March Madness in the Markets
03/01/2013 12:08 pm EST
The big moves we've seen in the last week of February are a preview of the volatility ahead. From the sequester today to a possible government shutdown, these events could move the market, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
March is supposed to come in like a lion and leave like a lamb. If only investors get that lucky.
I think the last few days of February are a preview for what we can expect in March. My calendar of potentially market-moving events reaches a climax on March 27 with a potential shutdown of the federal government.
I don’t know that the net move in the markets will be very large for March. But I’d be very surprised if we don’t see breathtaking volatility—confidence-sapping and can’t-sleep-at-night ups and downs—throughout the month. Here's a look at what's on the volatility calendar and how to get ready.
The Ups and Downs
How much volatility is in store? Consider the end of February a preview:
- Monday, February 25: Dow down 214 points and S&P 500 down 1.8% in its worst drubbing since November 7.
- Tuesday, February 26: Dow climbs 116 points.
- Wednesday, February 27: Dow up 174 points.
Total swing: From Dow 14,001 to 13,874 to 14,075, for a journey of 504 points in three days. Net move: 74 points.
Why do I see so much volatility ahead for March? For the same reason that February finished with such a flourish. The news calendar for March is full of the kind of trend-making and trend-breaking uncertainty that is likely to drive stocks up one day and down the next.
The prototype event from the end of February is the Italian election, which encouraged directional bets on the euro and then confounded those bets, while whiplashing the yen, Tokyo and other markets, and commodity prices.
Gold up $20 an ounce on February 26, then down $20 an ounce on the 27th? That’s directionless volatility at its best—or worst.
The Volatile Events of March
My volatility event calendar actually began with the February 28 release of the second estimate for fourth-quarter growth in the US gross domestic product. The last estimate showed growth dipping slightly, with a 0.1% decline.
However, the consensus going into the news was that changes in estimated data for things such as imports and inventories would push the figure slightly positive, and it did, at a slim 0.1%. The number is clearly important for the debate over how badly the battles over the fiscal cliff and the sequester had hurt US growth.
March 1: The start of the sequester. These automatic federal budget cuts—about $85 billion for 2013—will gradually take effect starting now. Estimates by the Congressional Budget Office are that the cuts will cost the economy 750,000 jobs.
I expect that the beginning of the sequester will make the financial markets more nervous, but that actual volatility will wait for numbers such as the weekly initial claims for unemployment, the monthly jobs numbers, or the monthly and quarterly retail sales figures from companies such as Walmart (WMT) and Target (TGT) to show the effects of the cuts on the economy.
March 7: This is the date of the first meeting of the European Central Bank after Italy’s elections. The markets will expect Mario Draghi to say something calming about the central bank’s will to defend the euro (and Italian and Spanish debt markets).
Some investors also will be looking to see a cut in the bank’s 0.75% benchmark interest rate. If the Italian postelection search for a government has turned into a circus by then, I’d expect European stock markets and the euro to be disappointed if the bank doesn’t cut rates.
Don’t underestimate central bank presidents' ability to talk up financial markets—Federal Reserve Chairman Ben Bernanke did it this week. Draghi’s March 7 press conference will be a major test of the continuing power of his words.
March 15: Italy’s newly elected parliament will meet to begin the process of picking a new prime minister. Finally.
March 20: Italian president Giorgio Napolitano will invite Pier Luigi Bersani, the leader of the coalition that garnered the most votes in the election, to try to form a new government. If Bersani can’t, Napolitano will gradually work his way down the list until he either finds a solution or declares that he can’t find one.
There’s obviously a good chance that the search for a new prime minister will unsettle financial markets—and, of course, there’s the outside chance that Napolitano will actually find a way to form a government, which would cause a huge rally in the euro, Eurozone stocks, and Italian debt.
Also on this day, the Federal Reserve’s Open Market Committee will end its meeting with a press conference. No one expects that the Fed will change interest rates, but everyone will be parsing the Fed’s words for clues on the timetable for ending the central bank’s most recent round of quantitative easing. If ever words move markets, this is the occasion.
March 27: The continuing resolution that funds the US government expires. In the absence of a new, continuing resolution or passage of a budget (virtually no chance of that), the government will run out of money and all nonessential—and some essential—services will shut down.
This is actually a much bigger deal than the sequester, although not—at least from the perspective of global financial markets—as big a deal as the debt-ceiling battle. A failure to raise the debt ceiling could have led to a default by the US government on its debt. The next debt-ceiling crisis doesn’t come until May 18.
How to Ride the Volatility
If I’m right, and we’re looking at a March with big volatility, what do you do?
First, immediately—right now, not tomorrow—go through your portfolio and decide what stocks and other assets you’re willing and able to hold through the volatility. Try to separate those assets that might take a beating in any market downturn—but would then also recover with a market upturn—from those that will show fundamental damage from likely events in March.
For instance, this doesn’t look like a time to hold on stubbornly to economically sensitive stocks. If the economy slows as feared, you might want to be light on retailers and shares of stocks in the consumer discretionary sector. On the other hand, I don't see a need to sell the shares of companies such as IBM (IBM) or McDonald’s (MCD) that have shown an ability to grow revenue and earnings during periods of modest economic softness.
Second, sell those stocks that you’ve decided not to hold through a volatile March, but see if you can make your sales on a rally day. Just as we’ve seen a big drop and a big rally this week, I think you’ll see selling opportunities on up days during March.
Third, try not to let those rally days change your decisions on what and when to sell. A rally in March isn’t likely to last long, and it isn’t a sign that volatility is over and markets are headed back to normal, however you define that.
Fourth, raise a little cash using this selective selling on up days so you have the money to take advantage of bargains, if volatility sends any your way.
Fifth, put together a list of stocks you’d like to buy if March volatility brings them down to attractive prices. I gave you a list in my February 25 column, 10 Stocks to Buy on a Sell-Off, that you can use to jumpstart your own ideas.
Sixth, and most important of all, try to keep some perspective even during the most volatile days. March volatility doesn't mean that you should stop heeding strong medium-term trends for a chance to make some money.
For example, every scare that sends the euro falling will produce a very temporary yen rally that will send stocks down in Tokyo. But I think you can count on the Japanese government to keep downward pressure on the yen that will eventually weaken that currency.
Short of a full-fledged return of the euro crisis—and I’m still not looking for that until the July-to-September period—I think you can count on the trend for the yen being downward, no matter the day-to-day volatility.
If you want to make this personal—and some days, I admit to feeling that the market is out to get me—you can think of short-term volatility as a force that wants to make you do stupid things with your money. Your job is to resist and to keep thinking.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.