By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Shutdown Doesn’t Deter Market
Stocks wobbled a bit at the end of the third quarter, likely due to portfolio rebalancing, but it could hardly be called a pullback, and it didn’t last but a couple of days.
By midday Oct. 1, the S&P was once again making new all-time highs despite a government shutdown, which seemed to be more of a positive catalyst than a reason to be worried.
And why not? Every shutdown over the past few decades has been resolved within a couple of weeks, and rarely has it resulted in any impact on the economy and/or markets.
For the time being, the story remains pretty much the same. Earnings revisions are improving, money supply is growing thanks to the Fed and investors are feeling the FOMO. That’s fear of missing out for those of you who haven’t heard the FOMO acronym before – now you know.
We remain steadfastly on watch for signs something is changing, but for now anyway, the trend is still your friend.
Featured Insight: Don’t Chase Yield
There are no free lunches when it comes to investing – I promise you.
If something seems too good to be true, it most definitely is. That doesn’t mean you can’t earn a huge return on a good trade or get lucky from time to time; it just means there is no holy grail or shortcut to riches that can be consistently exploited over the long run.
One of the free lunches many investors think they can get is by selecting an investment with a high yield – that is, something that pays a large dividend or interest payment relative to its price.
Higher yield comes with higher risk – on the stock side it could come in the form of a dividend cut or declining stock price that wipes out the benefit of the dividend yield.
On the bond side it could ultimately come in the form of a default, in which case you don’t get some or, in extreme cases, any of your principal investment back.
Looking Ahead: The Calm Before the Storm
Earnings season won’t begin until mid-October, and there aren’t many important economic reports expected out over the next week or so, and if the government stays closed, many of the scheduled economic reports won’t get released.
Therefore, investors will likely continue to push prices in the direction they’ve been heading, which, in the case of the stock market, is likely higher.
Nevertheless, these environments do leave the market vulnerable to unexpected shocks, so if anything happens that we’re not expecting, it could easily result in some market volatility.
Whether it happens sooner or later, volatility will return to markets at some point, and with stocks trading at nosebleed valuations, it could be a bumpy ride.