Can stocks really go up from here? And what about that old saying: “Sell in May and go away?” Well, on balance of the evidence it could be that stocks are on the way up again!
The negative test
Let’s test this out.
If you put a lot of anecdotal stuff together, you could easily be negative. Try this list:
- US stock markets at all-time highs with Friday seeing the S&P 500 going to a new best close ever and even the Nasdaq has put behind the highs of the dot.com bubble!
- The Yanks are overdue for a correction, which is a 10% plus slide.
- US economic data is not as strong as I would like, as a bull, but the rising greenback and very cold weather at the start of the year could be clouding the clarity of the data. The March durable goods number saw economists cut back their growth forecasts with JPMorgan paring back its Q2 forecast from 3% to 2.5%. That said Barclay’s economics team thinks the cold weather cut 1% off growth in Q1.
- UBS Wealth Management in the US dropped its exposure to US stocks for the first time in three years. It has cut its rating from overweight to neutral.
- Europe is doing OK economically but not as well as you’d like given the Purchasing Managers’ Indexes last week. For instance Germany came in at 54.2, down from 55.4 in March but that said, any number over 50 equals expansion.
- Greece! And all the question marks it brings for stock markets.
- Mark Mobius, a legend of the market and fund manager of emerging markets for Templeton, told CNBC that investors should get out of US stocks because of earnings weakness but he thinks emerging markets look like a better bet, so he’s not totally anti-stocks.
- Japanese data was mixed recently with a weak leading index for February and another fall in its manufacturing conditions PMI for April, but there was a much better than expected trade surplus and stronger services sector conditions.
The positive test
Now for my arguments for stocks and to refute any accusations of craziness, so here goes:
- Emerging markets have done well this year, up about 9% on the MSCI Emerging Markets Index, while the S&P 500 is only up 2% or so. This says emerging markets are doing well and are expected to continue to do so, and it means the US market is not too stretched, at least for this year.
- The S&P 500 all-time close on Friday could bring out the bulls — it could be pack mentality.
- The US Fed does not seem in any hurry to raise rates, especially as the greenback is doing its job to hose down inflation fears. However, there is a FOMC meeting this week, which is where US rates are set and key statements are made.
- Also, the slower economic data now, whether it’s weather or not, should make many think the first rate rise is further away, rather than closer, which should help stocks.
- The Chinese Government looks determined to push up growth and its action last week to reduce its banks’ reserve ratio shows that.
- The rising oil and iron ore prices could put a fire under material stock share prices, which will not only help our stock market, but the US market also can be material-sensitive as well.
- The technical story is positive in the US and here too. The S&P 500 ended at 2117.69 on Friday and the charts guys say 2200 could be the next testing point. The Yanks are in a triangular pattern, which makes techies think positively and, by the way, we are in the same kind of triangular situation as my interview with Gary Stone [1] showed last week. If you did not watch it on Saturday when I first suggested it, have a look at it now.
- Of the 201 S&P 500 companies to have reported to date, 77% have beaten earnings expectations and earnings growth expectations for the quarter have improved from -5.6% year-on-year a month ago, to now being -1.6% year-on-year. By the way, this is another huge week for US first quarter earnings reports.
I could go on but I won’t. The main driver of stocks has been low interest rates and they are still there and will persist for some time.
Technically stocks can go up in the near-term, but the Fed is getting closer to a rate rise and the fact that a correction is overdue, will be bringing some dramas this year. However if the US market does drop 10% or more, a whole lot of experts will be telling you that this is a buying opportunity and I will be one of them!
Unfortunately our currency could be a lot lower then, so there will be less currency gains, compared to what we have seen over the past six months.
Oh well, you can’t have everything when it comes to the crazy world of stocks!
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