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By: Costas Bocelli — October 24, 2013

Here's My Outlook for the Coming Weeks

“Serenity Now!”

If you’re familiar with the iconic 1990’s American TV sit-com Seinfeld, then you know that quip was uttered frequently throughout a popular episode as the characters were challenged with all sorts of unexpected and frustrating sequences.

And when things really became intense, the phrase was bellowed aloud like a proclamation to command an instant feeling of composure.

Well it’s now been exactly one week since Washington ended the fiscal fiasco with a temporary measure to keep the government funded through January 15, and a suspension of the debt ceiling until February 7.

And as the eleventh hour deal was quickly cobbled together on the eve of the United States Treasury exhausting all its borrowing authority, the market uttered its very own version of “serenity now”.

The CBOE Volatility Index (VIX), which gauges investor fear, plunged out of the danger zone after hitting one of the highest readings of the year.  It’s now back below 15 as markets become sanguine once again.

The S&P 500 rose for five consecutive days, which included an all-time record close in three of them.

Yesterday broke the winning streak, though, as the major averages posted moderate declines.  Nevertheless, it’s very clear that another breakout has occurred and the medium-term bullish trend remains firmly intact.

S&P 500 continues to make a series of higher highs...

Clock is ticking to year end

It’s hard to believe, but there are about nine weeks left to 2013.  And since the start of the year, the S&P 500 has gained about 22 percent, which is quite impressive.

Now that Washington has postponed the next fiscal showdown until sometime early next year, the market’s “wall of worry” has been reduced to Popsicle sticks between now and then.

The Federal Reserve could be considered a potential concern, as markets reacted rather badly on several occasions already this year on the prospect that the QE punch bowl of liquidity could soon be reduced or even taken away.

But thanks to a 16-day partial government shutdown and recent disappointing economic data, the Fed is now likely compelled to continue their monthly asset purchases at the current pace of $85 billion a month.

A recent survey of primary dealers (firms that are obligated to participate directly in Treasury debt auctions) showed that 9 out of the 15 now believe the Fed will be forced delay tapering until March of next year.

The September jobs report was also released earlier this week and showed that the economy added just 148,000 new net jobs.  That tally disappointed expectation and was below the monthly average over the past year.

Inflation also remains below the Fed’s target.  We haven’t seen much data because of the shutdown, but export and import prices for September were just made available.  Prices did rise a touch from August, but year over year shows both in decline.  Pricing pressure simply has not gained traction.

Inflation still too tame for the Fed...

The US Treasury bond market is also voting that the Fed will keep putting upward pressure on bond prices, which drives down yields and lowers the cost of capital for consumers and companies.

After markets thought the Fed would announce a taper at last month’s meeting, yields on ten-year treasury notes front-ran the event and hit 3.00% at one point.  Now, they were recently trading just under 2.50%.

The bond market thinks QE will continue at the current pace...

You don’t want to take the market cues?   That’s okay because the next FOMC meeting is this upcoming Wednesday and, with it, the committee’s next policy directive.  Clearly a change from the prior statement will be needed and likely will say that a few more months of data will be needed before warranting the tapering of asset purchases.

Middle East conflict and spiking oil prices

Forget about it over the next nine weeks.  After the latest United Nations soiree, leaders agreed to give diplomacy another try with regards to Syria and Iran.  That has drastically reduced regional tensions and has taken a potentially destabilizing military strike off the table in the near-term.

Oil prices have also come down sharply as the war premium deflates and domestic supplies and production increase.  That bodes well for consumers as we move into the holiday spending season.

Oil prices drop below $100/barrel (WTI)...

European sovereign debt jitters

Did someone say the Eurozone periphery has way too much debt and not enough economic growth?  The answer is an undeniable YES!

But is the crisis stew pot on the verge of boiling over?  It doesn’t seem like that is going to be the case over the next nine weeks.

We only have to look at one chart, and that is the sovereign yields on the ten-year bonds of Greece.  The risk premium has plunged and is still trending lower.

Greek ten-year bonds are yielding 8%... Opa!!!

The 9-week outlook as we close out 2013

It’s been a great year for stocks, and with the S&P 500 posting 22% gains year to date, the reality is that many institutional fund managers have found themselves lagging behind the performance of their respective benchmarks and will be eager to try and play catch-up before year end.

But as individual investors, we must also understand that stocks have rocketed to new all-time highs in a very short-time, which leaves near-term trading conditions now overbought.

That should open to a consolidation phase or some measure of a pullback.  But if we do happen to get that corrective action, don’t wait too long, because any period of weakness between now and year end will likely be brief and shallow.

Serenity now... Insanity later! (After the New Year)

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