Bernanke’s announcement of an open-ended QE3 surprised markets and triggered a temporary spike in equity prices. However, most indices have pulled back from those post-announcement highs. Despite ongoing concerns about Europe, the election, a subpar economic recovery, the upcoming “fiscal cliff”, the efficacy of more Quantitative Easing, the nagging underperformance of the transports, I am comfortable owning the names in the PCM portfolio, but am treading cautiously with regard to new positions.
Overall, I continue to believe that the environment is good for US equities, although the real test for me is whether PCM companies deliver earnings – and earnings season is just starting.
At the risk of repeating my previous months’ comments, I believe that valuations are generally attractive, and that monetary forces and the uber-friendly Fed will continue to support asset prices, at least for the time being. Recent polls show Obama ahead in a few key states (Ohio, New Hampshire, Wisconsin), so perhaps the election’s outcome is no longer so uncertain. Additionally, the fiscal cliff has been in the news for so long that I suspect it won’t have a material effect on stock prices, regardless of what happens.
I also repeat my concern about the longer term direction of interest rates from today’s extraordinarily low levels. Who knows when the pendulum begins swinging the other way, or from what level it will begin swinging, but after a 30 year bull market in bonds there’s simply very little room left for capital appreciation in many fixed income products.
October has a well deserved reputation for being scary, as it has delivered a few crashes over the years. However in the past 20 years, it has been a positive month 70% of the time, according to market watcher Don Hays in a recent report, and starts the “best 3-month period of the year.”
PCM doesn’t invest according to the calendar or election cycle, (after all, September is the weakest month of the year, and it was just up 2.4%, net of advisory fees) but it’s worthwhile noting that in election years when the S&P 500 Index (SPX) is ahead by more than 10% through September, the index has gained on average 6.2% in the fourth quarter according to a recent article in the Financial Times.
The index comparisons herein are provided for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors.
The investments discussed are held in client accounts as of September 30, 2012. These investments may or may not be currently held in client accounts.The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
