Sell in May and “Go Away”?—Maybe, but Probably Not

For the past two years, we have been in an era plagued by major uncertainty. After a pretty disappointing 2011 where the only certainty was uncertainty, as we near the end of April, 2012, markets are almost at the same level as one year ago. The domestic large cap S&P500 is up 2.2%, but the Dow Jones Developed World ex US Index is down 15.7%. The Russell 2000 Index, a broad measure of the US market is down 6.4% over the past 12 months. So a lot of a portfolio’s performance was reliant on how much was allocated to domestic vs international and how much was allocated to large cap vs mid and small cap stocks.

To make things even more complicated, the performance of various sectors of the market was very different.  Despite high gasoline prices, the Energy sector is down 12%. At the same time Consumer Discretionary is up 11%.

As I wrote in January, “To many, the market is grossly undervalued.  To others, looking at the same data, the market is set for a fall.”  These are still valid comments in an era of uncertainty.  While corporate profits of large cap US companies seem to be quite strong, the risks associated with Europe, Iran, and China continue to loom large.  Then of course, we have the US deficit and the 2012 Presidential Election.

As we approach the month of May, because of the pattern in 2010 and 2011 being fresh in our minds, the old saw, “Sell in May and Go Away” will be in the press and on investor’s minds.  Here’s the facts:  A) If you sold everything on May 1 and bought the same investments back on October 31 for the past 60 years, you would have done much better than just “holding” through the Summer; BUT in those same 60 years; B) 59% of the time the stock market went up from May thru October; and C) Some summers like 2003 and 2009, markets have risen more than 15%.    The lesson: EACH YEAR IS DIFFERENT and you should act accordingly.

It is highly probable that there is now, and will continue to be some selling pressure thru the first days of May as proponents of the Sell in May and Go Away strategy execute their plans. (A self fulfilling prophesy) Added to this will be increased fears regarding Europe and China.  As I have said, there is likely to be a correction before we begin our rise to new permanent highs. (We have already seen a 4% fall from the 2012 highs—the “correction” might be as little as 5% or as high as 10%.)  

It is generally not wise to sell long term investments based on a strategy that is wrong 59% of the time. (59% of the time over the past 60 years the stock market went up from May thru October) On the other hand, it is probably wise to be cautious upon entry with new investments, using a proven “Dollar Cost Averaging” approach.

For those (and there are many) that are over-weighted in cash, remember that: 1) corporate earnings continue to be strong; and 2) price earnings ratios are relatively low. So, it is likely that sometime soon, in May or June, it is likely that we will see a long term buying opportunity that may prove to be better than most expect.

Dealing with uncertainty is a part of investing.  That is why diversification and choosing proven value oriented investments are always important strategies.  Own companies that are well capitalized, industry leaders in relatively stable markets.  Stick with segments where demand is likely to steadily increase over time.

This weblog is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Bull Market as 55-64 Age Group Doubles?

Financial Planning Article by Tom Steinhert-Threlkeld

Quote by Bill Dwyer of LPL Financial....

"In 1988, there were roughly 22 million Americans between the ages of 55 and 64. Those are the years when the amount of retirement funds in a household expand by 46 percent, Dwyer said.

By 2008, that was up to 33 million Americans and this will peak at 43 million in 2020. That means the numbers of Americans in the key age bracket will be twice as large as in 1988. And … these individuals will have three to four times the assets under their control than their parents did."

As the number of investors in this 55-64 "pre-retirement" age group grows in number, sooner or later, history teaches that a large portion of their funds go into equities.  When demand increases, usually prices rise as well. 

As I have stated previously, it is impossible to tell when sentiment changes from it's present pessimistic bent, but when it does, it is likely markets will be surprisingly strong.  It's looking a bit like the late 1970's, absent the inflation and high interest rates.

This information/opinion is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and those quoted, and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Europe? Maybe price of gasoline/diesel is more important?

Informative articles in Morningstar Advisor about Europe:

http://www.morningstar.com/advisor/morningstar-advisor-magazine.htm

How Europe is Making Its Crisis Worse

Impact on US Economy Will Be Minimal

Bottom line:

Bonds that were once thought as "safe" turned out not to be so safe.  And, with 14% of US GDP related to exports, and 22% of that to Europe--Exports to Europe are 3.1% of US GDP.  A 6% decline in sales to Europe would only be a 0.2 % change in US GDP.

While the market seems focused on Europe--watch out for inflating prices, particularly oil and gasoline.  A big rise in gasoline prices is thought by many to be the spark that led to the 2008 decline. People are better prepared today, but it could have a major impact on economic growth in 2012.

This information/opinion is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and those quoted, and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor

Don't Fight the Last War

In November, I wrote that Stock and Bond markets around the world were then what I called “Fraidy Cat Markets” where every possible threat was thought by many to surely lead to economic catastrophe. On the other hand, there was fear that perhaps the pessimism was overdone and many had inordinate fear of “missing out” on a massive upturn. As I have said, “Mr. Market” suffers hopelessly from manic-depressive syndrome.  After a pretty disappointing 2011 where the only certainty was uncertainty, January’s “recovery from the depths” was being called a “rally”.  Then on January 25^th, worry took over and markets started to head down a little, again.

To put things in perspective, the S&P500 is around 4% LOWER than it’s 2011 peak, and it would have to rise 20% to reach it’s “all time high” last set in 2007, more than four years ago.

To many, the market is grossly undervalued.  To others, looking at the same data, the market is set for a fall.  My take on this is that we are in an age of pessimism, much like the 1970’s.  Bad, unexpected things have happened to us. Many of us fear that more bad things are coming…again.   Also, the whole world is still recovering from a huge “debt hangover”. History teaches such times when debts need to be repaid or excess capacity absorbed can be pretty depressing, psychologically, if not economically.  But, for the most part, economics and markets are affected by psychology.

Negative psychology or “pessimism” is a headwind causing caution and an undervalued market.  Anything bad that happens may make it worse—in the short run.  This is always a risk for investors. Anything bad that happens can make investments fall in value—in the short run.

I’m clearly one that believes markets are currently grossly undervalued.  Other than in the US, almost every country in the world has been fighting inflation. (Most governments and many investors tend use strategies of the “last war” until they realize they are wrong.)  Governments had been “tightening” by raising interest rates and/or restricting credit, and/or by raising bank capital requirements.  In late 2011, this situation completely reversed with now almost every country in the world “stimulating” by cutting interest rates and encouraging credit expansion. It’s as if the entire world took their foot off the brake and mashed the throttle down to wide open. 

For many years investors have been warned against “fighting the Fed” meaning, that when governments “stimulate” their money supply, economies tend to grow faster, not slower.  Assets tend to go up in value. The risk is not usually small growth, but rather big inflation.  Today the “Fed” is being joined by almost every other central bank in the whole world.

Only God knows the future. So be prepared for the unexpected. Be cautious and stay diversified. But, wisdom and history teaches us that asset prices and interest rates are probably headed up not down in the longer run—especially when government central banks are easing to this extent.  True, borrowing and printing money have ramifications---usually the biggest ramification is inflation.

For the long term investor, this time will probably prove to be an above average opportunity for growth in stock markets. The biggest risk I see being is what few are telling us about—namely inflation.  

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Professional Advice--Worth the Price?

Here is an excerpt from an article at CNNMoney by Walter Updegrave (See link for entire article)

"In a recent study, benefit consultant Aon Hewitt and advice firm Financial Engines looked at the 401(k) returns of more than 425,000 savers from 2006 through 2010.

The findings: The median annual return of those who got professional help was almost three percentage points higher than the return for those who invested on their own, even after taking fees into account.  (emphasis added)

One reason for that performance gap is that the investors who flew solo were far more likely to be too aggressive or too conservative (see graphic below). Emotions also played a role: Do-it-yourselfers were more apt to cash out of stocks in the 2008 crash. As a result, their returns lagged substantially when the market rebounded in 2009."

Better performance is not just picking the winning horse or horses--it is choosing the right race track and the right strategy.  We propose that history teaches that a highly diversified, value oriented, risk managed portfolio, managed by a skilled and experienced pro will produce better than average long term returns.  

Link to: Should I Hire a Financial Adviser or Go It Alone?

The Bond Market (re Europe) is very powerful. Beware.

Bond markets determine the interest rate that a borrower must pay to borrow.  In the 1990's, when President Clinton attempted to increase the US budget deficit, the "Bond Market" reacted negatively with such force (rising interest rates) that Clinton was forced to abandon the strategy and instead balance the budget.  His political advisor, James Carville was quoted as saying.

“	I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.	”
— James Carville, political advisor to President Clinton Rising interest rates in Italy, Spain, France and many European countries other than Germany threaten economic growth. The Bond Market sees risk of default and demands higher interest. High interest rates paid by governments lead inevitably to higher taxes, which tend to reduce economic growth. Rising interest rates and lower economic growth are bad for stocks, so stocks tend to decline. So the Bond Market does indeed have a powerful influence. At some point, the process tends to be self compensating in that lower growth leads to less demand for credit--more cash, and lower interest rates. So far, rising rates in the weak European countries has led to LOWER interest rates in the US as money seeks a "safe haven". Sooner or later, when interest rates go high enough, governments tend to cut spending. This reduces borrowing and interest rates fall.  Since, bond prices change in the opposite direction of interest rates--the Bond Market loves falling interest rates because bond prices go up and participants sell bonds at a profit. Whether it be the stock or bond market, people that try to make their living speculating or trading love volatility. Perhaps that is why we are seeing so much of that lately. Be aware that the US is not immune from rising interest rates and pressure from the Bond Market.  Right now, the Bond Market is focused on Greece, Italy, and Spain.  With continued deficits, it may not be long before we become the focus of the Bond Market with rising interest rates. Owning bonds is not much fun when interest rates rise rapidly. Keep in mind that bonds being sold by Italian and Spanish governments are yielding close to 7% interest and they are selling about all that they need to sell. And, a lot of people are spending a lot of money buying these bonds--the majority of them assume that: A) they will get the 7% interest and a return of principal as agreed; and/or B) Interest rates will fall, bond prices will rise, and they will sell for a profit.

Fraidy Cat Markets

Fraidy Cat was a cartoon character first introduced in 1942 as a MGM short Tom and Jerry film, directed by the famous team of Hanna and Barbera. The character was reintroduced in an ABC TV series in the 1970’s. Seems like Fraidy Cat was afraid of everything. He had nine lives, but had used up eight of them. To Fraidy, the world was a very dangerous place, and everything he encountered was sure to end in disaster and the end of him—or so he thought. (Go to YouTube and search for Fraidy Cat and many of the shows can be viewed.)

Stock and Bond markets around the world are now what I call “Fraidy Cat Markets” where every possible threat is thought by many to surely lead to economic catastrophe. On the other hand, there is fear that perhaps the pessimism is overdone and many have inordinate fear of “missing out” on a massive upturn. Fear and Greed are always present, but we seem to have entered a period where the extremes are amplified beyond reason.

As I have said, “Mr. Market” suffers hopelessly from manic-depressive syndrome. But lately “Mr. Market” seems to be more manic and/or more depressed than usual. Volatility is the name for all this up and down. Seems like the only certainty is uncertainty.

There are many theories about the cause/s of all this. My take is that we are in an age of pessimism, much like the 1970’s. Bad, unexpected things have happened to us. Many fear that more bad things are coming.

In the age of financial entertainers like Cramer and shows like Fast Money, with major investment banks around the world gambling by “trading”, the buying and selling of stocks and bonds looks like a really crazy and dangerous activity. Yet, in my opinion, true “investors” should not see it that way.

Risk in the short term has clearly increased (MF Global proves that.) but risk in the long term for prudent investors has probably not increased much more than historical “normal” levels. In fact, true investors have a unique opportunity to use the craziness of short term volatility to their advantage. (Time arbitrage.) True investors take ownership in business enterprises that over time generate profits and increased stockholder value. When “Fraidy Cats” are selling all their holdings fearing the collapse of Europe, investors might be wise to use this as an opportunity to increase their holdings in companies likely to prosper in the long run, even if Europe does experience severe problems.

Seems like fundamental data is coming out on a regular basis confirming that the consumer is still spending, even in Germany. Corporate earnings are UP. Threats of inflation have lessened.

Life (economic and non-economic) is dangerous. There is always risk—from things we know about, and most importantly from things we do not expect. I think we can safely say that the situation in Europe is certainly dangerous (economically) and a recession or slowdown there is likely. But, it is highly probable that all but the worst case scenario is already “priced in”.

One thing for sure—the best case scenario is not “priced in”. Probability is on the side of those who believe that markets are way too pessimistic. For the long term investor, being a irrationally overcautious “Fraidy Cat” is unwise and expensive. A balanced approach with intelligent risk management is probably the surest way to prosperity for intelligent long term investors. Focus on where we will likely be in 3-5 years—not in 3-5 days or weeks.

 

The uncertainty of the past year is likely to continue for a long time. Fears about Spain will be added to fears about Italy and Greece. The upcoming controversy in the US “Super Committee” will surely generate fears that the US may “go the way of Greece”. There will be talk about military action by Israel and the US taking action against Iran. We are now in an election year—with each weekly poll creating anxiety on the part of some portion of the electorate.

Here is an excerpt from the famous poem “If” by Rudyard Kipling:

IF YOU can keep your head when all about you

Are losing theirs….

If you can trust yourself when all men doubt you

But make allowance for their doubting too;

If you can wait and not be tired by waiting…
Yours is the Earth and everything that’s in it

Written to commemorate the hero of a 1895 British military campaign in South Africa—but applicable to today’s long term investor as well.

I think it is also good to share (Again in case you missed it.) an allegory from the famous value investor Benjamin Graham about Mr. Market. http://en.wikipedia.org/wiki/The_Intelligent_Investor

Mr. Market, is an obliging fellow who suffers from a severe case of bi-polar disorder. He turns up every day at the share holder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. Sometimes Mr. Market is wildly overly optimistic and is willing to pay a very high price. Other times, Mr. Market is in such a depressed state that he is convinced that the future is hopeless and that the value of your shares are ridiculously low. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. As an investor, you need to be confident enough in the value of your investments to be able to take advantage of Mr. Market rather than being affected by his disease.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.