Watch the pitch count
The Yankees are having one heck of a post-season. ARod's bat and some excellent pitching have the Yanks on the brink of the World Series for the first time since 2003. As a fan of both the Yankees and the capital markets, 2003 was a pretty good year. However, when watching the games, in addition to the score, I am constantly focused on the pitch count, in particular for CC Sabathia.
It seems that the market is doing the same. Here we are, deep into October with 10 weeks left in the year - is the market's pitch count too high? Does it need a 5 day rest?
As a year-long staunch advocate for investing in equity and fixed income markets, I will acknowledge this week's "market performance" suggests that our pitcher just may be out of gas. Technically the price action in the S&P failing to elevate beyond 1100 is sending a cautious signal. In addition, a deeply oversold U.S. dollar may need a modest shakeout before resuming its secular downtrend. The "pay cut" news out of Washington was also an unfriendly reminder that this administration is serious about regulation.
Overseas, the foundation of strength in Q1 2009 was China. Their easy monetary policy and stimulus package provided the groundwork for a global recovery. In the past 24 hours, we gained insight into how much growth is actually coming out of China; their economy grew 8.9% in the 3rd quarter, the fastest pace in over a year. The concern would be that Chinese Central Bankers would begin to shift away from easy monetary policy toward a tighter policy. My belief is that yes that will occur, but just not yet.
So yes, we have a "tired" pitcher on the mound. China, the engine of global growth, may throttle back just a bit in the next 3 to 6 months. However, I see no reason for investors to make any significant adjustments to their portfolios.
In fact, if a correction in the capital markets is unfolding, I suggest preparing your holiday shopping list now. The 4th quarter commodity story remains intact. Clearly, an investable theme where I would look for opportunities during any market pullback is natural resources and commodities. Emerging markets and corporate bonds round out my top picks. But let's add one more to the mix - recent earnings support exposure to small caps. I might have been slow to come around on this story, but on a market correction I believe small caps - from small to larger -- are worth a look.