look ahead to the final four months of the year, I think it’s prudent to assess the state of the markets.  By analyzing both the opportunities and risks, you can make definitive choices for your portfolio in the context of a rational game plan to achieve your goals.  2013 has been a year characterized by significant changes in stocks, bonds, and commodities which have likely made an impact on your expectations for future returns.  The shifting dynamic between each of these asset classes has brought to light the need for proactive changes to navigate these murky waters.

Global Macro View

From an economic standpoint the data continues to point to positive trends.  U.S. second quarter GDP was recently revised up to 2.5% from an initial reading of 1.7%, which the markets reacted favorably to.  In addition, job numbers continue to remain stable and we have yet to see the full impact of rising interest rates on consumers.  These are all net positives for the domestic economic picture and point to a confirmation of the Fed’s plan to taper its asset purchases sometime this year.  We all know at some point the free money train was going to have to come to an end and we may get an announcement of that plan in September.

From a geopolitical context, the picture is much darker.  We are facing the potential for conflict with Syria which has spooked the markets and sent energy prices higher.  In addition, we are seeing continued weakness in emerging market stocks, bonds, and currencies which does not bode well for overseas investments.  All of these factors have me concerned about the potential for a spillover effect into the U.S. markets if conditions continue to worsen.

Stocks:  Make The Most Of This Pullback

The domestic stock market has had a fantastic run this year.  The SPDR S&P 500 ETF (SPY) has risen over 21% from the beginning of the year to the August highs, and has since pulled back slightly.  Currently the bellwether large-cap index is sitting just below its 50-day moving average.  Logic would dictate that a correction between 5-10% is long overdue but stocks have been amazingly resilient.

believe that the current weakness in stocks will worsen if we see a lack of conviction on the buy side, combined with additional policy shift from the Fed or an escalation of international conflict.  However, any additional weakness should be viewed on the context of a buying opportunity for cash on the sidelines.

In particular I have been using this pullback to add small positions in low risk equity holdings such as the iShares U.S. Minimum Volatility ETF (USMV).  Another sector that has outperformed considerably is technology stocks, with the reemergence of Apple Inc (AAPL) keeping the PowerShares QQQ (QQQ) close to its year-to-date highs.

Keep in mind that any new positions should be added with small allocations that you average into by using additional weakness to your advantage.  In addition, you should be mindful of the long-term trend lines and use stop losses to define your risk.

Bonds:  The Most Hated Correction of All Time

Without a doubt the move in interest rates this year has been a shock to income investors that had grown accustomed to safe and steady returns in their bond funds.  In addition, interest rate sensitive investment vehicles such as REITs, preferred stocks, and utilities have all been stung by higher Treasury yields.

There has generally been a very high level of animosity towards any investment with associated interest rate risk.  However, that rushing tide of resentment may be starting to slow.  Recently the iShares 20+ Year Treasury Bond ETF (TLT) hit a new year-to-date low and bounced higher.   This was likely due to long-duration Treasuries hitting oversold levels combined with the fear of a middle-east conflict sending money pouring back into high quality bonds.

I recently wrote an article that described the three reasons why I believe that we will see at least short-term stability in bonds as a result of technical and fundamental support.  However, there is still a great deal of turmoil that may be lurking if the Fed does decide to taper their asset purchases in September.

I am keeping my bond exposure very short in duration with a slant towards high yield and floating rate note funds that have outperformed.  Underperforming bond sectors that I am avoiding right now are emerging market, municipal, and TIPs positions.

Gold:  Pause for Applause

While there are numerous fundamental reasons for owning gold that can be debated ad nauseum, I have always taken a more balanced and technical approach to owning the precious metal.  Back in June I predicted that the SPDR Gold Shares (GLD) was getting oversold due in large part because of the tremendous pessimism surrounding its downward spiral.  Since that time, GLD has rallied nearly 20% from its low.

GLD as now regained several key technical levels and is in a strong up-trend, which has been due in large part to a weaker US dollar and strong foreign demand.  In addition, gold bullion typically acts well during times of global turmoil as a flight to quality instrument.

Despite its harried momentum, I would not be surprised to see GLD take a breather at this point.  We may see some backing and filling that will work off some of the overbought indicators and allow for systemic buyers to return to this sector.  Short-term traders should consider taking some profits off the table at this juncture and looking to use additional weakness to their advantage.  Ultimately I think that a minor correction in gold will be a healthy and constructive event to continue its upward progress.

The Final Word

As you are flipping burgers or hot dogs on the grill this Labor Day weekend, be sure to spend some time giving thanks to the little things in life that make you happy.  Without our friends, family, and health, none of this investing game really matters.

But when you return from the long holiday, consider the opportunities and risks that we are presented with for the remainder of the year and position your portfolio to benefit from these trends.    You will likely sleep better at night knowing that you are making proactive changes to enhance your returns no matter how the next four months play out.

David Fabian is the chief operating officer at Fabian Capital Management LLC.