I’m not afraid of the big bad May

Founder and Publisher of the Switzer Report
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For those sweating on a share market sell-off to coincide with that market maxim – sell in May and go away – to get some bargains, or to dollar cost average down some good stocks you want to keep, here is an assessment of what might hurt or help, whether your hopes are for a slide or a spike in stocks.

The negatives:

  • US economic growth at 2.5% in the March quarter rather than the 3% expected. We can blame fiscal cliff fears back in November, sequester issues that cut back federal government spending – defence spending was down 11.5% annualised in the quarter – and a 2% jump in payroll tax, which would not have helped growth. There is a fiscal drag on the US economy that only the Congress can get rid of, but those guys in Washington are carrying on like dopes.
  • In fact, Congress is an obstacle to US business confidence and business investment.
  • The massive stock rise in four months with the Dow up 12.27% since New Year’s Eve, which makes a sell-off look overdue, but this could be a real McCoy bull market rally.
  • The question mark over whether China’s slow down is fair dinkum.
  • The European recession will only be an issue if it gets measurably worse and I will be watching Germany, which has had a bad quarter.

Now for the good news and here it is:

  • US consumers are helping with household spending, which was up 3.2% in the March quarter – that’s the best for nine quarters.
  • I know it sounds irresponsible, but the Yanks are running down savings to buy stuff –  that’s a good sign for future economic growth.

  • The improving US housing sector and the stock market’s rise will help the wealth effect kick in, which will buoy consumers.
  • US stocks are up 136% in four years, including dividends.
  • Economists think growth will get up to 2.5% by year’s end – so gradual growth is factored in for the rest of 2013.
  • The Fed’s Ben Bernanke’s guts with the $85 billion a month bond-buying program, nearly offsets any mildly worrying bad news.
  • Fundamentals – economic and market – are improving, albeit slowly for the US economy.  Even France saw a better manufacturing number last week, though Europe will be a worry for most of this year.
  • US mutual funds are up for 16 weeks and some $92 billion has chased stocks.
  • I like the fact that materials, energy and industrials did better last week – that’s a less defensive sign.
  • I expect Japan to help global growth with its near 20% depreciation of the yen really assisting this embattled economy, which is still the third biggest contributor to world demand! The latest tourism numbers were a record high and I suspect this new and weaker yen will spur growth there and for places like Australia, as Japan is still our second best export customer. Go Japan!
  • Also the attitude towards austerity measures for fiscal policy is less severe following a new paper that disputes some dodgy figuring by economists Kenneth Rogoff and Carmen Reinhart, whose seminal work said if the public debt to GDP ratio is over 90%, then any more public spending will be counterproductive.

I think May will be tested by short-sellers and hedge funds, but provided China does not spook us big time, then I don’t think the May runaway will be anything dramatic.

Anyway, with interest rates so low, overseas stocks that are defensive in nature and dividend-payers look a better bet than bonds, while the news is of a non-bone rattling scary nature.

For investors, the glass is now half full and that has been the way since the middle of 2012. You can thank God, or is it Ben?

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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