Many Times I Wrote the Markets Historically Decline Between 5% and 20% in the Months Heading into the Midterms.

Many times I wrote the markets historically decline between 5% and 20% in the months heading into the midterms.  It is also widely known September is historically the worst month for equities.

It is also widely known that sometime in mid-October the averages enter into seasonal strength lasting until mid-April.  There is also strong precedence the averages bottom about 7-10 days before the mid-terms and the sectors that were lagging become the market leaders.

The first paragraph is or has materialized given the typical NASDAQ stock is down over 20% albeit the bifurcation is great between the indices.

Will the second paragraph come to fruition?

Earning season commences next week. Will profits again exceed expectations for the gazillionith quarter?  The S & P 500 is trading around 16.5x trailing and 15x anticipated earnings, valuations that may be “full” but are far from “stretched” or “overvalued.”

The general economic landscape is positive albeit there are several strong headwinds including uncertainty about monetary policy and an ugly geopolitical environment.  Optimism/confidence is low and cash levels high.

I think the odds are around 60% the current drubbing in the Russell 2000 will be viewed only as “noise” in four to five months because of the generally positive economic environment.

I think it is noteworthy that when the Federal Reserve begins tightening money supply, equities are higher three months later.  The markets are volatile going into and immediately following the first change, but the first tightening move is typically viewed as a sign of strength that will positively impact earnings and hinder valuations.

This week the markets are faced with a plethora of data consisting of various employment, manufacturing and housing statistics.  How will these statistics influence outlooks?

Commenting upon Friday’s market activity, equities staged a narrow based rally on dated data stating the economy expanded during the second quarter by the greatest amount since 2011.  I rhetorically ask is the “buy on dip mentality” alive and kicking?

Last night the foreign markets were down.  London was down 0.33%,  Paris down 0.64% and Frankfurt down 0.58%.  Japan was up 0.50% and Hang Sang down 1.90%.

The Dow should open considerably lower as the pro-democracy protests in Hong Kong is yet another geopolitical hot spot.  The dollar also furthered strengthened to a four year high.   The 10-year is up 8/32 to yield 2.51%.

kentThe information is the personal views of Kent Engelke and is not necessarily indicative of those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed here are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results.

Capitol Securities Management, Inc. is a Mid-Atlantic based, privately owned brokerage and investment firm with branch offices in Mclean and Richmond, VA, Boston MA, Hickory, NC, Florham Park, NJ and Tampa, FL. Capitol employs over 170 fulltime investment professionals and independent affiliates in locations from New England to Florida and has been serving the needs of its investors for over 25 years. It is a member of FINRA and SIPC.