The Coast is Now Clear for the Markets

10/17/2013 12:00 pm EST

Focus: STOCKS

Howard Gold

Founder & President, GoldenEgg Investing

The shutdown's ending and the US government will reopen, now that a deal with Congress has been reached to extend the debt ceiling until the beginning of February, writes MoneyShow's Howard R. Gold. He fills you in on the direction he feels stocks will head next on the news.

Now that Congress has finally come to its senses and reached a deal to reopen the federal government and extend the debt ceiling, markets are back to doing what they did before—rallying.

In the wee hours of Thursday morning, President Obama signed a bill passed by the US Senate and House of Representatives that will fund the government through January 15, 2014 and extend the debt ceiling through February 7.

If you think we've seen this movie before, you're right—back in August 2011, and again late last year, with the overhyped fiscal cliff.

And if you think stocks are now ready to move on to new highs, you're also probably right.

Markets rallied big time Wednesday, in anticipation of a deal. With default off the table (at least for a few months, and maybe for good, God willing), one more major obstacle to the market's advance has been removed.

In early September, I wrote about five hurdles the market faced this fall. We've mostly cleared four of them: the Syrian crisis, the German election, the appointment of a new Federal Reserve chair, and the government funding/debt ceiling battle.


And the fifth—if and when the Fed starts tapering its $85-billion-a-month bond purchase program—is closely tied to the new Fed chair-designate, Janet Yellen.

Yellen's appointment by the president last week, and the favorable turn in the market's seasonal calendar, are two reasons why I'm giving the all-clear signal for stocks for the rest of the year.

Yellen, in contrast to her chief rival for the job, former Treasury Secretary Larry Summers, who withdrew his name from consideration last month, is a true believer in the Fed's unconventional easy money policy which she helped orchestrate as vice chair.

She may try to soft-pedal that in upcoming confirmation hearings, but her own inclinations came out strongly when President Obama announced her appointment at the White House on October 9.

In his remarks, the president emphasized Yellen's belief in “both sides of the Fed's mandate.” “She's committed to increasing employment, and she understands the human costs when Americans can't find a job,” he said.

Echoing the president, Yellen added, “I pledge to do my upmost… to promote maximum employment, stable prices, and a strong and stable financial system…Too many Americans still can't find a job and worry how they'll pay their bills and provide for their families. The Federal Reserve can help… ensure that everyone has the opportunity to work hard and build a better life.”

NEXT: Don't fight the Fed or the calendar

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Note how strongly Yellen came down on the employment side of the dual mandate, twice placing it before fighting inflation. That's actually the statutory language of the Federal Reserve Reform Act of 1977: “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

But it's a 180-degree switch from the practices of many central banks, including the Fed, until recently. Fighting inflation is the European Central Bank's sole mandate.

Yellen is likely to get some tough questions in her confirmation hearings from senators like Rand Paul (R-Ky.), and rightly so—the Fed's power has expanded greatly in the last 25 years, while its effectiveness has not. But ultimately, she will be confirmed.

As the late, great Marty Zweig put it, “The monetary climate—primarily the trend in interest rates and Federal Reserve policy—is the dominant factor in determining the stock market's major direction” (italics added).


Yellen's comments, and her entire tenure as Fed vice chair, suggest she's in no hurry to taper the Fed's bond-buying program. Actually raising short-term interest rates may be even further down the pike.

“Don't fight the Fed,” investors have concluded. The Standard & Poor's 500 index (SPX) is up 4% in the week since Yellen's appointment was announced, and it wasn't just because of speculation about a shutdown/debt-ceiling deal.

The calendar is another big factor that comes into play. The S&P 500 has gained 8% since May 1, so sell in May and go away clearly didn't work this year.

But unless we see a delayed reaction from truly terrible earnings or a wave of sell on the news following the budget deal, we're now entering the market's strongest period—from November through April, where the Dow Jones Industrials averaged 7.5% gains in the 62 years ending in 2011.

Historically, the year after a presidential election is the worst of the four-year presidential cycle. The mid-term election year is the second worst on average. But according to the Stock Trader's Almanac, the six months through the April of a mid-term, historically, have been favorable for stocks. That's almost where we are now.

Having weathered the traditionally weak spring and summer just fine, I don't see anything to stop stocks from moving up again. We may have some more bumps in January, as Congress revisits the budget, but I don't expect a repeat of what we've just been through. Everybody is too exhausted.

What does not kill us makes us stronger. That's how many investors must feel now, and it's one reason I think stocks are heading higher in the months ahead.

Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. Follow him on Twitter @howardrgold. The World MoneyShow Toronto is only a week away! For more information, and to register for FREE click here...

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