September is a really risky month, so everyone tells us.
Go back for decades, and you’ll find that on average, the stock market takes a bath at the start of autumn.
And this September, there are loads of reasons to be worried: the taper; Syria; German elections.
It’s all true, of course – September could go horribly wrong.
But it could also go horribly right.
In my view (and you’ll have gathered by now that I am not one to play down the bearish side of a situation), there’s at least as much risk of a ‘melt-up’ from here as of a meltdown.
Here’s why – and what you should do about it…
How everything could go horribly right
Let’s start with Syria. Syria is an awful situation; it will end badly whatever happens. There is no happy outcome. So what’s the most likely one?
It’s clear that western voters do not want to get involved. The practical consequences of liberal interventionism can be seen in Iraq and Afghanistan. Rightly or wrongly, that’s raised the bar quite substantially for any leader who tries to use the phrase ‘surgical strike’ while maintaining a straight face.
So Barack Obama is likely to leap at any face-saving opportunities to back off. Russia seems to be offering one now, acting as a go-between. As long as Assad agrees to kill his population with non-chemical weapons, then we’ll leave him be. It’s a bad ending – like the rest of the potential endings – but it means the geopolitical fallout is minimised for now.
In investment terms, that could result in a sharp drop in the oil price from here. Not to ridiculously low levels, but certainly enough to reduce the risk of a consumer squeeze at exactly the wrong moment.
Then you’ve got the ‘taper’. Markets have been fretting over the Federal Reserve slowing down the pace of quantitative easing (QE) since May. And next week we’ll get the big decision.
But it’s important to remember: this is only slowing down the rate of QE. Chances are the Fed will cut the amount it’s pumping in by $10-15bn. It could be less, it could be more. But the point is, it’ll still be buying a huge number of bonds each month. The Fed will also be at great pains to assure markets that this can be reversed, and that it doesn’t say anything about the timing of interest rate rises.
Given that bond yields have risen quite steeply since May, I reckon a fair bit of the fear of the taper is now priced in. Unless there’s a big surprise on the day, the potential for markets cratering off the back of it seems low.
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As for the German election – the other big ‘event’ of September – the fact is, Angela Merkel has it in the bag. Outside of Greece, she may well be the least disliked world leader around just now (she’s even popular with her own voters!).
Yes, there might need to be some jiggery-pokery with her coalition arrangements. But whatever happens at the election, there’s no obvious reason for it to reignite the eurozone crisis immediately. And with the economic data steadily picking up across the region, the pressure will stay off the European Central Bank too.
As for the other big worry – China – the data is starting to perk up there too. Sure, China has huge problems. And the data might well be fiddled. But again, in the shorter term, it’s only likely to continue for now. And with everyone feeling so gloomy about China earlier this year, there’s plenty of scope for sentiment to turn around.
There are plenty of cheap markets out there
I’m not saying you should pile into any old rubbish. And I’m not saying you should panic-buy and ‘fill your boots’. I’m outlining the ‘Goldilocks’ scenario here. It’s one that I think could easily come true, but there’s still plenty that could go wrong.
However, my point is that you shouldn’t put your regular investment plans on hold for fear of what one month might hold. As we’ve been saying for a long time, there are still plenty of cheap markets out there.
Emerging markets look interesting again, as we’ve highlighted in recent issues of MoneyWeek magazine – here are links to stories on ways to play Russia, Brazil and Asia, for example. If you’re not already a subscriber, you can get your first three issues free here.
Meanwhile, momentum is building behind Japan again. Hosting the 2020 Olympics clearly wasn’t ‘in the price’, with construction and related stocks surging after the decision was made this weekend. So it’s very possible that Japan will end this year as it began it – in full-on bull market mode. A lower oil price would only help with this.
Mainstream fund managers are even now waking up to the attractions of even the ‘dangerous’ parts of Europe again. They’re not so bullish that you’d worry about over-exuberance. They’re just about ready to tiptoe back in. So I’d be comfortable sticking with the dodgy eurozone markets we’ve been telling you to buy since last summer.
And hang on to some gold as insurance, just in case things go seriously wrong.
Our recommended articles for today
If the Co-op Group thinks it can conveniently ‘forget’ its ethical stance, it’s going to have a fight on its hands, says Bengt Saelensminde.
Mark Carney’s policy of saying that the base rate won’t rise until at least 2016 looks a bit silly, says Merryn Somerset Webb.
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