When September Ends
It appears the Fed is finally out of the picture. In the last couple weeks leading up to the decision to leave interest rates at 5.25% consensus developed that we would finally be in the clear for the averages to move higher. Stocks have substantially lagged earnings growth during this expansion and if past history holds true we would expect to find some relief now that we know the direction of interest rates. Although interest rates do not appear to be heading any higher right now, concerns have immediately shifted to whether the slowdown may be more severe than we currently expect.
Recession proof stocks are in favor right now barring the last couple of days. In our opinion Johnson & Johnson (JNJ) is the best stock in this group. Financials also typically outperform at this point in the cycle, but be careful here. Banks with overexposure to the mortgage markets should be completely avoided. Bank of America and Wachovia are good bets right here, though wait for Bank of America to complete its pullback before taking a position. Financial Watch has been bullish on the investment banks throughout this year, but concerns about a slowdown could reign in their valuations in the near term. It might be better to wait until the fall to trade in this sector.
August and September are on average among the most brutal months of the year to be long stocks. Financial Watch believes we will stay in our 2006 trading range for the next month. Watch for a pullback once more evidence comes in about the housing market slowing more rapidly than many currently believe. Assuming we reach 10,600’s on the Dow this fall it will be time to buy. The trend toward supermarket stocks will have played itself out and cyclical stocks should come back into favor after we bottom in this fall. Financial Watch predicted the Dow to end at 11,500 – 11,700 at the start of 2006; we are standing by this pick. The Fed rally will eventually arrive, but it will just happen later than most expect.