May 1, 2013
The calendar beckons investors to tread lightly through the stock market, according to an old saying.
"Sell in May and go away" is a popular slogan among pundits because, over the years, stocks have sometimes suffered losses from May through October, although there have been gains about two-thirds of the time.
With growing economic weakness as a warning, and the Standard & Poor's 500 index at a record high, investors have wondered if they should heed the refrain. In April they sold for a couple of weeks, sending stocks down about 4 percent. And Tuesday a slumping Chicago manufacturing index and eurozone unemployment rate at a record 12.1 percent prompted some temporary stock selling early in the day.
But neither the weak global economy nor anti-May thoughts are a match for a more powerful force and catchphrase: "Don't fight the Fed." That's the message related to periods when the Federal Reserve is busy pouring money into the system. It's considered silly for an investor to resist the herd, which buys stocks simply because of the Fed's stimulus. The belief is that when billions of dollars are pumped into the system, the money will land somewhere, and investors expect the somewhere to be stocks. So investors go with the flow, buying stocks on the expectation that a rising stock market is inevitable.
Recently, the Fed hasn't been the only source of knee-jerk stimulus. There is a massive effort throughout the world by central banks, including the Fed, to try to bring the economy out of its funk. Stimulus is coming from Japan and Europe. So it's "Don't fight central banks," rather than simply the Fed.
Analysts have warned that if investors see any sign that the stimulus will end, stocks could fall in value because they've been propped up by fake conditions rather the growth. But after a spate of weak economic data lately, investors are expecting the Federal Reserve board to say at the end of its two-day meeting Wednesday that it will keep buying bonds — or what's known as money-printing — to try to juice the economy. And the European Central Bank is expected to announce an interest rate cut Thursday to try to lift Europe out of recession.
While investors await their new infusions, analysts question the value.
"The global economy is no better than very slow growth," said Ned Davis, of Ned Davis Research. "This leads me to question the effectiveness of Fed and other central banks' policies that are supposed to ignite faster growth and, with a flood of liquidity, lift all boats. But there are a number of signs that the massive global easing by central banks is helping stocks."
The reaction to stimulus in the stock and bond markets has been dramatic. Strategist Michael Hartnett, of Bank of America Merrill Lynch, points out that some of the largest gainers of the last month have been Italian stocks and Greek bonds. That's despite major, unresolved economic issues in those countries. And Japanese stocks have been the winners of the year — gaining 19 percent — now that Japan's central bank is trying to stimulate the economy after two decades of malaise.
In the U.S., investors have shown some caution by choosing stocks from sectors considered defensive — dividend-paying stocks from utility, health care and consumer staple companies. Investors have been less interested in technology, energy and industrial stocks, which depend on a strong economy for growth. But with safe U.S. Treasury bonds yielding only about 1.66 percent, investors have been driven by the Federal Reserve's low-interest policy to take risks in the stock market.
Investors have been encouraged by analysts and companies such as Cummins to expect an improving economy later this year. Cummins on Tuesday fell far short of profit expectations with diesel engines but said it expects improvement before year's end.
Yet economist Howard Archer of IHS Global Insight said "there is little evidence overall that the eurozone economy has bottomed. There were signs that this may have been happening around the turn of the year, but this was not sustained."
He noted that global growth is sputtering, which is not helping eurozone exports. And weakness in the eurozone is weighing on the rest of the world because Europe is buying less.
Meanwhile, unemployment in Spain is now at about 27 percent, and among people younger than 25 it is 55.9 percent. In Greece, unemployment among those under age 25 is 59 percent.
The U.S. is considered by some analysts to be the bright spot of the world, and consumers showed an increase in optimism in the most recent consumer confidence numbers released Tuesday. Yet, those who thought jobs were "hard to get" rose. Only 9.8 percent said they thought jobs were plentiful.
Copyright © 2013 Chicago Tribune Company, LLC