While the Dow rallied nearly 100 points Wednesday, I wouldn’t get used to it.
#1—The Dog Days Of Summer Bring In Record Outflows
For one, the flow of funds into the stock market is starting to dry up over the long run. Just recently, BlackRock (BLK) reported that August was a record month for withdrawals of exchange-traded funds (ETF). Last month, ETF investors cashed in over $16 billion—the largest monthly outflow on record. The S&P 500 (SPY) alone had $13 billion in outflows in August. These withdrawals will likely cause the breadth and power of the overall stock market to deteriorate this fall, because money is no longer flowing to every stock in the S&P 500.
#2—Uncertainty About Syria and the U.S. Deficit
And investors already have plenty of things to worry over this fall. At the top of everyone’s radar is the uncertainty surrounding a U.S. attack on Syria. So while crude oil and gold have emerged as a temporary oasis, the stock market has started to slosh back and forth like a washing machine. And Wall Street has been so distracted by the Syrian situation that Treasury Secretary Jacob Lew has been largely ignored. Specifically, Lew recently said that the federal government would hit its debt ceiling in mid-October and be unable to borrow money to pay its bills.
Adding to all of this, historically speaking, September is the worst month for the stock market. This is the only month of the year that the Dow has finished in the red in the past twenty, fifty and one hundred year periods.
So will these outflows persist in September? It sure looks like it. But in a liquidity-fueled market, an investor’s best defense remains a strong offense. The best thing you can do to prepare is to invest solely in companies with the best earnings prospects. Of course, the best place to start is to run your portfolio through my Portfolio Grader screening tool. It doesn’t take much to see that sticking to A- and B-rated stocks pays off big in the long run.
That also applies in the near-term. Fortunately, even though the overall stock market has deteriorated (and will likely continue to do so), the crème a la crème is doing much better. And once we approach third-quarter earnings season, and Wall Street refocuses on the quarterly announcements, I expect liquidity to pick back up.
Best of luck to you this month. Despite the challenges ahead I’m convinced that with a little planning and a strict set of standards, we can all profit through the end of 2013.