Question: Once the dust settles in Washington D.C., what should we expect from the markets and the economy?
Answer: As you may expect, the answer is “it depends.” Markets dislike uncertainty. Much of what’s occurring in our nation’s capital reflects indecision. Since the results are out of our control let’s begin by focusing on what we do know.
The following factors have influenced markets these past few months; 1) Our government decided not to invade Syria over the use of chemical weapons, 2) Larry Summers withdrew as the leading candidate to replace Ben Bernanke as Federal Reserve Chairman, 3) Politicians are playing hardball over the budget and debt ceiling, and 4) As this article is written, there is not an agreement in Congress over the budget or debt ceiling, and we are in the midst of a partial government shutdown.
The question remains, once existing controversies are settled, what should we expect? A current understanding of the facts helps us anticipate what may occur. First, the Syrian situation is resolved for the time being. Second, it appears that Janet Yellen, the current Federal Reserve Vice-Chairman, will likely be the next Chairman of the Fed. She is expected to follow the current Fed policy of keeping interest rates low to help the economy improve.
With the probable successor to Ben Bernanke identified and the Syrian situation resolved, it is logical that stocks should begin to trade on fundamental valuations such as earnings. However, the markets trade on emotion and logic. This is why common sense does not always prevail and the result is unpredictable market activity.
We do know that most corporations have had time to “right size” and restructure their balance sheets. As a result, the hope is that corporate earnings will continue to be satisfactory. We also know that earnings reports are at times adjusted or moved into one quarter or another. Something that cannot be altered or faked is cash flow, so dividends are a reasonable determinant of a company’s cash flow and financial health. For this reason, large cap stocks that pay dividends (which are dependent on cash flow) are worth a look.
“Large cap” is the abbreviation for large capitalization. The term describes companies with market capitalization values of more than $10 billion. Market capitalization is determined by multiplying the stock price by the number of outstanding shares.
We still don’t know when or how the proverbial dust will settle in D.C. so the answer to the question of what to expect remains “it depends.” How you invest depends on your personal cash flow needs, desired liquidity and comfort with volatility. This is why it is important to know what you own and why you own it. The next few weeks are a good time to evaluate your financial health and align your investment plan with personal risk tolerance, portfolio goals, and overall asset allocation. Review your portfolio and make decisions about any necessary adjustments before the holidays compete for your time. Stay focused and invest accordingly.
Investing always involves risk and you may incur a profit or a loss. No investment strategy can guarantee success. Dividends are not guaranteed and will fluctuate. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or solicitation to buy or sell any particular investment. Opinions expressed herein are those of the author and subject to change at any time.
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Darcie Guerin, CFP®, is Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. www.raymondjames.com/Darcie