Investors Hope This Time It's Defferent

by Irwin Kellner

August is usually a down month for stocks, but this year the market is heading in a different direction in the eighth month - it's actually going up.

This is a marked difference from the Dow’s change in August of each of the previous 20 years. Indeed, historically, August has marked the beginning of a seasonally tough period for stocks.

In the past, the days from the beginning of August through the end of October have brought with them more than the usual headwinds for investors to cope with. It’s tough to say why.

Maybe it’s the realization that earnings forecasts made earlier in the year were too optimistic. Or it could be self-fulfilling, based on past history. It could also be a result of annual reminders from pundits and the press.

The market’s performance last year was especially turbulent - and with good reason. There was a litany of woes for investors to wrap their arms around.

First and foremost, the U.S. economy was plodding along so slowly that fears were rife it would tumble into a double-dip recession. On top of that, there were concerns that, because of a political stalemate, the debt ceiling would not be raised, thereby curbing Washington’s borrowing, and thus its ability to roll over its debt.

This would have caused our government to default for the first time in its history. And while the ceiling was raised in time to avert such a development, the very threat of a default led to an unprecedented downgrade in the ratings of our debt.

Overseas the situation was no better. The euro zone was engulfed in one of its periodic spasms, leading to fears that one or more of its members would pull out of the currency compact, thereby jeopardizing the further existence of the euro.

But the same issues are present this year - plus a couple of more.

First there is the fiscal cliff. That will occur at year-end, when, under current law, spending is set to drop and taxes are scheduled to rise by a combined amount equaling 4% of our gross domestic product.

A strong economy could be knocked for a loop by such a one-two punch - much less the kind of economy we are currently experiencing. Yet Congress is content to engage in petty party politics, oblivious to the fact that just the threat of the fiscal cliff has already affected business decisions to spend, hire, pay dividends and the like.

Then there are the elections. Right now, the race is very close, and either party could win. But this only adds to uncertainty, as you can imagine.

In the face of all this, not only are stocks rising, but the market is also unusually calm. The VIX, a measure of volatility, is currently at a five-year low.

So why are investors so complacent? One reason could be hope (however misplaced) that the Federal Reserve will somehow figure out a way to rescue the economy.

Another bit of wishful thinking is that the pols on both sides of the pond will do the right thing. Overseas, the euro will hold; stateside, we won’t default or go over the fiscal cliff. Also in the back of investors’ minds is that an election year is usually good for equities.

This is all well and good, but if Wall Street is also betting that the Republicans will win the presidency, it could be disappointed if its wish comes true. In the past, the stock market has fared better when a Democrat was in the White House than a Republican.

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