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Gregory is the President and Senior Investment Advisor of Axcel Capital Management, LLC. He directs all research, analysis, and corporate strategy for the ACM Managed Account Programs. He is a former U.S. Army officer and a graduate of Hampton University. He began his career in investments in... More
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Axcel Capital Management, LLC
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Axcel Capital Management Market Commentary
  • September 2013 Market Commentary: Return To Volatility Ahead? 0 comments
    Sep 1, 2013 7:54 PM

    As we head into the fall season, the month of September brings with it a fair amount of uncertainty. After a month of July in which the S&P 500 was up nearly 5%, August saw a decline of -3.13% amid uncertainty about Fed tapering and interest rates continuing their historic rise. The Dow Jones Industrial Average (DJIA) saw a steeper decline of -4.5%. For the year, the S&P 500 and DJIA are up 14.5% and 10.44%, respectively.

    While digesting the worst month for stocks since 2012, the focus turns to September and beyond. While September is historically the worst month of the year for stocks, the real question is the impact of any actions by the Federal Reserve to taper its purchasing of treasuries. For most of the spring and summer, the economy has dealt with a roller coaster of opines and comments from Fed officials both supporting and advocating responsible tapering towards the end of this year, yet reaffirming commitment to accommodative monetary policy and doing whatever is necessary to sustain economic growth. At this point, it's a matter of when tapering begins, and how much.

    At the moment, the consensus opinion seems to be that Fed tapering will begin in September, with the decisions made at its policy meeting Sept. 17-18th. Currently, the Fed is purchasing $85 billion in treasuries per month; this is likely to be reduced by between $10-20 billion. The idea is to gauge how the market reacts to a small reduction in stimulus before rating its ability to continue.

    So what impact will this have on the markets? Has this scaling back already been priced in to the markets with this correction we've experienced?

    It's possible that it has. It's also likely that the Fed may lean towards the more conservative end of tapering, if it even does so, due to the still-anemic economic growth patterns we've seen. More importantly, rising interest rates and commodity prices (a Syrian conflict will push oil prices even higher) should continue to put pressure on consumer spending and thus spur the need for continued support.

    On the subject of interest rates - the 10-year Treasury note closed the month at 2.75%, up a whopping 70% from its 2013 lows in May. Despite the stock market uncertainty going into the fall, we continue to see fixed income - especially long-term fixed income - as the far greater risk to investors at this time. Many economists continue to see rates rising to levels of between 3-4% going into 2014. This, of course, presents added risk to the equity markets as well; rising consumer prices (as discussed before) and

    From a technical standpoint, the S&P 500 has dipped below its 50 and 100 day moving average, and relative strength is virtually flat. However from a fundamental view, the index is still trading well below its recent historical Price-Earnings (P/E) ratio; suggesting that we have yet to catch up - from a stock price perspective - to the record corporate earnings we've seen this year.

    We will continue to remain invested in small-cap stocks and are cautiously optimistic for a responsible winding down of quantitative easing and the market's ability to digest it. However, we are also rotating out of large-cap stocks and establishing a position in an inverse long-term treasury security in order to benefit from a likely continued rise in interest rates.

    Disclosure: I am long IWM, TBF.

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