|TheStreet.com, Fall, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — “Take the money and run” is a concept that has gained currency in popular culture.
There’s the famous Woody Allen movie, no less than seven books bearing the title and the Steve Miller Band 1970s hit, all with the same name.
It’s darn good advice, especially as investors face the dawning of the fourth quarter.
Remember, year over year the S&P 500 has now risen nearly 20% in the past 12 months, and is up over 11% year to date. At the beginning of 2012, I predicted the S&P 500 would return about 10% in 2012.
Therefore, I’m very comfortable advising investors that if we see a run up of 4% to 6% going into the elections, to take their money and run.
That’s because after the election — which, no matter who wins, will deliver a morning-after headache notable for its size and acuteness — investors might be in for a rougher ride.
Here are five post-election catalysts we believe could cause market disruptions and a potential year-end selloff.
Earnings estimates. We believe corporate earnings estimates for the fourth quarter will be brought down dramatically, perhaps as much as 25% below current estimates.
Basel III capital rules. To be implemented in October, new Basel III requirements will cause large banks to reduce their “shadow” inventory of real estate, putting significant downward pressure on home prices. Likely to be hardest hit: Florida, Arizona, Nevada and southern California.
Latent recognition. Markets, policymakers and politicians will recognize further monetary policy measures, such as a QE 3, will do little for consumer and business confidence, forcing politicians to focus on the fiscal cliff and actual policy development. Though a long-term positive, in the shorter term we’ll likely see much more volatility.
Emergence of data. Chinese and European data beginning to point to a more significant slowdown than currently priced into the markets will become more prevalent. Investors will likely grow more nervous and act more defensively.
Those pesky Europeans. Current stop-gap measures will likely prove to be insufficient to halt capital outflows from Spain, Greece and other troubled nations. European leaders will begin to openly discuss alternatives to the current monetary union; i.e. Greece exiting the euro zone. “Discussions” such as these will rattle already dazed markets.
What to do? Well, as mentioned, your circumstances permitting, take the money and run.
At the very least, review your portfolio. Your security holdings should be of quality, size and have revenue growth. Avoid areas where revenue growth is tepid or even declining.
Let’s take a look at financial shares as the ultimate example.
Financials have led the markets so far this year, with the SPDR Financial ETF (XLF) gaining more than 20% this year. Investors have been focusing on the fact that financials had the highest earnings growth rate of the 10 Standard & Poor’s sectors, increasing EPS by 62% in the past year. But revenue have only grown by 2.2% of the same period.
Moreover, if you exclude Bank of America (BAC), the EPS growth rate for financials drops to +11.7%, and brings the overall EPS growth rate to the S&P 500 to a meager 1.5% from its current trailing growth rate of 6.5%.
Investors need to focus on names that have strong balance sheets, pay a “healthy” dividend and have a fundamentally strong business that will continue to grow revenue.