Today, I want to take a look beyond earnings and see what the next few months will hold for the stock market. Our strategy is clear for the near term, but we must also make sure we’re fully prepared for the remainder of the year in order to keep ahead of the market.
The Volume Game: Earnings season will end just before Wall Street comes back from summer vacation in August, a time traditionally characterized by light trading volume and profit taking. Therefore, the first thing you need to do is steel yourself for some market volatility in August. It is common for August to be bumpy, though, and since we can see it coming, there are no major moves you need to make before next month. Owning A and B rated stocks is enough to protect from any major swings that may occur.
The Unemployment Report: It is likely that the most unwelcome surprise for which we will need to prepare is coming on Friday, August 6, when the Labor Department releases the July unemployment report. I can tell you that Wall Street has very low expectations for job creation in this report, especially now that U.S. Census workers largely have been laid off and are hitting the ranks of the unemployed.
The truth of the matter is that the U.S. economy needs to create 150,000 jobs a month to keep unemployment stable. We are far from this point, so, despite the obvious economic recovery, it will seem like a slow climb in the next several months because of the anemic job creation. However, even though I expect August to be volatile in the wake of the second-quarter earnings season, good news is right around the corner with the impending mid-term elections in November.
The Election Cycle: This is one of the most influential and predictable events in the market cycle that affects Wall Street every four years, but it is often ignored by private investors. This cycle affects the stock market in a profound way and I want you to be aware of how it can benefit your portfolio.
Historically, after a new president implements his agenda in the first half of his term and mid-term elections roll around, he enters a “lame duck” period for the next two years. This happens because politicians start positioning for mid-term elections and generally, little progress is made on policy initiatives at this time. Interestingly, Wall Street loves this period precisely because of the Congressional stagnation, as it increases certainty in the market and encourages a rally that usually begins in late September.
Essentially, the stock market will rally from late September of this year until November of 2012 when the next presidential election will take place, using history as a guide. This means a nice 26-month rally in the overall stock market is coming our way in a little over a month.
These three things we know will happen in the next several months. There will be other market forces that will come into play and change the game slightly on a day-to-day basis, but overall, I’m confident that a bumpy August will be quickly followed by improved conditions in the fall lasting through 2012.
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