The Opportunity in Summer Volatility
As we look ahead to the heat of July and wave goodbye to the June swoon, I am exceptionally bullish.
Yes, we just had a 700+ point drop in the Dow in just four trading days, but frankly I didn’t mind the June market selloff. It was only natural to see a pullback after the outstanding run we saw in the first five months of the year. In fact, we were able to pick up great stocks for the second half at stellar prices and leave the panic-sellers in the dust.
So rather than looking backward, I want to look forward to a number of summer catalysts that will provide significant upside through year-end.
Good economic data — but not too good: The Fed is forecasting for unemployment to decline to between 6.5% and 6.8% by the end of 2014. Economists widely expect for that 6.5% number to not be hit until 2015. In addition, the Fed expects to see at least 3% GDP growth in both 2014 and 2015. The consensus estimate among economists is for growth of 2.3% for 2013 and 2.8% in 2014.
So while I do expect slow-but-steady economic growth, I think that Ben Bernanke may be bluffing a bit with his recent QE statements that spooked the market. It’s hard to see the dove-dominated Fed getting fully out of the market anytime soon. Wall Street remains obsessed with the possibility of QE ending, but I don’t expect it to happen under Bernanke’s watch.
A multinational ‘turbo boost’ from the weaker dollar: Despite a shrinking federal budget deficit, rising bond yields and steady consumer spending, the U.S. dollar has significantly weakened against major currencies over the past month or so, recently hitting a 3½-month low against the euro and a 2-month low against the battered Japanese yen.
This is great news! A weaker dollar will help corporate profits rise in the second half of 2013 because multinational companies will be getting paid in currencies that appreciate as the dollar weakens. The earnings outlook for the S&P 500 should improve considerably in the upcoming months, so it will be key to make sure that you own the strongest earnings growers in the market.
A potential flood of money from bonds into stocks: Because of the hazy timetable from the Federal Reserve in tapping the monetary brakes, U.S. debt yields are surging and the 10-year Treasury bond yields have climbed to their highest level since August 2011 — gaining some 80+ basis points since the beginning of May.
These rising bond yields are likely to send more fixed-income investors back into the stock market, since nothing will make an investor feel worse than losing money in bonds as interest rates rise and their bond principal erodes. Back in 1995, when interest rates surged, it caused one of the most impressive and steady stock market rallies that I can ever remember.
So I hope that you were able to use the volatility we’ve seen so far this summer as an opportunity to pick and choose some stocks from your watch list while they were on a fire sale. I’m expecting a strong second half of the year, so please enjoy the ride this summer!