Tread With Caution on Shutdown

 | Oct 01, 2013 | 11:00 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

ge

,

aapl

,

chl

The market seems to be taking the possibility on an extended government shutdown in stride so far.

Although this is a testament to the market's resilience, it is a sad commentary as it shows society and investors have gotten used to the political dysfunction that is Washington. I also think it does not reflect the caution that I believe should be exhibited to start the new quarter.

Indices are up over 15% so far this year and the S&P and the Dow Jones are just under all-time highs. The majority of the recent gains have been as the result of multiple expansion rather than rapidly increasing earnings. One has to ask if the situation in Washington does get out of hand, how much of this multiple expansion will be given back in a selloff?

I believe October will be a volatile month. Both political sides are dug in, and there will be many obstacles before lawmakers "kick the can" down the road in some sort of last minute face saving deal. Whatever is agreed upon likely will just ensure more political showdowns through to the mid-term elections in 2014.

Even if the government gets over its latest temper tantrum with less recklessness than I envision, economic and job growth are likely to remain below trend as they have been for the last five years. Fiscal policies that have failed to ignite growth will remain in place and implementation of the Affordable Care Act will continue to negatively impact job growth. One aspect of the approaching healthcare changes is that most of the job growth in 2013 has been among part-time workers.

Given this outlook, I am keeping a good deal of cash on hand as I believe we have some lower entry points in the market in the near future. Investors should also be wary of homebuilders and stocks that depend on housing activity. Homebuilders were one of the biggest decliners during the debt limit debacle of 2011 and should underperform if we have similar acrimony within our political institutions once again.

In addition, airline stocks could be weak as furloughs at the Federal Aviation Administration will weaken demand for airline travel as flyers try to avoid additional travel hassles.

I am also building a "shopping list" of positions I would like to add to if we do get a pullback in coming weeks in the market. Apple (AAPL) is one of the equities near the top of that list even as I already have a heavy allocation to the stock. The launch of the new 5S/5C iPhones appears to be solidly beating expectations and helping the company gain market share again domestically as well as in Europe and Japan. I also believe a deal should soon be signed with China Mobile (CHL) and their 740 million subscribers, which obviously would be a significant positive catalyst.

General Electric (GE) would be another position I would like to add to if the stock dropped 5% to 10% in an overall market decline. The company continues to transform itself into more of a pure play industrial concern. The stock currently sells for a 20% discount compared to the average industrial stock based on forward price-to-earnings ratio. It also pays an over 3% dividend.

If nothing else the start of the new quarter should be exciting for political junkies. Investors should prepare for greater volatility in the stock market, try to somewhat lock in the solid gains so far in 2013 and take advantage of any pullback due to latest shenanigans from Washington.

Columnist Conversations

Market got beat like a rented mule today as equities posted their second worst day of the year. Geopolitical ...
down 302 now, at 16577 the dow 30 is unchanged for 2014. roll the media hype!
Last ditch support decision above the prior swing low. If we break this zone forget about this one for a whil...
syf
The fact that this one shook off all the flippers and stabilized is actually pretty hopeful..

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.