Last week the Fed threw us a slow curve with their decision to kick the taper down the road. I was prepared to adjust portfolios accordingly. You are going to hear various spins on why no action came about but in reality it gave stocks a temporary boost. Bonds profited since yields have climbed anticipating the Fed’s action and retraced as rates fell.
As we approach October, which is still in investors’ minds a volatile month, I am starting to hear rumblings of worry from potential clients. October 1987 and October 2008 were the worst Octobers we have been subjected to in my career; however, like the proverbial sell in May and go away, taking any action based off the calendar has cost investors a lot of upside potential. From all historical indications and measurements we are slightly overbought from the U.S. equity perspective but international is on the other side of the spectrum and could outperform over the next few months if some of the international problems are solved.
This has been some year for U.S. stocks, with most of the gains coming-not from good news- but rather investors have been giving a little richer valuation to expected earnings. The P/E now is up to 14.4 x expected earnings. Determining the right P/E for all conditions is difficult because it depends so much on inflation, interest rates, productivity, etc. and you can never guess what is “right”. One of the measurements I use to observe the potential for the markets going forward is telling us that based on the present criteria that 14.1% a year gains are possible over the next four years. You’re probably taking this with a grain of salt, but unless the train goes off the tracks we will surpass this 14.1% mark this year.
One main indicator I use is the VIX (better known as the fear factor). As of this writing, the ETF VXX (which follows the VIX) is at 13; which is historically low. I would wait until it reaches 18 or 19 before I would take evasive action. This is one of the indicators I will be watching as we approach the debt limit deadline which I personally feel will be a non-event or of little effect. The most important thing is to maintain your investment discipline and take advantage of buying opportunities.