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The May stock market spooks begin

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by Peter Switzer

We’re now into May and we should soon see if the investors and the traders who call the stock market shots will sell in May and go away. It happened last year and it has happened many times in the past but often you need a catalyst.

Last year it was the sovereign debt concerns and the question over whether the Yanks would go into a double dip recession. And this year the candidate catalysts would be war in Libya and the potential for more unrest in the Middle East forcing up the price of oil, another sovereign debt concern and the more likely one — the end of QE2.

X-factor

My guess is that we will see some selling in May, simply because the run up since late August last year has been so solid but I can’t see the reason for a wholesale rejection of stocks unless there’s a big X-factor from left field, where they always come from.

Such a surprise event could push up the price of oil and that could trigger recession concerns. The end of QE2 could test the market but at the moment the US economy and company earnings are not bad enough to worry me. In fact, they are still good.

On Friday, 323 companies had reported with 73 per cent saying they have beaten estimates while 15 per cent came in under expectations. Meanwhile, earnings growth of these companies is now up 22.6 per cent.

Look to history

This is very promising and leans against anyone wanting to sell in May and go away.

Maybe we should look at the history of this cliché — “sell in May and go away”.

Glenn Mumford in the AFR recently showed us the history and over the past 60 years the S&P 500 has averaged a five-fold better return in the six months from November to the end of April than May to November. The return is 6.8 per cent versus 1.3 per cent and it happens in 36 out of 37 situations studied by economists Sven Bouman and Ben Jacobsen.

So on this criteria you would be out most May-November periods but you can’t just be an historian — market valuations count too.

However, if you were a stickler for history, in 2009 you would have missed the big bounce back on the S&P/ASX 200. Sure, you would have got March and April, which saw the index shoot up 20 per cent from 6 March but you would have lost out on the 23 per cent between May and the end of October.

Last year, the double dip talk and the European debt issues were big market issues but now the US and global economies are doing well. Everyone agrees that the current soft patch in the US is linked to the shocking winter conditions, the Middle East/oil spike and the Japanese catastrophes. Quarter two is expected to show good growth and jobs as well.

Spot on company earnings

On top of that, company earnings are spot on! If what we’re seeing continues, then US earnings are on track for the best year ever. Until now, 2007 was the best with US$88.18 being the figure for the earnings of the S&P 500 but this year is tipped to hit US$99.31.

Right now, we’re seeing US businesses with great balance sheets, there has been profits driven by revenue rather than just cost cutting, which we saw in 2009 and 2010, and the low dollar is giving the Yanks a competitive edge. But wait, there’s more.

Many people like to bag the US economy but it still owns some of the best brands in the world — IBM, Apple, Hewlett-Packard, Wal-Mart, McDonalds, Microsoft, Google — and they are earning money overseas big time. They are not just US-dependent.

On Friday, Caterpillar’s earnings proved the point.

This earth-moving equipment company had a market earnings estimate of US$1.31 a share but it came in at US$1.84. On sales, the estimate was US$11.69 billion but it came in at US$12.95 billion!

But that’s not all.

Some 62 per cent of the company’s earnings are made outside of the good old ‘US of A’. That’s progress for the Americans and makes them less of a basket case as the debt worriers would have us believe.

You only worry about debtors if they haven’t got the means to pay you back.

Stay in May

Finally, as I said earlier, I would not be surprised to see a sell-off or pullback of share prices but from what I’m seeing, these down times should be a buying opportunity. I would not sell in May, I would stay.

Important information: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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Monday, May 02, 2011

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