Lately I've recommended investors do more selling than buying when it comes to stocks.
The market hates uncertainty. Yet right now there are so many rocks in the road that I believe investors are wise to book some gains and move that money to the sidelines for a spell.
I'm not suggesting that you exit the market altogether, or that there are no good stocks out there to buy. There is always an opportunity if you dig deep enough. In fact, I've got my eye on a few right now.
But I am saying that after a heck of a nice run, and when the future is so unclear, it's not a bad idea to tread carefully. It's likely to get harder to generate outsized returns in 2013 than in 2012.
There are at least five reasons I believe we're in for two quarters of volatility as the major world markets pick their way through a changing landscape:
This is where the rubber hits the road in corporate America. And let's face it … earnings have been awful so far, regardless of whether you're looking at technology, heavy equipment or conglomerates.
The list of dominant companies that have seen their stocks roll over after earnings, or have reduced forward guidance include (for starters) Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), IBM (NYSE: IBM), McDonald’s (NYSE: MCD), Caterpillar (NYSE: CAT) and 3M (NYSE: MMM).
That the trend of improving quarters seems to be coming to a close for these leaders raises eyebrows about who else will stumble and how the market will handle reduced expectations.
Interest Rate Policy
For so long now the Fed's zero-interest-rate policy has punished savers as it attempts to save the economy by flooding it with cheap dollars. So far it has appeared to work. But with bonds still yielding so little, conservative investors have been driven toward riskier assets like stocks, or forced to accept pitiful yields.
Banks have also been forced to find alternative streams of cash flow, like fees, to earn a return on deposited funds. Some, including Wells Fargo (NYSE:WFC), are holding onto mortgages that would normally be sold by now, meaning they are exposed to potential losses if bond prices should rise and they need to liquidate them at a loss.
This low-interest-rate policy, like most medicines, has a finite shelf life. There are a number of other unintended consequences that will arise if it goes on for too long. Not to mention the overwhelming concern that the economy still needs this life support.
On the top of the list is the Volker rule, which was part of the Dodd-Frank financial overhaul and is supposed to make the financial system safer in two ways. First, it limits bank investments in lightly regulated areas, such as hedge funds. And second, it bans banks from placing bets with their own money.
Needless to say, the various regulatory authorities – including the Federal Deposit Insurance Corp., the Comptroller of the Currency, the Federal Reserve, the Commodity Futures Trading Commission and the SEC – haven't exactly nailed down the details yet.
The Volker rule originally had a June deadline. Now that target has been pushed back to the end of 2012.
As if there weren't already plenty of big decisions to be sorted out by New Years.
Successors to Fed Chairman Ben Bernanke & Treasury Secretary Tim Geithner
The New York Times reports that these heavy-hitters are likely to be out of office by the beginning of 2014, meaning that two of the most important job positions in America are accepting resumes (three if you count the Presidency).
Given that Bernanke and Geithner were both around through the worst of the financial crisis, fresh talent could either be seen as a major disruption or a positive milestone. Which one won't be known until sometime after the fact, however.
In the meantime, investors have two more question marks to add to their list.
The Presidential Office
Of course this is the big one, and to some extent dictates the timeline, if not the direction, of all of the above. There's not too much I can say in a short space about the importance of the next President's role that you don't already know. Bottom line: It looks like every vote will need to be counted, so don't place any big bets one way or the other.
It's often said that the best investments are made in times of uncertainty. However, typically these investments are successful because the person behind the trade had a game plan. Right now, it's getting more and more difficult to assemble a game plan given the level of uncertainty out there.
My advice: narrow your investment focus and only buy stocks that you understand. For all the rest, avoid them if you don't own them. And if you do, consider taking some gains until the future is at least a little clearer.