“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Mark Twain
The volatility that’s been missing all year suddenly appeared this month with stocks headed south. In knee-jerk fashion, some people sold stocks as rates ticked a little higher. Well, some stocks. Tech stocks with low (or no) dividend yields were crunched. Stocks with attractive yields and the prospect of dividend boosts were better. The S&P Utility SPDR (XLU) is up 5 percent over the past six months while the S&P is up 3 percent. For years Wall Street told us, again and again, to avoid utilities because interest rates will be rising. They were right about rates, wrong about utilities.
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Those who are not concerned that interest rates will rise and rise might be worried about a slowdown in earnings growth and the economy. If so, they have company. Harvard economist Martin Feldstein said a stock market sell-off could cause a recession, though he has no idea just when. The trigger? According to Feldstein, who by the way is a credible economist and has been for decades, a rise in the ten-year Treasury yield to 5 percent would send stocks tumbling. Well, yes and no.
Stocks would decline long before the yield reached 5 percent. A relentless decline in bond prices and rise in yields would in time draw some investors away from stocks and toward income vehicles. True, but what would cause rates to rise so much? Only a sharp rise in inflation and recent CPI numbers show no reason to be concerned. To the Fed’s delight, in fact, surprise, no such rise has occurred nor is one in sight.
As long as the economic and profit outlook remains strong stocks will outperform other asset classes. Allow for some large daily declines and rallies, but those will be temporary as we’ve seen many times over the past nine years and saw again in October. Let the media search for reasons every time stocks fall. Blame it on this, blame it on that. Find something. Blame it on anything other than what it usually is, i.e. profit taking in a bull market.
