There’s an old adage on Wall Street, “Sell in May and go away”. It used to refer to the technology sector of the market which normally saw its slowest selling season arrive with the summer holiday season and it coincided with the traders on Wall Street heading off to their vacation homes. It has since been co-opted by the market in general. As soon as June rolls around people begin taking vacations that is true. But, does the market really stop working in June?
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Today, most of the market’s action is run from laptops, not a trading floor. Sure the New York Stock Exchange still exists, but it is a far cry from when it used to literally be the center of attention. Now, decisions are made all over the world, all the time and mostly electronically. Buying and selling huge chunks of stock, reacting to good and bad news and more importantly making and losing money is now just as easy from a mansion in the Hamptons as it is from lower Manhattan.
Last week we saw the single largest one-day fall in the market this year. It came on the back of lower than expected job growth, continued weakness in the housing market, weakness out of Japan, and concern over the Euro-zone…everything you’ve read about in these pages for months.
However, bull markets don’t end with warnings that are plain to see. They end when the unexpected happens. Right now everything that people are worried about is well publicized and well known. The deficit and debt are not “new” news, neither is unemployment or housing. The crisis in the Middle East, Europe and Japan are all over the news. This market has shown tremendous resilience in the face of the worst news and that has surprised many and probably confounded many more.
We can speculate and postulate about the proverbial “wall of worry” all we want. That wall, if you are not familiar, refers to another old Wall Street axiom. It refers to the sentiment of investors. When they are worried, the market moves higher as people are looking for reasons why the market should not move higher – the worst is yet to come mentality. This results in stocks being under priced and much better bargains than when there is no worry and stocks are over valued.
There are many metrics that one can look at for the current market to determine whether it’s truly over or under valued. Price to earnings on many blue chip stocks is at levels lower than in many bull markets. Companies like Intel, Cisco, Microsoft, the financials, and drug stocks are trading at below all-time price to earnings ratios. Mergers and acquisitions are booming, interest rates are at zero, government spending is way up, IPOs are once again coming to market, Asia ex-Japan is booming, and the dollar is low which aids exports. On the flipside, there is a mania building in the “cloud” and the social media sector of the market with companies like LinkedIn, Salesforce, and Opentable etc. trading at more than 100 times earnings. The deficit and debt are negative as is the low interest rate environment which is low for good reason the consumer is still not back.
While the above mentioned facts and factors are important in gauging sentiment and should be important in most market analysis, and likely one or more of the factors WILL result in a market correction, the truth is that there is really one reason that the market is higher and wants to go even higher. That reason is cash. It is earning nothing or close to it in the bank. Sooner or later people realize that in order to retire, live better and make money, they have to take risk. It’s inevitable. You look at your account and see that your savings are earning 0.10% per year and it’s sickening. The alternatives are few. Either sit in cash and wait for rates to move higher (the Japanese have been waiting 20 years for that to happen) or you invest in something. For most people that investment choice is the stock market. That my friends is the primary reason that stocks are moving higher in the face of the wall of worry – there are no other choices right now. While that makes for a poor reason to take on risk, it is the very outcome that the Federal Reserve wanted and wants to create. A higher market always results in optimism and optimism breeds spending, which in turns breeds a recovery.
We always think it’s going to be different this time, but the script that is being followed is actually the same as last time.
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