Will the Stock Market Rally This Fall?

One things seems clear this fitful season draws to a close: The recently range-bound stock market has the capacity to rally this fall. Whether it will is another matter.

Stocks have bounced back from their lowest level in nearly eight weeks.

It seemed we've spent much of this summer fretting about Europe's sovereign debt, China's tightening credit and our own economic vulnerability, in between sightings of Hindenburg omens and death crosses. And who still believes our politicians can fix this mess (don't all rush at once). But while stocks aren't egregiously expensive, they can fall 10% to 20% if the merely stagnant job market worsens. Can you blame investors for being indifferent, with bulls barely buying and bears barely selling?

American companies have the means to hire more employees and order new equipment this fall. Corporate profits as a percentage of gross domestic product are pushing 40-year highs. Costs have been cut to the bone. Cash vaults are at the fullest in decades. But what companies lack is the gumption. And CEOs can't pull the trigger on hiring or spending until today's economic and policy fog lifts.

Will it? Deleveraging and paying down debt is a long, cheerless slog, but some recent red flags may prove temporary. Jobless claims ticked up recently to a vexing nine-month high partly because a new law this July restored unemployment benefits to 2.5 million people—and not all because there were layoffs anew. The financial markets seized up in May as Europe struggled, triggering the hesitation now showing up in economic indicators, but financial conditions have eased fitfully since then. A 27% plunge in sales of existing U.S. homes in July isn't wholly shocking, since homebuyer tax credits that expired in the spring had pulled forward much of the demand.

As if Washington needs any more hurdles, a short window of just 20 legislative days leaves little time this fall to enact measures that might create jobs, stimulate the economy or reduce our debt. Campaigning and posturing for the midterm elections adds another distraction. But the faltering recovery has increased odds that the Bush tax cuts might get extended.

It's a lot to ask our politicians to get their act together, but a little resolution and clarity could go a long way. Policy uncertainty and collective breath-holding explain why the market typically muddles along before midterm elections, rising just an average 1.2% all year leading up to Election Day. But once that's over, stocks gain an average 3.2% for the rest of the year. Over the last 16 mid-term years, the market has never made a new low post Election Day, but it has climbed to new highs on seven occasions.

Demand for U.S. financial assets with relatively high yields and relatively low volatility could remain elevated for several years. Here is a short list of big-cap, dividend-paying and less economically-sensitive stocks.

These stocks pays an average yield of 4.2%, twice that for the S&P 500. These "better than bonds" opportunities include Verizon, Altria, Duke Energy, Eli Lilly, Southern, NextEra Energy, Abbott Labs, Lockheed Martin, General Mills, Coca-Cola, McDonald's and Colgate-Palmolive

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